UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
SEC File No. 001-31799
(Mark One)
[ ] Registration statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
or
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year endedJanuary 31, 2009
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________________ to _________________
[ ] Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of event requiring this shell company report _______________________
ROUGE RESOURCES LTD.
(Exact name of registrant as specified in this charter)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
#203-409 Granville Street, Vancouver
British Columbia, V6C 1T2, Canada
(Address of principal executive offices)
Darcy Krell - (Tel) 604-831-2739, (Fax) 604-831-2735
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to section 12(b) of the Act:
None | None |
(Title of each class) | (Name of each exchange |
on which registered) |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares Without Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as
of the close of the period covered by the annual report.
10,565,171 Common Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. [ ] Yes [X] No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
[ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark wether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes [ ] No [X] (Not Required)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing
U.S. GAAP [ ] | International Financial Reporting Standards as issued | Other [X] |
by the International Accounting Standards Board [ ] |
If “Other” has been checked in response to previous question, indicate by check mark which financial
statement item the registrant has elected to follow.
Item 17 [X] Item 18 [ ].
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
II
TABLE OF CONTENTS
III
IV
FORWARD-LOOKING STATEMENTS
We caution you that certain important factors (including without limitation those set forth in this Form 20-F) may affect our actual results and could cause such results to differ materially from any forward-looking statements that may be deemed to have been made in this Form 20-F annual report, or that are otherwise made by or on our behalf. For this purpose, any statements contained in this annual report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “except,” “believe,” “anticipate,” “intend,” “could,” estimate,” or “continue,” or the negative or other variations of comparable terminology, are intended to identify forward-looking statements.
PART I
ITEM 1. Identity of Directors, Senior Management and Advisors
1.1 Directors and Senior Management:
Linda Smith #203-409 Granville Street, Vancouver British Columbia, V0R 1X0, Canada | President, Chief Executive Officer and Director |
Darcy Krell #203-409 Granville Street, Vancouver British Columbia, V0R 1X0, Canada | Secretary, Chief Financial Officer and Director |
Shannon Krell #203-409 Granville Street, Vancouver British Columbia, V0R 1X0, Canada | Director |
1.2Advisors:
Lawyer: Mr. Doug Eacrett Law, Suite 203 – 409 Granville St, Vancouver BC, Canada V6C 1T2
Consulting Geologist:Mr. Andre M Pouwels, P. Geo., 4900 Mariposa Court, Richmond BC, Canada V7C 2J9
1.3Auditor:
Dale Matheson Carr-Hilton Labonte LLP, Chartered Accountants, Suite 1500 – 1140 West Pender Street, Vancouver BC, Canada V6E 4G1 | New auditor replaced Morgan & Company for the year ended January 31, 2009. |
Our auditors are members in good standing with the Institute of Chartered Accountants of British Columbia and are registered with the Canadian Public Accountability Board (CPAB) and the Public Company Accounting Oversight Board - United States (PCAOB).
ITEM 2. Offer Statistics and Expected Timetable
Not applicable
ITEM 3. Key Information
3.1 Selected Financial Data
The following tables set forth selected financial data of the Company for the fiscal years ended January 31, 2009, 2008, 2007, 2006 and 2005. We derived all figures from our financial statements, which were audited by our independent auditor. This information should be read in conjunction with our audited financial statements for the fiscal years ended January 31, 2009 and 2008 included in this annual report. Our audited financial statements for the fiscal years ended January 31, 2007, 2006 and 2005 are not included in this annual report.
Our audited financial statements and the table below have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). A reconciliation to United States generally accepted accounting principles (“US GAAP”) is included in Note 11 of our audited financial statements in this annual report. All amounts are expressed in Canadian dollars.
The first table below presents this financial data for five years in accordance with US GAAP. The second table presents the data in accordance with Canadian GAAP.
US GAAP (in Cdn $)
Year Ended January 31, 2009 | Year Ended January 31, 2008 | Year Ended January 31, 2007 | Year Ended January 31, 2006 | Year Ended January 31, 2005 | |
Net Operating Revenue | Nil | Nil | Nil | Nil | Nil |
Loss from operations | ($198,370) | ($154,327) | ($181,066) | ($203,256) | ($88,699) |
Loss per common share | ($0.06) | ($.27) | ($0.32) | ($0.36) | ($0.16) |
Total assets | $20,346 | $23,810 | $21,873 | $34,856 | $170,236 |
Shareholders’ deficiency | ($1,075,031) | ($1,364,790) | ($1,219,708) | ($1,025,710) | ($821,098) |
Long term debt | Nil | Nil | Nil | $39,676 | Nil |
Cash dividends per share | Nil | Nil | Nil | Nil | Nil |
Deficit | ($2,700,078) | ($2,481,144) | ($2,326,817) | ($2,145,751) | ($1,942,495) |
Capital stock | $1,613,471 | $1,113,471 | $1,113,471 | $1,113,471 | $1,113,471 |
Weighted average number of shares outstanding | 10,565,171 | 565,171 | 565,171 | 565,171 | 565,171 |
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Canadian GAAP (in Cdn $)
Fiscal Year ended January 31, 2009 | Fiscal Year ended January 31, 2008 | Fiscal Year ended January 31, 2007 | Fiscal Year ended January 31, 2006 | Fiscal Year ended January 31, 2005 | |
Net Operating Revenue | Nil | Nil | Nil | Nil | Nil |
Loss from operations | ($195,335) | ($156,658) | ($182,422) | ($138,379) | ($92,349) |
Loss per common share | ($0.05) | ($0.28) | ($0.32) | ($0.24) | ($0.16) |
Total assets | $101,485 | $90,043 | $88,106 | $101,089 | $170,236 |
Shareholders’ deficiency | ($952,111) | ($1,256,776) | ($1,141,899) | ($959,477) | ($821,098) |
Long term debt | Nil | Nil | Nil | $39,676 | Nil |
Cash dividends per share | Nil | Nil | Nil | Nil | Nil |
Deficit | ($2,618,939) | ($2,423,604) | ($2,266,946) | ($2,084,524) | ($1,946,145) |
Capital stock | $1,613,471 | $1,113,471 | $1,113,471 | $1,113,471 | $1,113,471 |
Weighted average number of shares outstanding | 10,565,171 | 565,171 | 565,171 | 565,171 | 565,171 |
Since June 1, 1970, the government of Canada has permitted a floating exchange rate to determine the value of the Canadian dollar as compared to the United States dollar. On June 3, 2009, the exchange rate in effect was US$1.00 = Cdn$1.0884. This exchange rate is based on the noon buying rates in New York City, for cable transfers in Canadian dollars, as certified for customs purposes by the Federal Reserve Bank of New York. For the past five fiscal years ended January 31 and for the six-month period ended January 31, 2009, the following exchange rates were in effect for Canadian dollars exchanged for United States dollars, calculated in the same manner as mentioned above:
TimePeriod | Average Exchange Rate for Period |
Year ended Jan 31, 2009 | $1.0846 |
Year ended Jan 31, 2008 | $1.0603 |
Year ended Jan 31, 2007 | $1.1357 |
Year ended Jan 31, 2006 | $1.2006 |
Year ended Jan 31, 2005 | $1.2912 |
Time Period | Average Exchange Rate for Period |
Month ended January 31, 2009 | $1.2229 |
Month ended December 31, 2008 | $1.2360 |
Month ended November 31, 2008 | $0.2219 |
Month ended October 31, 2008 | $0.1727 |
Month ended September 30, 2008 | $1.0568 |
Month ended August 31, 2008 | $1.0518 |
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3.2 Capitalization and Indebtedness
The following table sets forth our indebtedness and capitalization as at January 31, 2009:
US GAAP | Canadian GAAP | |
Indebtedness | ||
Short term debt (unsecured and not guaranteed) | $1,095,377 | $1,053,596 |
Long term debt | $Nil | $Nil |
Total | $1,095,377 | $1, 053,596 |
Shareholders’ Deficiency | ||
Common shares | $1,613,471 | $1,613,471 |
APIC/ Contributed surplus | $11,576 | $53,357 |
Accumulated deficit | ($2,700,078) | ($2,618,939) |
Total | ($1,075,031) | ($952,111) |
3.3 Reasons for the Offer and Use of Proceeds
Not Applicable
3.4 Risk Factors
Any investment in our common shares involves a high degree of risk. You should consider carefully the following information before you decide to buy our common shares. If any of the events discussed in the following risk factors actually occurs, our business, financial condition or results of operations would likely suffer. In this case, the market price of our common shares could decline, and you could lose all or part of your investment in our shares The following is a list of all known material risks relating to our business and an investment in our common shares:
We have a history of losses. Our inability to achieve profitability will negatively impact any investment in our shares.
We have incurred losses in our business operations since inception, and we expect that we will continue to incur losses for the foreseeable future. From March 31, 1998, the date of incorporation, to January 31, 2009, we have incurred losses totalling $2,618,939 under Canadian GAAP (Cdn$2,700,078 under US GAAP). Very few junior resource companies ever become profitable. Failure to achieve and maintain profitability may adversely affect the market price of our common stock.
We have limited financial resources and no source of operating cash flow. If we are unable to generate revenue, our business may fail.
We have limited financial resources, no source of operating cash flow and no commitments for additional funding for further exploration of the Dotted Lake property. Failure to obtain such additional financing could result in delay or indefinite postponement of further exploration and ultimately the failure of our business.
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Very few mineral properties are ultimately developed into producing mines. If we are unable to prove that a mineral reserve exists on our Dotted Lake property, our business may fail.
