ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 - NATURE OF BUSINESS /
ORGANIZATION
Business
Description
Arrow Resources Development, Inc. and
Subsidiaries (“the Company”), was subject to a change of control transaction
that was accounted for as a recapitalization of CNE Group, Inc. (“CNE”) in
November 2005. Arrow Resources Development, Ltd., (“Arrow Ltd.”) the Company's
wholly-owned subsidiary, was incorporated in Bermuda in May 2005. Arrow Ltd.
provides marketing and distribution services for natural
resource.
In April of 2006, Arrow Ltd. entered
into an agency agreement with Arrow Pacific Resources Group Limited (“APR”) that
provides marketing and distribution services for timber resource products and
currently has an exclusive marketing and sales agreement with APR to market
lumber and related products from land leased by GMPLH which is operated by APR
and it's subsidiaries, located in Indonesia. Under the agreement Arrow Ltd. will
receive a commission of 10% of gross sales derived from lumber and related
products. The consideration to be paid to APR will be in the form of a
to-be-determined amount of the Company's common stock, subject to the approval
of the Board of Directors.
As of December 31, 2005, the Company
also had a wholly-owned subsidiary, Career Engine, Inc. (“Career Engine”) for which
operations were discontinued prior to the recapitalization transaction. The net
assets of Career Engine had no value as of December 31,
2005.
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF
PRESENTATION
Interim Financial
Statements
In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
Company's financial position as of March 31, 2009 and the results of its operations,
changes in stockholders' (deficit) equity, and cash flows for the three months
periods ended March 31, 2009 and 2008, respectively and for the period from the
commencement of the development stage (November 15, 2005) to March 31, 2009, and
for the period from the commencement of the development stage (November 15,
2005) to December 31, 2008. Although management believes that the
disclosures in these consolidated financial statements are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to the rules and regulations of
the Securities Exchange Commission.
The results of operations for the three
months ended March 31, 2009 are not necessarily indicative of the
results that may be expected for the full year ending December 31,
2009. The accompanying consolidated
financial statements should be read in conjunction with the more detailed
consolidated financial statements, and the related footnotes thereto, filed with
the Company’s Annual Report
on Form 10KSB for the year
ended December 31, 2008 filed on April 15, 2009.
Going-Concern Status
These consolidated financial statements
are presented on the basis that the Company is a going concern. Going concern
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business over a reasonable period of
time.
As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of $1,251,480 for the three months ended March
31, 2009, and a net loss during the development stage from inception in November
15, 2005 through March 31, 2009 of $141,475,448. The Company’s operations are in the
development stage, and the Company has not substantially generated any revenue since inception.
The Company’s existence in the current period has been dependent upon advances
from related parties and other individuals, and proceeds from the issuance
of senior notes payable.
One of
the principal reasons for the Company’s substantial doubt regarding its ability
to continue as a going concern involves the fact that as of December 31, 2007, the Company’s
principal asset, a marketing and distribution intangible asset in the amount of
$125,000,000 was written off as impaired as discussed in Note 6 due to the fact that environment laws
affecting timber harvesting have become more restrictive in Papua New
Guinea.
The
condensed consolidated financial statements do not include any adjustments
relating to the carrying amounts of recorded assets or the carrying amounts and
classification of recorded liabilities that may be required should the Company
be unable to continue as a going concern.
Principles of
consolidation:
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Arrow Ltd. All significant inter-company balances and transactions have been
eliminated.
Development
Stage Company:
The
accompanying financial statements have been prepared in accordance with the
Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by
Development-Stage Enterprises”. A development stage enterprise is one
in which planned and principal operations have not commenced or, if its
operations have commenced, there has been no significant revenue there
from. Development-stage companies report cumulative costs from the
enterprise’s inception.
Income taxes:
The Company follows SFAS No. 109,
“Accounting for Income Taxes.” Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance has been provided for the Company's net deferred
tax asset, due to uncertainty of realization.