The business of exploration for minerals and mining involves a high degree of risk. Few properties that are explored are ultimately developed into producing mines. At present, our mineral properties have no known body of commercial ore. Most exploration projects do not result in the discovery of commercially mineable deposits of ore.
Substantial expenditures are required for us to establish ore reserves through drilling, to develop metallurgical processes, to extract the metal from the ore and, in the case of new properties, to develop the mining and processing facilities and infrastructure at any site chosen for mining.
It is unknown whether we will discover minerals in sufficient quantities to justify commercial operations or that we can obtain the funds required for development on a timely basis. The probability of an individual mineral exploration prospect such as the Dotted Lake Property ever containing reserves is extremely remote. It is unlikely that the property contains reserves, so any funds expended on the property will most likely be lost.
If we do not obtain additional financing, our business will fail.
As at January 31, 2009, we had cash in the amount of $4,856. Our ability to continue as a going concern is dependent upon the ability of management to obtain sufficient financing. Management is actively seeking additional financing, but has no specific commitments for investment. These matters raise doubt about the company’s ability to continue as a going concern. These financial statements do not include adjustments that would be necessary should the company be unable to continue as a going concern.
Because management has only limited experience in resource exploration, the business has a higher risk of failure.
Our management has only limited experience in resource exploration. None of our directors or officers has any significant technical training or experience in resource exploration for, starting and operating a mine. With no direct training or experience in this sector, our management may not be fully aware of many of the specific requirements related to working within the industry. Their business decisions may not take into account standard engineering or managerial approaches that mineral exploration companies with qualified management commonly use. As a result, our operations, earnings and ultimate financial success could suffer irreparable harm due to management’s lack of experience in this industry.
Mineral exploration involves a high degree of risk against which we are not currently insured. If an environmental liability was incurred, it may irreparably harm our business.
Unusual or unexpected rock formations, formation pressures, fires, power outages, labour disruptions, flooding, cave-ins, landslides and the inability to obtain suitable or adequate machinery, equipment or labour are risks involved in the operation of mines and the conduct of exploration programs.
It is not always possible to fully insure against such risks and we may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of our common stock. We do not currently maintain insurance against environmental risks relating to the Dotted Lake property.
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If title to the Dotted Lake property is disputed, we may lose our sole business asset and our business may fail.
The Dotted Lake property may be subject to prior unregistered agreements or transfers or native land claims and title may be affected by undetected defects. There is a risk that the property boundaries could be challenged. In such circumstances, we will incur costs defending our title to the Dotted Lake property and may lose our interest in the claims, causing our business to fail.
We may require permits and licenses that we may not be able to obtain. If we are unable to obtain such permits and licenses, our business plan will fail.
Our operations may require licenses and permits from various governmental authorities. If we are unable to obtain such licenses and permits, we will not be able to continue exploration and development of the Dotted Lake property and we may have to abandon our business plan.
We will be required to obtain work permits from the Ontario Ministry of Northern Development and Mines for the Phase II drilling program and any subsequent exploration work that results in a physical disturbance to the land if the program calls for the disturbance of more than 10,000 square meters of the property surface, or such areas that would total that amount when combined. A work permit is also required for the erection of structures on the property. There is no charge to obtain a work permit under the Mining Act.
Metal prices fluctuate widely. A decrease in metal prices may prevent us from raising the capital necessary to continue our business plan in the future. As well, low metal prices will reduce the value of any reserve we discover on the Dotted Lake property.
Factors beyond our control may affect the marketability of any minerals we discover. Metal prices have fluctuated widely, particularly in recent years. Our ability to raise capital for continuing exploration of the Dotted Lake property depends to a large degree on the market price for metals generally, as well as for gold in particular. In addition, the value of any reserve we discover on the Dotted Lake property will fluctuate depending on current metal prices. Low metal prices may make it uneconomical to commence production on the Dotted Lake property if a reserve is established, of which there is no guarantee.
The resource industry is very competitive. The competitive nature of the business may increase our cost of operations and prevent us from obtaining interests in additional mineral properties.
The resource industry is intensely competitive in all its phases. We compete with many companies possessing greater financial resources and technical facilities than us for the acquisition of mineral concessions, claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees.
In conducting exploration on the Dotted Lake property, we will be subject to environmental regulations. In addition, our operations may be adversely affected by changes in environmentalregulations. A significant change in such regulations may prevent us from proceeding with our business plan.
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Our operations are subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation provides for restrictions and prohibitions on spills, release or emissions of various substances produced in association with certain mining industry operations, such as seepage from tailings disposal areas, which would result in environmental pollution. A breach of such legislation may result in the imposition of fines and penalties. In addition, certain types of operations require the submission and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means that standards, enforcement, fines and penalties for non-compliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for us and our directors, officers and consultants. The cost of compliance with changes in governmental regulations has a potential to reduce the profitability of our operations. We do not maintain environmental liability insurance.
When our exploration program on the Dotted Lake property proceeds to the drilling stage, we may be required to post small bonds if the rights of a private land owner may be affected. We may also be required to file statements of work with the Ministry of Northern Development and Mines. We will also be required to undertake remediation work on any exploration that results in physical disturbance to the land. The cost of remediation work will vary according to the degree of physical disturbance.
Our listed securities are subject to penny stock regulation, which may impede an investor’s ability to purchase our common shares.
The price of our common stock is below $5.00 per share and is subject to "penny stock" regulation. "Penny stock" rules impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with a spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our shares of common stock. The market price of our shares would likely suffer as a result.
Enforcement of legal process may be difficult.
All members of our Board of Directors and management reside in Canada. As well, our address for service is a Canadian address. Accordingly, investors will not be able to:
1. | effect legal process upon us or upon individuals related to us within the United States; |
2. | enforce judgments obtained in United States courts against us based upon the civil liability provisions of the United States securities law; or |
3. | enforce United States court judgments based upon the civil liability provisions of the United States federal securities law. |
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However, investors may commence original actions against us, our directors and officers and our experts in British Columbia courts. However, as our sole mineral property asset is located in Ontario, additional legal proceedings would need to be commenced in that province in order to satisfy any judgment.
Investors may not be able to seek judgment in British Columbia or Ontario if the court determines that it is unable to rule in a matter that involves determinations respecting United States securities laws. In such circumstances, investors would be prevented from obtaining judgment that is enforceable against us.
As we are incorporated pursuant to the laws of British Columbia, duties of our directors and officers, and the ability of shareholders to initiate a lawsuit on our behalf, are governed by the British Columbia Business Corporations Act.
ITEM 4 Information on the Company
4.1 History and Development
We were incorporated under the name “Gemstar Resources Ltd.” pursuant to theCompany Act in the Province of British Columbia, Canada by registration of our Memorandum and Articles of Association and the issuance by the Registrar of Companies of a Certificate of Incorporation on March 31, 1988. In March 2006, we transitioned to the province’sBusiness Corporations Act. On October 23, 2007, we changed our name to Rouge Resources Ltd.; restructured our share capital by consolidating our issued and outstanding common shares on a one for ten (1:10) basis; and increased our authorized share capital from 10,000,000 common shares to an unlimited number without par value..
We are a reporting issuer in both British Columbia and Alberta and a foreign issuer in the United States with the Securities and Exchange Commission. Our common shares are posted for trading on the Over-The-Counter: Bulletin Board (OTC:BB) in the United States under the symbol ROUGF:OB.
We are engaged in the acquisition, exploration and, if warranted, development of mineral resource properties and beneficially own 1 mineral claim in north-central Ontario, Canada. Our head office is located at #203 – 409 Granville Street, Vancouver British Columbia, Canada, V6C 1T2 and our telephone number is (604) 831-2739.
We have not been involved in any bankruptcy, receivership or similar proceedings, nor have we been a party to any material reclassification, merger, consolidation, purchase or sale of a significant amount of assets.
In fiscal 2001, we entered into an agreement to acquire 100% interest in the Dotted Lake property (“the Property”) located in the Thunder Bay Mining District of North Central Ontario, Canada. Since then, we have conducted certain exploration activities described below; completed a 43-101 compliant geological report; and otherwise have kept the property in good standing with the Ontario Ministry of Northern Development and Mines for future exploration.
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Since the Company is in the exploration stage, it has no current revenues nor has it earned any since inception. There is no assurance that a commercially viable mineral deposit exists on our Property. Further exploration is required before a final evaluation of the economic feasibility can be determined. Significant additional financing and considerable time will be required before our mineral claim can be explored and, if warranted, developed into a commercial enterprise.
4.2 The Dotted Lake Property
As at January 31, 2009, the Company had incurred the following expenditures on the Property since inception:
January 31, | January 31, | ||||||
2009 | 2008 | ||||||
Mineral properties | |||||||
Staking | $ | 4,206 | $ | 4,206 | |||
Deferred exploration costs | |||||||
Geological survey | 40,000 | 40,000 | |||||
Geological consulting fees | 41,139 | 26,233 | |||||
81,139 | 66,233 | ||||||
$ | 85,345 | $ | 70,439 |
(i) Location and Access
The Property is situated in north central Ontario, approximately 50 kilometers northeast of Lake Superior and 260 kilometers east-northeast of Thunder Bay. Manitouwadge (45 kilometers north), Marathon (45 kilometers southwest) and White River (50 kilometers southeast) are the closest towns. The latter two communities are situated along Highway 17, part of the Trans-Canada Highway network, while the property itself lies approximately 20 kilometers north of Highway 17. Hemlo Gold Mines is 20km south of the Property.