Effective January 1, 2007, the Company
adopted Financial Accounting Standard Board Interpretation No. 48 Accounting for
Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS Statement No. 109 Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting interim period, disclosure
and transition. There were no adjustments required upon adoption of FIN
48.
Fair value of financial
instruments:
For financial statement purposes,
financial instruments include cash, accounts and accrued expenses payable, and
amounts due to Empire Advisory, LLC (“Empire”) (as discussed in Notes 6 and 7)
for which the carrying amounts approximated fair value because of their short
maturity.
Use of estimates:
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those
estimates.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Loss per share:
The Company complies with the
requirements of the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, “Earning per share” (“SFAS No. 128”).
SFAS No. 128 specifies the compilation, presentation and disclosure requirements
for earning per share for entities with publicly held common stock or
potentially common stock. Net loss per common share, basic and diluted, is
determined by dividing the net loss by the weighted average number of common
shares outstanding.
Net loss per diluted common share does
not include potential common shares derived from stock options and warrants
because they are anti-dilutive for the period from November 15, 2005 to
December 31, 2008 and for the period ended March 31, 2009. As of March 31, 2009,
there are no dilutive equity instruments outstanding. However, the Company has
355,000 and 355,000 shares of Series A Convertible Preferred Stock and
25,000 and 0 shares of Series C Convertible Preferred Stock that are issuable as of March 31, 2009
and 2008, respectively.
Acquired
intangibles:
Intangible assets are comprised of an
exclusive sales and marketing agreement. In accordance with SFAS 142, “Goodwill
and Other Intangible Assets” the Company assesses the impairment of identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors the Company considers to be
important which could trigger an impairment review include the
following:
|
1.
|
Significant underperformance
relative to expected historical or projected future operating
results;
|
|
2.
|
Significant changes in the manner
of use of the acquired assets or the strategy for the overall business;
and
|
|
3.
|
Significant negative industry or
economic trends.
|
When the Company determines that the
carrying value of intangibles may not be recoverable based upon the existence of
one or more of the above indicators of impairment and the carrying value of the
asset cannot be recovered from projected undiscounted cash flows, the Company
records an impairment charge. The Company measures any impairment based on a
projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in the current business
model. Significant management judgment is required in determining whether an
indicator of impairment exists and in projecting cash flows.
The sales and marketing agreement was to
be amortized over 99 years, utilizing the straight-line method. Amortization
expense had not been recorded since the acquisition occurred as the company had
not yet made any sales.
The value of the agreement was assessed
to be fully impaired by the Company and it recorded a loss on the write off of
the Marketing and Distribution agreement of $125,000,000 at December 31, 2007
(See Note 6).
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Consideration of Other
Comprehensive Income Items:
SFAS 130 - Reporting Comprehensive
Income, requires companies to present comprehensive income (consisting primarily
of net income plus other direct equity changes and credits) and its components
as part of the basic financial statements. For the period from inception
(November 15, 2005) to March 31, 2009, the Company’s consolidated financial
statements do not contain any changes in equity that are required to be reported
separately in comprehensive income.
Recent Accounting
Pronouncements:
In April
2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,” which further clarifies the
principles established by SFAS No. 157. The guidance is effective for the
periods ending after June 15, 2009 with early adoption permitted for the periods
ending after March 15, 2009. The adoption of FSP FAS 157-4 is not expected to
have a material effect on the Company’s financial position, results of
operations, or cash flows.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active”, (“FSP 157-3”),
to clarify the application of the provisions of SFAS 157 in an inactive market
and how an entity would determine fair value in an inactive market. FSP 157-3
was effective upon issuance and applies to the Company’s current financial
statements. The application of the provisions of FSP 157-3 did not materially
affect the Company’s results of operations or financial condition for the three
months ended March 31, 2009.
Other
accounting standards have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.
In June
2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock” effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008. EITF No.07-5 provides guidance for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock. The adoption of EITF No. 07-5 is not expected to have a
material effect on the Company’s consolidated financial statements.