Currently, there is no road access directly onto the Property but drivable logging roads are within 1km. From Highway 614, located 13 kilometres north of Highway 17, a bush road leads seven kilometers north-eastward to the southwest shore of Dead Otter Lake. From there, the property may be conveniently reached by boat in summer or snowmobile in winter. Alternatively, another bush road that connects with Highway 614, approximately 19.2 kilometers north of Hwy 17, terminates 0.7 kilometers north of the north claim boundary.
The Property experiences a temperate climate with moderate to long cold winters and short warm to hot summers. Total annual precipitation is about 1,000 millimeters, including over three meters of snow. Break up or freeze up conditions may impinge upon exploration activities, but normally exploration and mining may be conducted year round. However, it is more economical to explore in spring and summer when access to and travel across the property is much easier, and when snow removal for surface exploration is not required.
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(ii) Title and Claim Status
We currently hold a 100% interest in 1 mineral claim comprising 15 claim units totalling approximately 375 hectares known as the Dotted Lake property. It is currently in good standing until March 14, 2010 after which additional exploration spending of approximately $1,000 would be required to maintain it for another year.
From the beginning, the claim has been registered in the name of 1179406 Ontario Ltd., a private Ontario company owned by Mr. R.J. Reukl, in trust as a convenience for us to help keep costs down since we were an extra-provincial claimholder in Ontario. However, on April 8, 2009 the trust arrangement was changed from Mr. Reukl to Mr. D.T. Krell, one of our directors, who now owns the claim in trust for us. We do not have any third party obligations against the claim.
There is no assurance that a commercially viable mineral deposit exists on the Property and further exploration will be required before final evaluation of its economic feasibility.
(iii) Previous Exploration
Several companies and individuals have conducted exploration activities on various parts of the Property over many years. To date, no mineral deposit has been delineated and, consequently, there has been no production from the property nor any reserve or resource estimated.
In fiscal 2002, we completed our acquisition of the Property by paying $200,000 in cash to an unrelated private British Columbia company named LCM Equity Inc. (“LCM”). We also advanced $152,000 to LCM for planned exploration of the Property. All of these funds came from our officers and immediate family members in the form of related party loans.
Near the end of calendar 2002, as a result of extreme weather conditions, we were having difficulty undertaking our planned work program on the Property, including the required assessment work to keep the claims in good standing. Following discussion with our consulting geologist, Mr Andre Pauwels P. Geo, we decided it would be less expensive to allow the claim to lapse and then re-stake it early the following year. As a result, the claim was permitted to lapse and, consequently, the acquisition cost was written off during the year ended January 31, 2003. Once the weather conditions improved, our consulting geologist re-staked the claim in March 2003 at a cost to us of $4,206 with an initial expiry date of March 14, 2007 from the Ontario Ministry of Northern Development and Mines. The expiry date has since been extended and to date the claim remains in good standing.
During the quarter ended April 30, 2005, we completed an airborne VLF-EM survey of the mineral claim at a cost of $40,000 paid in full from the $152,000 of exploration funds advanced to LCM per above. We were searching for changes in the magnetic field over certain areas of the Property. Magnetic anomalies may result from accumulations of certain magnetic rocks such as phrhotite, hematite and magnetite. These rock types are often found alongside base metals such as copper, zinc and nickel, or precious metals such as gold and silver.
A VLF-EM survey consists of two separate surveys: a Very Low Frequency survey and an ElectroMagnetic survey. Very low frequency surveys use radio waves to determine whether rocks on a mineral property conduct electricity. Almost all of the precious and base metals that we seek are above average conductors of electricity and will affect VLF readings. Electromagnetic surveys involve measuring the strength of the earth’s magnetic field. Variations in the magnetic readings on a property may indicate the increased likelihood of precious or base minerals in the area.
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Also, during the quarter ended April 30, 2005, we commissioned and advanced $4,500 to our consulting geologist to complete an evaluation report regarding the merits of the Property in accordance with Form 43-101 prescribed by the regulatory authorities.
During the quarter ended July 31, 2005, we undertook a ground VLF (Very Low Frequency) and magnetic survey over 100 meter spaced cut lines (15 km) at the north western side of the Property costing $14,636. Also, during this quarter, the $112,000 balance of funds advanced to LCM per above was returned to us after we discontinued using LCM’s exploration services.
Effective December 6, 2005, the 43-101 compliant evaluation report was completed by our consulting geologist, Mr. Andre Pauwels, for an additional cost of $7,097. It recommended the two phase exploration program below:
- Phase 1 spending of $51,500 on geological surveys to explore the exhalite horizon on the Property including a TDEM (Time Domain Electromagnetic) survey centered at the Fairservice showing to test for massive sulphides bodies at depth and to do research to delineate the possible western extension of the exhalite horizon on the property. The TDEM survey is one of several geophysical exploration methods. In the conventional TDEM survey, an induction coil is used as the magnetometer which allows conductivity of rock below the surface to be measured at greater depths.
- Phase 2 spending of $171,900 on extensive targeted diamond drilling to determine the mineral content of rock below the surface of the Property. Drillinginvolves extracting a long cylinder of rock, known as a drill core, from the ground for analysis to determine the amount of metal content at different depths. This phase will only be considered after Phase I has proven successful.
This 43-101 report is available under our public disclosures onwww.sedar.com.
During the years ended January 31, 2007 and 2008, we kept our claim in good standing but did not conduct any work on the Property. In fiscal 2007, this was mainly due to the significant amount of time, effort and cost required to lift the cease trade orders by August 2006 initiated by the British Columbia and Alberta Securities Commissions in late fiscal 2004.
(iv) Current and Proposed Exploration
In May 2008, we hired Fladgate Exploration Consulting to conduct a soil sampling program on the Property to try and find a drilling target. The program involved examining surface samples for base metal content and cost $14,906. Their report dated August 5, 2008 indicated the possibility of some gold and zinc mineralization in certain of the 47 samples collected. This increased the total exploration spending on the Property since acquisition to $85,345 of which $4,206 relates to the re-staking in March 2003.
Before proceeding with more extensive exploration, the Fladgate report recommended a $12,000 follow-up soil sampling program to expand on the gold samples found during its May 2008 testing. Depending on the results of this follow-up program planned for fiscal 2010, the Company remains committed to the recommendations contained in its 43-101 compliant Evaluation Report dated December 6, 2005. The phased exploration budget contained therein totaled $223,400 as follows:
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Phase I: TDEM Survey and Research | |||
Planning , organization, supervision (senior geologist 9 days at $600 each): | $ | 5,400 | |
Line cutting (15 kilometers at $500 each): | $ | 7,500 | |
TDEM contract (12 kilometers at $1,500 each) | $ | 18,000 | |
Mobilization of TDEM crew: | $ | 6,000 | |
Supplemental VLF/HLEM ground surveys: | $ | 3,000 | |
Research western area of the claims (senior geologist 6 days at $600 each): | $ | 3,600 | |
Processing 2005 airborne VLF data: | $ | 2,500 | |
Drafting, travel costs and miscellaneous: | $ | 3,000 | |
Contingency 5%: | $ | 2,500 | |
Total | $ | 51,500 | |
Phase II: Diamond Drilling – Six Holes | |||
Contract price (1,000 meters at $85 per meter): | $ | 85,000 | |
Drill mobilization and de-mobilization: | $ | 15,000 | |
Drill site preparation: | $ | 7,200 | |
Core boxes and supplemental drill supplies: | $ | 6,000 | |
Assays (75 samples at $20): | $ | 1,500 | |
Senior geologist supervision, organization, logging travel: | $ | 21,000 | |
Field assistant for sampling and core handling (25 days at $200/day): | $ | 5,000 | |
Report: | $ | 5,000 | |
Drafting: | $ | 3,000 | |
Domicile for geologist and field assistant: | $ | 5,200 | |
Transportation (rental of trucks and snowmobiles) | $ | 2,000 | |
Supplies for sampling and surveys, sample transport: | $ | 2,000 | |
Permitting and reclamation: | $ | 6,000 | |
Contingency 5%: | $ | 8,000 | |
Total | $ | 171,900 |
4.3 Competition
The mineral property exploration business, in general, is intensely competitive and there is no assurance that even if commercial quantities of ore are discovered, a ready market will exist for the sale of same. Numerous factors beyond our control may affect the marketability of any minerals discovered. These factors include market fluctuations, the proximity and capacity of natural resource markets and processing equipment, government regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals, environmental protection, etc. The exact effect of these factors cannot be accurately predicted, but in combination these factors may make it very difficult to realize an adequate return on investment.
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We compete with many companies possessing greater financial resources and technical capabilities than we have regarding the acquisition of mineral concessions, claims, leases and other mineral interests as well as for the recruitment and retention of qualified staff.
4.4 Management and Employees
We do not have any employees other than our directors and officers.
We are party to an amended agreement dated May 1, 2008 with Mr. Darcy Krell, our Secretary and Chief Financial Officer, who is engaged to perform certain management and administrative services on our behalf for a fee of $6,500 per month, including $5,000 as management fees. Mr. Krell is the husband of our President, Ms. Linda Smith, and the father of our director, Ms. Shannon Krell.
We retain Mr. Krell to arrange and negotiate mineral property acquisitions and exploration contracts (subject to director approval); arrange for and secure financings for the company; arrange for the payment of all company obligations and the collection of all receivables, if any; establish and maintain suitable banking relations; ensure the maintenance of proper accounting records and compliance with all statutory reporting requirements; and acknowledge corporate inquiries and correspondence as required.
4.5 Environmental Regulations
We will be required to comply with all regulations, rules and directives of governmental authorities and agencies applicable to the exploration of minerals in Canada generally, and in the Province of Ontario, specifically. Under these laws, prior to production, we have the right to explore the property, subject only to a notice of work which may entail posting a bond. To date, we have not been required to post a bond with respect to our exploration activities on the Dotted Lake property.
In addition, production of minerals in Ontario will require prior approval of applicable governmental regulatory agencies. We can provide no assurance to investors that such approvals will be obtained. The cost and delay involved in attempting to obtain such approvals is unknown at this time.
We have budgeted for regulatory compliance costs as part of our operations. We will have to incur the cost of reclamation and environmental mediation for all exploration work undertaken. The amount of these costs is also unknown at this time as we do not know the extent of future exploration.
Permits and regulations will control all aspects of any production program if the project continues to that stage because of the potential impact on the environment. Examples of regulatory requirements include:
- | Water discharge will have to meet water standards; | |
- | Dust generation will have to be minimal or otherwise re-mediated; | |
- | Dumping of material on the surface will have to be re-contoured and re-vegetated; | |
- | An assessment of all material to be left on the surface will need to be environmentally benign; |
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- | Ground water will have to be monitored for any potential contaminants; | |
| ||
- | The socio-economic impact of the project will have to be evaluated and if deemed negative, will have to be re-mediated; and | |
| ||
- | There will have to be an impact report of the work on the local fauna and flora. |
We do not require any government authorization to proceed with Phase 1 of the exploration program recommended in our 43-101 technical evaluation report since it (and our other exploration activities conducted to date) will cause little, if any, physical disturbance of the land. However, we will be required to obtain work permits from the Ontario Ministry of Northern Development and Mines for the Phase 2 drilling program and any subsequent exploration work that results in a physical disturbance to the land. If more than 10,000 square meters of property surface are affected, or such areas that would total that amount when combined, a work permit is required. There is no charge to obtain a work permit under the Mining Act.
When our exploration program proceeds to the drilling stage, we may be required to post small bonds if the rights of a private land owner may be affected. We may also be required to file statements of work with the Ministry of Northern Development and Mines and to undertake remediation work on any exploration that results in physical disturbance to the land. The cost of remediation work will vary according to the degree of physical disturbance.
ITEM 5. Operating and Financial Review and Prospects
(stated in Canadian $ under Canadian GAAP)
5.1 Results of Operations
We are an exploration stage company owning 1 claim on the Dotted Lake property located in north-central Ontario, Canada and no revenue has been realized to date.
The following table shows selected audited financial information for the three most recently completed fiscal years:
Year Ended January 31, 2009 | Year Ended January 31, 2008 | Year Ended January 31, 2007 | |
FINANCIAL POSITION | |||
Total Assets | $ 101,485 | $ 90,043 | $ 86,106 |
Total Liabilities (all current) | $ 1,053,596 | $ 1,346,819 | $ 1,230,005 |
Accumulated Deficit | $ (2,618,939) | $ (2,423,604) | $ (2,266,946) |
OPERATIONS | |||
Total Revenues | Nil | Nil | Nil |
Total Expenses / Net Loss | $ (195,335) | $ (156,658) | $ (182,422) |
Net Loss per Share | $ 0.05 | $ 0.28 | $ 0.32 |
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The following results of operations should be read in conjunction with the audited financial statements for the years ended January 31, 2009 and 2008:
Year Ended | Year Ended | |||||
January 31, 2009 | January 31, 2008 | |||||
Revenue | $ | Nil | $ | Nil | ||
Expenses | ||||||
Accretion of convertible promissory note | $ | 11,871 | $ | 2,331 | ||
Management fees | 52,750 | 30,000 | ||||
Office administration and travel | 49,026 | 69,967 | ||||
Professional fees | 70,056 | 45,162 | ||||
Transfer agent and filing fees | 11,632 | 9,198 | ||||
Total Expenses / Net Loss | $ | (195,335 | ) | $ | (156,658 | ) |
Revenue
The Company is in the exploration stage and has not generated any revenues since inception.
Expenses and Net Loss
The Company reported a net loss of $195,335 in fiscal 2009 compared to $156,658 in fiscal 2008. This $38,677 increase in expenses and net loss was due to the net changes in the following expense line items:
- increase in professional fees (legal, audit and accounting) by $24,893 due to higher costs associated with being a public company.
- increase in management fees by $22,750 due to more time and effort required to run the business leading to a fee increase from $2,500 to $5,000 per month effective May 1, 2008.
- decrease in office administration, travel and other by $20,940 due to combination of reduced management travel and office expenses in fiscal 2009 during economic downturn and non-recurring expenses in fiscal 2008 pertaining to reactivating the Company as a reporting issuer in British Columbia and Alberta and a foreign issuer in the United States.
- increase in transfer agent and filing fees by $2,434 due to higher costs of administering the shareholders’ annual general meeting.
- increase in accretion of convertible promissory note by $9,540 due to three year extension of its maturity date to January 1, 2011, giving rise to additional accretion of the embedded conversion feature.
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5.2 Liquidity and Capital Resources
(i) Working Capital (Deficiency) | As At | As At | ||||
January 31, 2009 | January 31, 2008 | |||||
Current assets | $ | 7,392 | $ | 10,063 | ||
Current liabilities | (1,053,596 | ) | (1,346,819 | ) | ||
Working capital (deficiency) | $ | (1,046,204 | ) | $ | (1,336,756 | ) |
During the year ended January 31, 2009, the working capital deficiency decreased by $290,552 mainly due to decreased amounts owing to related parties.
(ii) Cash Flow | Year Ended | Year Ended | ||||
January 31, 2009 | January 31, 2008 | |||||
Net cash used in Operating Activities | $ | (162,573 | ) | $ | (180,512 | ) |
Net cash used in Investing Activities | (14,906 | ) | (2,662 | ) | ||
Net cash provided by Financing Activities | 176,336 | 179,517 | ||||
Decrease in Cash during the Year | $ | (1,143 | ) | $ | (3,657 | ) |
Cash, Beginning of Year | 5,999 | 9,656 | ||||
Cash, End of Year | $ | 4,856 | $ | 5,999 |
At January 31, 2009, the Company’s cash position was $4,856 compared to $5,999 at January 31, 2008. The decrease in cash of $1,143 in fiscal 2009 and $3,657 in 2008 resulted from the following cash flow activities:
(i) | Net cash used in operating activities of $162,573 in 2009 and $180,512 in 2008 was due to operating losses in both years net of an increase in current liabilities in 2009 and a decrease in 2008. | |
(ii) | Net cash used in investing activities of $14,906 in 2009 and $2,662 in 2008 was due to completion of a soil sampling program on the Property in 2009 and purchase of office equipment in 2008. | |
(iii) | Net cash provided by financing activities of $176,336 in 2009 was due to $500,000 of cash raised from a non-brokered private placement of $323,664 repayment of advances to related parties. The $179,517 of cash provided in 2008 was exclusively due to advances received from related parties. |
(iii) Anticipated Cash Requirements
Over the next 12 months, the Company has estimated its minimum cash requirements as follows:
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Operating Expenses | |||
Management fees | $ | 60,000 | |
Professional fees | 70,000 | ||
General, administration and other expenses | 60,000 | ||
$ | 190,000 | ||
Mineral exploration regarding on-going soil sampling program | 12,000 | ||
Total | $ | 202,000 |
As previously mentioned, we plan to spend approximately $12,000 on the Property during the Spring-Summer 2008 based on the Fladgate report recommendation of a follow-up soil sampling program to expand on the gold samples found during its May 2008 testing. We also anticipate spending approximately $190,000 for on-going management and administration of our corporate affairs during the ensuing twelve month period to January 31, 2010.
With no operating revenues to date, the Company initially financed its operations through the issuance of common shares and, over the past six years, has primarily used related party loans from Company officers and immediate family members. However, during the 2nd half of year ended January 31, 2009, we were successful in raising $500,000 through the issuance of 10,000,000 units at a price of $0.05 per unit under a non-brokered private placement to help pay down our debt and reduce our working capital deficiency. Each unit consists of one common share of the Company and one non-transferable share purchase warrant entitling the holder to acquire one additional common share at a price of $0.10 for two years.
At January 31, 2009, we had total assets of $101,485 under Canadian GAAP consisting of: cash $4,856, GST receivable $2,536, credit card deposit $6,900, mineral properties and deferred exploration costs $85,345 and computer equipment $1,848. At the same date, we had total liabilities of $1,053,596 consisting of $124,648 in accounts payable and accrued liabilities and $928,948 in demand loans from related parties.
At January 31, 2009, we had accumulated $1,046,095 of non-capital losses available for carry forward as deduction against future taxable incomes (if any) which expire from 2010 to 2029.
There can be no assurance that additional financing will be available when needed or, if available, on commercially reasonable terms. If the Company is unable to obtain additional financing on a timely basis, either through issuance of more common shares or obtaining additional advances from related parties, the Company may not be able to meet its obligations as they come due and may be forced to scale down or perhaps even cease business operations.
To a significant extent, our ability to raise capital is also affected by trends and uncertainties beyond our control. These include the market prices for base and precious metals and results from our exploration programs. Our ability to attain our business objectives may be significantly impaired if prices for metals such as gold, copper and platinum fall or if results from our intended exploration programs on our Property are unsuccessful.
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ITEM 6. Directors, Senior Management and Employees
6.1 Directors and Officers
As at January 31, 2009, our directors and executive officers, their ages, positions held, and duration of such, are as follows:
Name | Position Held with the Company | Age | Date First Elected or Appointed |
Linda Smith(1) | President, Chief Executive Officer and Director | 60 | October 27, 2000 |
Darcy Krell(1) | Secretary, Chief Financial Officer and Director | 61 | October 27, 2000 |
Shannon Krell | Director | 32 | October 27, 2000 |
(1)Member of the Audit Committee
There are no arrangements or undertakings between any of our directors or executive officers, pursuant to being selected as a director or executive officer. However, there are family relationships among our directors and officers in that Ms. Linda Smith and Mr. Darcy Krell are husband and wife and Mr. Krell is the father of Ms. Shannon Krell.
The following describes the business experience of our directors and executive officers, including other directorships held in reporting companies:
Linda Smith
Ms. Linda Smith has acted as our president and as a director since October 27, 2000. Ms. Smith also acted as Blue Lightning Ventures Inc.’s president and director from October 1999 to July 2004. She also acted in the same capacities for Big Bar Gold Corporation from August 1999 to June 2003 and for Candorado Operating Company Ltd. from June 2000 to November 2001. All of these companies are British Columbia and Alberta reporting corporations involved in mineral property exploration. Ms. Smith was also employed part-time as a dental assistant from 1995 to 2002. At present, Ms. Smith assists Mr. Darcy Krell in providing management services to us and is currently not compensated for her services. In addition, Ms. Smith acts as a director of Algorithm Media Inc., an Alberta and British Columbia reporting company that is also pursuing mineral property acquisitions.
Darcy Krell
Mr. Krell has acted as our Secretary and Chief Financial Officer since October 27, 2000 and is a private investor in various reporting and private companies since 1996. He also acted as a director of Big Bar Gold Corporation from March 2002 to April 2004 and Blue Lightning Ventures Inc. from March 2002 to July 2004, both of which are Alberta and British Columbia reporting companies involved in mineral property exploration. In addition, Mr. Krell acts as a director of Algorithm Media Inc., an Alberta and British Columbia reporting company, that is also pursuing mineral property acquisitions.
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Mr. Krell is long on experience but has no professional training or technical credentials in the field of mineral property exploration or development. He spends approximately 35% of his time on our affairs.
Shannon Krell
Ms. Shannon Krell has acted as our director since October 27, 2000. She recently graduated in psychology from the University of British Columbia in Vancouver and is currently attending the University of Victoria on Vancouver Island in pursuit of her Bachelor of Law degree.
Ms. Krell has no professional training or technical credentials in the field of mineral property exploration or development. She spends approximately 10% of her time on our affairs.
6.2 Compensation of Directors
We are required, under applicable securities legislation in Canada, to disclose to our shareholders details of compensation paid to our directors. The following fairly reflects all material information regarding compensation paid to our directors for the fiscal years ended January 31, 2009 and 2008:
Summary Compensation Table
NAME AND PRINCIPAL POSITION | YEAR | ANNUAL COMPENSATION | LONG-TERM COMPENSATION | |||||
Salary | Bonus | Other Annual Compens -ation | Awards | LTIP payouts | All Other Compen- sation | |||
Restricted StockAwards | SecuritiesUnderlyingOptions/ SAR’s | |||||||
Linda Smith President, Chief Executive Officer and Director | 2009 2008 | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil |
Darcy Krell Secretary, Chief Financial Officer and Director | 2009 2008 | $52,750 $30,000 | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil |
Shannon Krell Director | 2009 2008 | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil | Nil Nil |
We did not pay any compensation for director services per se in the fiscal years ended January 31, 2009 and 2008. However, certain management and administrative services are performed by Mr.
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Darcy Krell, our Secretary and Chief Financial Officer, for a fee of $7,500 per month of which $5,000 is for management services and included in the above table. The management fees were increased from $2,500 to $5,000 per month effective May 1, 2008 due to more time and effort required to run the business.
6.3 Board Practices
Linda Smith was appointed as our President and a director on October 27, 2000 and Shannon Krell was appointed as a director on the same date. The directors hold office until the next annual general meeting of the shareholders at which time they may stand for re-election. We are required to hold an annual general meeting once in every calendar year and not longer than thirteen months from the last annual general meeting. The last annual general meeting was held in Vancouver, BC on November 13, 2008.
Our audit committee is comprised of Linda Smith and Darcy Krell and we have not appointed a compensation committee.
6.4 Employees
We do not have any employees other than our directors and officers. When required, we retain geological, financial and other consultants.
6.5 Share Ownership of Directors and Officers
Our directors and officers own beneficially the following common shares as of the date of this annual report:
Percentage of Issued and | ||
Number of Shares Owned | Outstanding Shares | |
Linda Smith * | 56,783 | 0.54% |
Darcy Krell * | 40,000 | 0.38% |
Shannon Krell ** | 0 | 0.00% |
96,783 | . 0.92% |
* Darcy Krell and Linda Smith are husband and wife.
** Shannon Krell is the daughter of Darcy Krell and Linda Smith
The above percentages are based on the 10,565,171 common shares issued and outstanding in our capital stock as of the date of this annual report following the issuance of 10,000,00 shares during the year ended January 31, 2009 and the 1:10 share consolidation during the year ended January 31, 2008.
In December 2006, we adopted an incentive stock option plan but to date no stock options have been granted to our directors and officers and no stock options are outstanding to the date of this annual report.
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ITEM 7. Major Shareholders and Related Party Transactions
7.1 Beneficial Ownership
As used in this section, the term "beneficial ownership" with respect to a security is defined by Regulation 228.403 under the Securities exchange Act of 1934, as amended, as consisting of: (1) any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power (which includes the power to vote, or to direct the voting of such security) or investment power (which includes the power to dispose, or to direct the disposition of, such security); and (2) any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership.
As of the date of this annual report, 10,565,171 common shares are issued and outstanding and we are authorized to issue an unlimited number of common shares without par value.
As of the date of this annual report, the following persons known to us were the beneficial owner of more than five percent of our outstanding common shares.
Number of Shares | Percentage of Issued and | |
Name of Shareholder | Owned | Outstanding Shares |
Ryan Krell** | 1,050,000 | 9.93% |
Marie Krell | 1,000,000 | 9.47% |
Ivan Martinez | 1,000,000 | 9.47% |
Al Mencor | 1,000,000 | 9.47% |
Don MacDougall | 1,000,000 | 9.47% |
Frank McGill | 1,000,000 | 9.47% |
Ted Hayes | 900,000 | 8.51% |
Lyle Smith | 800,000 | 7.57% |
Karen Law | 800,000 | 7.57% |
Colleen Barrow | 800,000 | 7.57% |
Steve Chen | 700,000 | 6.62% |
10,050,000 | 95.12% |
** | Ryan Krell is the son of Linda Smith and Darcy Krell and has a non-interest bearing promissory note with us in the face amount of $106,755. This note is convertible at the holder’s option into 213,510 of our common shares prior to the new maturity date of January 1, 2011 (formerly January 1, 2008). |
Each of our issued shares entitles the holder to one vote at our general shareholder meetings. There are no disproportionate or weighted voting privileges.
We are not controlled directly or indirectly by any other corporation or any other foreign government or by any other natural or legal person, severally or jointly.
There are no arrangements which at a subsequent date may result in a change in our control.
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7.2 Related Party Transactions
As at January 31, 2009, there were no balances or transactions with any director, executive officer or beneficial holder of more than 5% of our outstanding common stock, or any of their respective relatives, spouses, associates or affiliates, which materially affected or will materially affect us, except as follows:
a) As at January 31, 2009, loans payable of $851,128 (2008 - $1,174,792) to the Company’s officers and immediate family members were unsecured and non-interest bearing with no specific terms of repayment.
b) As at January 31, 2009, a loan from an immediate family member of an officer of the Company in the face amount of $106,755 (2008 - $106,755) is secured by a convertible promissory note dated February 3, 2003 and amended on both December 31, 2005 and December 31, 2007. It is non-interest bearing and now due on January 1, 2011. The note is convertible into 213,510 common shares of the Company prior to maturity at the holder’s option on the basis of one common share for each $0.50 of principal outstanding following the 1:10 share consolidation on October 23, 2007. On December 31, 2007, the maturity date was extended for an additional three years to January 1, 2011 giving rise to note modification including re-calculation of the equity component of the debt. Consequently, $64,974 was allocated to the debt component and $41,781 to the embedded conversion feature using an 18% risk-adjusted debt discount rate. The debt component continues to be accreted to its face value at maturity. Accretion expense of $11,871 was recorded for the year ended January 31, 2009 (2008 - $2,331) increasing the debt component to $77,820 at January 31, 2009.
c) During the years ended January 31, 2009 and 2008, the Company recorded the following transactions with related parties:
Year Ended | Year Ended | ||||||
January 31, | January 31, | ||||||
2009 | 2008 | ||||||
Management fees | $ | 52,500 | $ | 30,000 | |||
Office rent | 18,000 | 18,000 | |||||
$ | 70,750 | $ | 48,000 |
The foregoing related party transactions are conducted in the normal course of business and are recorded at their exchange amount, which is the consideration paid or received by us as agreed between the parties.
7.3 Interests of Experts and Counsel
Our experts and legal counsel have no interest in our shareholdings.
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ITEM 8. Financial Information
The financial statements required by this Item are attached hereto as an exhibit and are incorporated herein by reference.
8.1 Legal Proceedings
To the best of our knowledge there are no legal or arbitration proceedings threatened, pending or in progress against us.
8.2 Significant Changes
There have been neither significant subsequent events nor changes in our business plan since the date of the audited financial statements included herein.
ITEM 9. The Offer and Listing
9.1 Offer and Listing Details
We are currently a reporting issuer in both British Columbia and Alberta and file as a foreign issuer with the United States Securities and Exchange Commission. After filing and receipting a registration statement on Form 20-F with the United States Securities and Exchange Commission, our common shares were posted for trading on the Over-The-Counter: Bulletin Board (OTC:BB) in the United States under the symbol GMSRF:OB on February 14, 2007. With the name change to Rouge Resources Ltd., the trading symbol was changed to ROUGF:OB effective March 26, 2008.
The following table sets forth the high and low prices of our common shares in US funds since trading commenced on the OTC:BB:
Period | High | Low |
February 14, 2007 to April 30, 2007 | No trading | |
May 1, 2007 to July 31, 2007 | No trading | |
August 1, 2007 to October 30, 2007 | $0.50 | $0.20 |
November 1, 2007 to January 31, 2008 | $0.70 | $0.10 |
February 1, 2008 to April 30, 2008 | $1.00 | $0.12 |
May 1, 2008 to July 31, 2008 | $0.10 | $0.13 |
August 1, 2008 to October 31, 2008 | $0.05 | $0.10 |
November 1, 2008 to January 31, 2009 | $0.06 | $0.07 |
February 1, 2009 to April 30, 2009 | $0.01 | $0.06 |
Previously our common shares were traded on the Canadian Venture Exchange and its predecessor, the Vancouver Stock Exchange, under the symbol “GMS” before the name change to Rouge Resources Ltd. On July 12, 2001, our shares were suspended from trading on the Canadian Venture Exchange due to failure to meet the Exchange’s minimum working capital requirements. The Canadian Venture Exchange (now called the TSX Venture Exchange) requires that listed companies have a minimum of $50,000 in unallocated working capital. At that time, we did not meet this requirement and trading in our shares was suspended.
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The Cease Trade Orders issued against us on November 7, 2003 by the Alberta Securities Commission (the “ASC”) and on January 14, 2004 by the British Columbia Securities Commission (the “BCSC”) were lifted on August 18, 2006 by the BCSC and on August 23, 2006 by the ASC. These reactivation and revocation orders resulted from the Company bringing its disclosure records up-to-date on SEDAR (www.sedar.com); preparing a new 43-101 report regarding the merits of the Dotted Lake property dated December 6, 2005; meeting all other regulatory requirements; and paying all required fees and penalties.
The following table sets forth the high and low closing prices in Canadian funds of our common shares during the time they traded through the facilities of the Canadian Venture Exchange, and its predecessor, the Vancouver Stock Exchange:
Period | High | Low |
February 1, 1999 to January 31, 2000 | 1.50 | $0.30 |
February 1, 2000 to January 31, 2001 | $2.50 | $0.60 |
February 1, 2001 to July 12, 2001 | $1.00 | $0.60 |
ITEM 10. Additional Information
10.1 Share Capital
(i) Common Shares
Authorized
Unlimited common shares without par value
Issued
Number of Shares | $ | |||||
Balance at January 31, 2008 and 2007 | 565,171 | 1,113,471 | ||||
Private placement at $0.05 per share | 10,000,000 | 500,000 | ||||
Balance at January 31, 2009 | 10,565,171 | 1,613,471 |
During the year ended January 31, 2009, the Company completed a non-brokered private placement of 10 million units at $0.05 for total proceeds of $500,000. Each unit consists of one common share and one non-transferable share purchase warrant, each warrant entitling the holder to acquire one additional common share of the Company at a price of $0.10 per share for two years. No value was attributed to the warrant.
During the year ended January 31, 2008, the Company affected a one for ten (1:10) share consolidation of its authorized, issued and outstanding share capital resulting in all share and per share information in these financial statements being presented on a retroactive basis as if the share consolidation took place at the beginning of all years presented. Accordingly, the issued and outstanding share capital was reduced from 5,651,714 to 565,171 common shares. After the share consolidation, the Company increased its authorized share capital from 10,000,000 common shares to an unlimited number without par value.
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(ii)Share Purchase Warrants
Balance | Balance | |||
January 31, | January 31, | Exercise | ||
2008 | Issued | 2009 | Price | Expiry |
Nil | 10,000,000 | 10,000,000 | $ 0.10 | June 30, 2010 |
As at January 31, 2009, the weighted average remaining contractual life of the share purchase warrants is 1.14 years and the weighted average exercise price is $0.10.
(iii)Stock Option Plan
The Company’s Stock Option Plan (the “Plan”) was adopted in December 2006 and is administered under the following basic terms and conditions:
(a) | the maximum available for grant is up to 10% of the Company’s issued shares outstanding at any one time; |
(b) | Company employees, directors, officers and consultants are eligible to receive a grant of stock options provided that bona fide services have been rendered and that such services are not in connection with the offer or sale of securities in a capital-raising transaction. There is a 10% limitation of options granted in any one year to one specific employee, director or officer and a 2% annual limitation to one specific consultant; |
(c) | the grant price shall not be less than the market value of the shares at the time of grant less any discount permitted by the relevant regulatory authorities; |
(d) | the exercise price shall be determined by a plan committee at the time of grant; and |
(e) | the option period shall not exceed five years from the date of grant. |
No stock options have been granted and no stock options are outstanding at January 31, 2009.
(iv) Contributed Surplus
$ | |||
Balance, January 31, 2007 | 11,576 | ||
Equity component of convertible debt | 41,781 | ||
Balance, January 31, 2009 and 2008 | 53,357 |
All shares issued and to be issued in the future have been and must be approved by an authorizing resolution consisting of a simple majority of our board of directors.
We do not hold any of our own shares. We do not have any potential obligations to increase our issued and outstanding share capital.
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10.2 Memorandum and Articles of Association
We were incorporated pursuant to theCompany Act of British Columbia by registration of our articles of incorporation and memorandum on March 31, 1988 and were subsequently transitioned to the replacementBusiness Corporations Act in March 2006. Pursuant to the provisions of theBusiness Corporations Act, a company may conduct any business that it is not restricted by the terms of its articles. Our articles contain no such restrictions.
Our directors are required to disclose to the board of directors the nature and extent of their interest in any proposed transaction or contract and must thereafter refrain from voting in respect thereof. An interested director may be counted in the quorum when a determination as to such director’s remuneration is being considered but may not vote in respect thereof. The directors have an unlimited power to borrow money, issue debt obligations and mortgage or charge our assets provided such actions are conducted bona fide and in our best interests. There are no mandatory retirement ages for directors or any required shareholdings.
All holders of common shares are entitled to receive dividends out of assets legally available therefore at such times and in such amounts as the board of directors may from time to time determine. All holders of common shares will share equally on a per share basis in any dividend declared by the board of directors. The dividend entitlement time limit will be fixed by the board of directors at the time any such dividend is declared. Each outstanding common share is entitled to one vote on all matters submitted to a vote of our shareholders in general meeting. There are no cumulative voting rights attached to any of our shares and, accordingly, the holders of more than half of the shares represented at a general meeting can elect all of the directors to be elected in a general meeting. All directors stand for re-election annually. Upon any liquidation, dissolution or winding up, all common shareholders are entitled to share ratably in all net assets available for distribution after payment to creditors. The common shares are not convertible or redeemable and have no preemptive, subscription or conversion rights. In the event of a merger or consolidation, all common shareholders will be entitled to receive the same per share consideration.
The rights of shareholders may only be altered by the shareholders passing a special resolution at a general meeting. A special resolution may only be passed when it has been circulated to all shareholders by way of an information circular and then must be passed by seventy-five percent of the votes cast at the general meeting.
The board of directors may call annual and extraordinary general meetings when required. One or more shareholders holding in aggregate five percent or more of our issued shares may requisition an extraordinary meeting and the directors are required to hold such meeting within four months of such requisition. Only registered shareholders or persons duly appointed by proxy may be admitted to meetings unless otherwise permitted by the chairman of the meeting.
There are no national limitations or restrictions on the right to own our common shares.
There are no provisions in our articles of association that would have the effect of delaying, deferring or preventing a change in control.
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There are no provisions in our articles of association that establish any threshold for disclosure of ownership. However, the British Columbia and Alberta Securities Commissions require that persons who are the registered owners of, and/or have voting control over 10% or more of our common shares must file insider reports disclosing securities holdings.
10.3 Material Contracts
The only material contract currently outstanding is the amended management agreement with Mr. Darcy Krell whereby management fees increased from $2,500 to $5,000 per month effective May 1, 2008 due to more time and effort required to run the business.
10.4 Exchange Controls and Other Limitations Affecting Security Holders
There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of common shares, other than withholding tax requirements. See "Item 10.5" below.
There is no limitation imposed by Canadian law or by our constituent documents on the right of a non-resident to hold or vote common shares, other than are provided in the Investment Canada Act (Canada). The following summarizes the principal features of the Investment Canada Act (Canada).
The Investment Canada Act (Canada) requires certain "non-Canadian" individuals, governments, corporation or other entities who wish to acquire a "Canadian business" (as defined in the Investment Canada Act), or establish a "new Canadian business" (as defined in the Investment Canada Act) to file either a notification or an application for review with a governmental agency known as "Investment Canada". The Investment Canada Act requires that certain acquisition of control of Canadian business by a "non-Canadian" must be reviewed and approved by the Minister responsible for the Investment Canada Act on the basis that the Minister is satisfied that the acquisition is "likely to be of net benefit to Canada", having regard to criteria set forth in the Investment Canada Act. Only acquisitions of control are reviewable under the Investment Canada Act; however, the Investment Canada Act provides detailed rules for the determination of whether control has been acquired and, pursuant to those rules, the acquisition of one-third or more of the voting shares of a corporation may, in some circumstances, be considered to constitute an acquisition of control. Certain reviewable acquisitions of control may not be implemented before being approved by the Minister; if the Minister does not ultimately approve a reviewable acquisition, which has been completed, the acquired Canadian business must be divested. Failure to comply with the review provisions of the Investment Canada Act could result in, amongst other things, an injunction or a court order directing disposition of assets of shares.
10.5 Canadian Federal Income Tax Consequences to U.S. Investors
A brief description of certain provisions of the tax treaty between Canada and the United States is included below, together with a brief outline of certain taxes, including withholding provisions to which United States security holders are subject under existing laws and regulations of Canada and United States; the consequences, if any, of state and local taxes are not considered. The following information is general and security holders are urged to seek the advice of their own tax advisors, tax counsel or accountants with respect to the applicability or effect on their own individual circumstances of not only the matters referred to herein, but also any state or local taxes.
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Canadian federal tax legislation generally requires a 25% withholding from dividends paid or deemed to be paid to the Company's nonresident shareholders. However, shareholders resident in the United States will generally have this rate reduced to 15% through the tax treaty between Canada and the United States. The amount of stock dividends paid to non-residents of Canada will be subject to withholding tax at the same rate as cash dividends. The amount of stock dividend (for tax purposes) would generally be equal to the amount by which our stated capital has increased by reason of the payment of such dividend. We will furnish additional tax information to shareholders in the event of such a dividend. Interest paid or deemed to be paid on our debt securities held by non-Canadian residents may also be subject to Canadian withholding tax, depending upon the terms and provisions of such securities and any applicable tax treaty. Under present legislation in the United States, we are generally not subject to United States back up withholding rules, which would require withholding at a rate of 20% on dividends and interest paid to certain United States persons who have not provided us with a taxpayer identification number.
Gains derived from a disposition of shares of the company by a non-resident shareholder will be subject to tax in Canada only if not less than 25% of any class of our shares was owned by the nonresident shareholder and/or persons with whom the nonresident did not deal at arm's length at any time during the five-year period immediately preceding the disposition. In such cases gains derived by a U.S. shareholder from a disposition of our shares would likely be exempt from tax in Canada by virtue of the Canada-U.S. tax treaty.
10.6 United States Federal Income Tax Consequences to U.S. Investors
The following general discussion sets forth a summary of the material United States federal income tax consequences that are applicable to the following persons who invest in and hold our common shares as capital assets ("U.S. Shareholders"): (i) citizens or residents (as specially defined for federal income tax purposes) of the United States, (ii) corporations or partnerships created or organized in the United States or under the laws of the United States or of any state and (iii) estates or trust the income of which is subject to United States federal income taxation regardless of its source. This discussion does not deal with (a) all aspects of federal income taxation that may be relevant to a particular U.S. Shareholder based on such U.S. Shareholder's particular circumstances (including potential application of the alternative minimum tax, (b) certain U.S. Investors subject to special treatment under federal income tax laws or foreign individuals or entities, (c) U.S. Investors owning directly or by attribution 10% or more of our common shares, or (d) any aspect of state, local or non-United States tax laws. Additionally, the following discussion assumes that the Company will not be classified as a "foreign personal holding company" under the Internal Revenue Code of 1986 as amended (the "Code").
Passive Foreign Investment Company
For any of our taxable years, if 75% or more of our gross income is "passive income" (as defined in the Code) or if at least 50% of our assets, by average fair market value (or adjusted income basis if the Company elects), are assets that produce or are held for the production of passive income, we will be deemed to be a Passive Foreign Investment Company ("PFIC").
A U.S. Shareholder of a PFIC is subject to special U.S. federal income tax rules in Section 1291 to 1297 of the Code. As described below, these provisions set forth two alternative tax regimes at the election of each such U.S. Shareholder, depending upon whether the U.S. Shareholder elects to treat us as a "qualified electing fund" (a QEF election").
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U.S. SHAREHOLDERS ARE STRONGLY URGED TO CONSIDER MAKING A QEF ELECTION TO AVOID CERTAIN POTENTIALLY SIGNIFICANT ADVERSE U.S. TAX CONSEQUENCES
The QEF Election Alternative
Each U.S. Shareholder is strongly urged to consider making a QEF Election because of the potential benefits of such election that are discussed below, and because we anticipate that we will not have any earnings and profits (as computed for United States federal income tax purposes) for the current taxable year and little, if any, earnings and profits for any future taxable year in which we are a PFIC. There can be no assurance, however, that this will be the case. Accordingly, the timely making of the QEF election, as discussed below, generally should, subject to the discussion below under "Other PFIC Rules", avoid any significant adverse United State federal income tax consequences resulting from any classification of us as a PFIC, although this may depend on a particular U.S. Shareholder's particular circumstances.
A U.S. Shareholder who elects in a timely manner to treat us as a QEF (an "Electing U.S. Shareholder") will be subject, under Section 1293 of the Code, to current federal income tax for any taxable year in which we are a PFIC (or is treated as a PFIC with respect to the U.S. Shareholder) on such Electing U.S. Shareholder's pro-rata share of our (i) "net capital gain" (the excess of net long-term capital gain over short-term capital loss), which will be taxed as long-term capital gain to the Electing U.S. Shareholder 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. Shareholder, in each case, for the shareholder's taxable year in which, or with which, our taxable year ends, regardless of whether such amounts actually are distributed. An Electing U.S. Shareholder, however, would not take into account any income with respect to any of our taxable years for which we have no earnings and profits. Adjustments are provided generally to prevent double taxation at the time of later distributions on or dispositions of Common Shares.
The QEF election also allows the Electing U.S. Shareholder to (i) generally treat any gain realized on the disposition of our common shares (or deemed to be realized on the pledge of such shareholder's common shares) as capital gain; (ii) treat such shareholder's share of our net capital gain, if any, as long-term capital gain instead of ordinary income; (iii) probably (although in the absence of regulations this matter is not free from doubt) retain in the case of an individual Electing U.S. Shareholder, the "step-up" in the tax basis of Common Shares to the fair market value of such shares on the date of such Electing U.S. Shareholder's death (which would otherwise not be retained); and (iv) generally avoid interest charges resulting from PFIC status altogether.
In the event we are deemed a PFIC, we intend to comply with the reporting requirements prescribed by Treasury regulations. In particular, we will maintain information so that our ordinary earnings and net capital gain may be determined. However, future regulations may contain reporting and record-keeping requirements that are so onerous that it would not be practicable for us to comply. If, after review of the requirements, we decide not to comply with the PFIC record-keeping requirements, we will so notify our shareholders.
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A QEF Election must be made by attaching the following documents to the timely filed U.S. federal income tax return for the first taxable year of the U.S. Shareholder in which or with which our taxable year during which we were a PFIC and the U.S. Shareholder held (or was considered to have held) common shares ends: (i) a "Shareholder Section 1295 Election Statement" executed by the U.S. Shareholder, (ii) a "PFIC Annual Information Statement" received by the U.S. Shareholder from us, and (iii) a Form 8621. In addition, the Electing U.S. Shareholder must file a copy of the Shareholder Section 1295 Election Statement with the Internal Revenue Center, PO Box 21086, Philadelphia, PA 19114. In the case of common shares owned through a U.S entity, the election is made at the entity level.
The following six paragraphs apply to electing U.S. shareholders:
(i) Dividends Paid on Common Shares:
Dividends paid on our common shares (including any Canadian taxes withheld) to an Electing U.S. Shareholder will be treated as ordinary dividend income for United States federal income tax purposes to the extent of our current and accumulated earnings and profits (as computed for U.S. federal income tax purposes) unless paid out of earnings and profits that were taxed to the Electing U.S. Shareholder under the QEF rules. Such dividends generally will not qualify for the dividends-received deduction available to corporations. Amount in excess of such earnings and profits will be applied against the Electing U.S. Shareholder's tax basis in the common shares, and to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such common shares.
(ii) Credit for Canadian Taxes Withheld:
Subject to the limitations set forth in Section 904 of the Code (which generally restricts the availability of foreign tax credits to a U.S. Shareholder's tax liability attributable to foreign-source income of the same type as the income with respect to which the tax was imposed, as determined under complex U.S. tax rules), the Canadian tax withheld or paid with respect to dividends on the common shares generally may be taken as a foreign tax credit against United States federal income taxes by an Electing U.S. Shareholder who chooses to claim such a credit for the taxable year. Electing U.S. Shareholders who do not choose to claim foreign tax credits for a taxable year may claim United States tax deduction for such Canadian tax in such taxable year.
(iii) Disposition of Common Shares:
Any gain or loss on a sale or exchange of common shares by an Electing U.S. Shareholder will be capital gain or loss, which will be long-term capital gain or loss if the common shares have been held for more than one year, and otherwise will be short-term capital or loss. The sale of common shares through certain brokers may be subject to the information reporting and back-up withholdings rules of the Code.
(iv) The Non-QEF Election Alternative
If a U.S. Shareholder does not timely make a QEF Election for the first taxable year during which he holds (or is considered to hold) the common shares in question and we are a PFIC (a "Non-electing U.S. Shareholder"), then special rules under Section 1291 will apply to (i) gains realized on the disposition (or deemed to be realized by reason of a pledge) of common shares, and (ii) certain "excess distribution" (as defined in the Code) by us. We have never made any distributions with respect to our common shares and we do not anticipate making any such distribution in the foreseeable future.
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A non-electing U.S. Shareholder generally would be required to pro-rate all gains realized on the disposition of our common shares and all excess distributions over such shareholder's entire holding period for the common shares. All gains or excess distributions allocated to prior years of the U.S. Shareholder (provided such U.S. Shareholder's holding period and beginning after December 31, 1986 for which it was a PFIC) would be taxed at the highest tax rates for each such prior year applicable to ordinary income. Special foreign tax credit rules apply with respect to withholding taxes imposed on amounts that are treated as excess distributions. The Non-electing U.S. Shareholder 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. Shareholder that is not a corporation must treat this interest charge as "personal interest" which is 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 respect to such balance.
If we are a PFIC for any taxable year during which a non-electing U.S. Shareholder holds, or is considered to hold, our common shares, then we will continue to be treated as a PFIC with respect to such common shares, even if we no longer meet the definition of a PFIC. A Non-electing U.S. Shareholder may determine this deemed PFIC status by electing to recognize gain (which will be taxed under the rules discussed above for Non-electing U.S. Shareholders) as if such common shares had been sold on the last day of the last taxable year for which it was a PFIC. Certain other elections are also available to Non-Electing U.S. Shareholders.
(v) Other PFIC Rules
Certain special, generally adverse, rules will apply with respect to our common shares while we are a PFIC, regardless of whether the common shares are held, or considered to be held, by an Electing or Non-electing U.S. Shareholder. For example, under Section 1297(b)(6) of the Code, a U.S. Shareholder 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 stock. In addition, under Section 1291(f) of the Code, the Treasury has authority to issue regulations that would treat as taxable certain transfers that are generally not so treated, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death, although it is not clear that such authority extends to transfers by Electing U.S. Shareholders.
(vi) Future Developments
The foregoing discussion is based on existing provisions of the Code, existing and proposed regulations thereafter, and current administrative rulings and court decisions, all of which are subject to change. Any such changes could affect the validity of this discussion. In addition, the implementation of certain aspects of the PFIC rules requires the issuance of regulations which in many such instances have not yet been promulgated and which may have retroactive effect. Furthermore, legislation has been proposed which would replace the PFIC provisions with a consolidated anti-deferral regime. While this legislation was vetoed, it may be re-introduced in subsequent years.
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ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING THE COMMON SHARES.
10.7 Statements by Experts
We have placed reliance upon:
(i) our new auditor, Dale Matheson Carr-Hilton Labonte LLP, Chartered Accountants, Suite 1500 – 1140 West Pender Street, Vancouver BC, Canada V6E 4G1, as expert in Canadian and US accounting and auditing matters; and
(ii) our lawyer, Mr. Doug Eacrett Law, Suite 203 – 409 Granville St, Vancouver BC, Canada V6C 1T2, as expert in Canadian securities law.
10.8 Documents on Display
You may review a copy of our filings with the SEC, including exhibits and schedules filed with it, at the SEC's public reference facilities at 100 F Street NE, Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC maintains a Web site (HTTP://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. We have made our filings with the SEC electronically as a reporting foreign issuer.
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial statements due to adverse changes in financial market prices and rates, including credit, foreign exchange, interest rates and liquidity.
We are engaged primarily in the mineral exploration business and manages related industry risk directly. We are potentially at risk for environmental reclamation and fluctuations and commodity-based market prices associated with resource property interests. We are of the opinion that we address environmental risk and compliance in accordance with industry standards and specific project environmental requirements. There is no certainty that all environmental risks and contingencies have been addressed.
We are also exposed in varying degrees to a variety of financial instrument related risks as follows:
(i) | Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Our primary exposure to credit risk is in our cash accounts. This risk is managed through the use of a major financial institution which has high credit quality as determined by the rating agencies. |
(ii) | Foreign exchange risk is the risk that we will be subject to foreign currency fluctuations in satisfying obligations related to its foreign activities. We operate primarily in Canada and therefore are not exposed to foreign exchange risk arising from transactions denominated in a foreign currency. |
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(iii) | Interest rate risk is the risk that the fair value of future cash flow of a financial instrument will fluctuate because of changes in market interest rate. Our exposure to interest rate risk relates to our ability to earn interest income on cash balances at variable rates. The fair value of our cash account is relatively small and unaffected by changes in short term interest rates. Our long term debt bears interest at a fixed rate and we are therefore not affected by changes in long term interest rates. |
(iv) | Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. Our objective in managing liquidity risk is to maintain sufficient readily available capital in order to meet our liquidity requirements. |
ITEM 12. Descriptions of Securities Other than Equity Securities
12.1 Warrants
Refer to Item 10.2 (ii) above.
12.2 Stock Options
Refer to Item 10.2 (iii) above.
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies
None
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None
ITEM 15. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this annual report, being January 31, 2009, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our company’s Chief Executive Officer and our Chief Financial Officer
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concluded that our company’s disclosure controls and procedures are effective as at the end of the period covered by this report. There have been no changes in our company’s internal controls over financial reporting during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and our Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed, under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in Canada. A reconciliation of all material differences between Canadian and US GAAP has been disclosed in Note 11 to the audited financial statements.
Management conducted an assessment of the effectiveness of our Company’s internal control over financial reporting as of May 29, 2009, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of May 29, 2009 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in Canada; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisitions, use, or disposition of our Company’s assets that could have a material affect on our Company’s financial statements are prevented or detected on a timely basis.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparations and presentations. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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ITEM 16A. Audit Committee Financial Expert
Audit Committee
Linda Smith and Darcy Krell act as our audit committee; undertake reviews of our company’s financial statements; and determine the adequacy of internal controls and other financial reporting matters. The members of our board of directors are Linda Smith, Darcy Krell and Shannon Krell and they have determined that no member of either the board or the audit committee is “independent” as the term is used in Rule 10A-3 of the Securities Exchange Act of 1934, as amended, and the definition of independent director as defined in section 4200 of the Marketplace Rules of the NASD.
Audit Committee Financial Expert
Our board of directors has determined that it does not have a member that qualifies as an “audit committee financial expert” as defined in Item 401(e) of Regulation S-B. We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.
ITEM 16B. Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, our company’s officers including President , Chief Financial Officer, contractors, consultants and advisors. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
(1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
(2) full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
(3) compliance with applicable governmental laws, rules and regulations;
(4) the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
(5) accountability for adherence to the Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s personnel shall be accorded full access to our president with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our company’s personnel are to be accorded full access to our company’s board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our company officers.
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In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company’s President. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the President, the incident must be reported to any member of our board of directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our Code of Business Conduct and Ethics by another.
ITEM 16C. Principal Accountant Fees and Services
During the fiscal years ended January 31, 2009 and 2008, we incurred approximately $26,500 and $14,300 respectively in fees to its principal independent accountant for professional services rendered in connection with the audits of our year end financial statements and our annual report filed on Form 20-F.
During fiscal years ended January 31, 2009 and 2008, we did not incur any fees for professional services rendered by our principal independent accountant for any of the following:
(i) information technology services including, but not limited to, operating or supervising or managing our information or local area network or designing or implementing a hardware or software system that aggregate source data underlying the financial statements.
(ii) any other non-assurance services including, but not limited to, tax-related services, actuarial services or valuation services.
ITEM 16D. Exemptions from the Listing Standards for Audit Committees
Not Applicable
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not Applicable
ITEM 16F. Change in Registrant’s Certifying Accountant
Pursuant to Section 4.11 of Canadian National Instrument 51-102, we replaced Morgan & Company, Chartered Accountants, as the auditor of Rouge Resources Ltd. and appointed Dale Matheson Carr-Hilton Labonte LLP, Chartered Accountants, in their place. This was reported on March 24, 2009 to the British Columbia and Alberta Securities commissions and we confirm that:
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(i) There were no reservations contained in the auditor's reports on our annual financial statements for the two completed fiscal years preceding the date of the resignation of Morgan & Company, Chartered Accountants.
(ii) Our audit committee and board of directors participated in and approved the appointment of Dale Matheson Carr-Hilton Labonte LLP, Chartered Accountants, as successor auditor to replace Morgan & Company, Chartered Accountants, following their resignation.
(iii) In connection with its audits for the two most recent fiscal years in which Morgan & Company, Chartered Accountants, was auditor, there have been no disagreements with Morgan & Company, Chartered Accountants, on any matter of accounting principles or practices, financial statements disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Morgan & Company, Chartered Accountants, would have caused them to make reference thereto in their report on our financial statement for such years.
(iv) In our opinion, no reportable events occurred prior to the resignation from office of Morgan & Company, Chartered Accountants, on or about March 24, 2009.
ITEM 16G. Corporate Governance
Not applicable.
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PART III
ITEM 17. Financial Statements
Our financial statements for the year ended January 31, 2009 were audited by Dale Matheson Carr-Hilton Labonte, Chartered Accountants, and for the year ended January 31, 2008 were audited by Morgan & Company, Chartered Accountants, both without reservation, as follows:
• | Audit report dated May 8, 2009 | |
• | Balance sheets as at January 31, 2009 and 2008 | |
• | Statements for the years ended January 31, 2009, 2008 and 2007 | |
• | Operations, Comprehensive Loss and Deficit | |
• | Cash Flows | |
• | Notes to financial statements for the years ended January 31, 2009 and 2008 |
All our financial statements are prepared in accordance with Canadian GAAP and are reconciled to US GAAP and disclosed in Note 11. All figures are expressed in Canadian dollars.
ITEM 18. Exhibits
The unmarked exhibits below are attached to this report.
* Previously filed with Form 20-F on September 16, 2003
** Previously filed with Form 20-F on December 20, 2004
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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
ROUGE RESOURCES LTD. | |
Dated: June 10, 2009 | |
By: /s/ Linda Smith | |
_________________________________ | |
Linda Smith, | |
President and Chief Executive Officer |
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