In June
2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” Under the FSP, unvested share-based payment awards
that contain rights to receive nonforfeitable dividends (whether paid or unpaid)
are participating securities, and should be included in the two-class method of
computing EPS. The FSP is effective for fiscal years beginning after December
15, 2008, and interim periods within those years, and did not expect to have a
significant impact on the Company’s results of operations, financial condition
or cash flows.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity
exists in practice in accounting for financial guarantee insurance contracts by
insurance enterprises under FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises. This results in inconsistencies in the recognition and
measurement of claim liabilities. This Statement requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. The adoption of FASB 163 is not expected to
have a material impact on the Company’s financial position.
In May 2008, the FASB issued SFAS No.
162, “The Hierarchy of Generally Accepted Accounting Principles.” The
current GAAP hierarchy, as set forth in the American Institute of Certified
Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles,
has been criticized because (1) it is directed to the auditor rather than the
entity, (2) it is complex, and (3) it ranks FASB Statements of Financial
Accounting Concepts. The FASB believes that the GAAP hierarchy should be
directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. Accordingly, the FASB concluded that the
GAAP hierarchy should reside in the accounting literature established by the
FASB and is issuing this Statement to achieve that result. This Statement is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The adoption of FASB 162 is not expected to have a material
impact on the Company’s financial position.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities—an amendment of FASB Statement No. 133.” Constituents have expressed concerns
that the existing disclosure requirements in FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, do not provide adequate
information about how derivative and hedging activities affect an entity’s
financial position, financial performance, and cash flows. SFAS No. 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. The adoption of
FASB 161 is not expected to
have a material impact on the Company’s financial
position.
In December 2007, the FASB issued SFAS
No.160, “Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51”. SFAS No.160 requires that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, in the amount of consolidated net income attributable to
the parent and to the noncontrolling interest on the face of the consolidated
statement of income, and that entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No.160 is effective for
fiscal years, beginning on or after December 15, 2008 and cannot be applied
earlier.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141(revised 2007), “Business
Combinations,” (“FASB 141R”). This standard requires that entities recognize the
assets acquired, liabilities assumed, contractual contingencies and contingent
consideration measured at their fair value at the acquisition date for any
business combination consummated after the effective date. It further requires
that acquisition-related costs are to be recognized separately from the
acquisition and expensed as incurred. FASB 141R is effective for fiscal years
beginning after December 15, 2008.
The Company does not anticipate that the
adoption of SFAS No. 141R and No. 160 will have an impact on the Company's
overall results of operations or financial position, unless the Company makes a
business acquisition in which there is a non-controlling
interest.
In December 2007, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB
110 expresses the current view of the staff that it will accept a company’s
election to use the simplified method discussed in Staff Accounting Bulletin
107, Share
Based Payment , (“SAB
107”), for estimating the expected term of “plain vanilla” share options
regardless of whether the company has sufficient information to make more
refined estimates. SAB 110 became effective for the Company on January 1, 2008.
The adoption of SAB 110 is not expected to have a material impact on the
Company’s financial position.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
(continued):
In February 2007, the Financial
Accounting Standards Board (“FASB”) issued SFAS No.159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No.115”. SFAS No.159 permits entities to choose to measure eligible
financial instruments and other items at fair value at specified election dates.
A business entity shall report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting
date. The fair value option may be applied instrument by instrument but only
upon the entire instrument - not portions of the instrument. Unless a new
election date occurs, the fair value option is irrevocable. SFAS No.159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company does not expect that the adoption of SFAS No. 159
will have a material effect on the Company's consolidated financial
statements.
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements”. The statement standardizes the definition of
fair value, establishes a framework for measuring in generally accepted
accounting principles and sets forth the disclosures about fair value
measurements. SFAS No. 157 is effective for the beginning of an entity's
fiscal year that begins after November 15, 2007. The Company does not expect
SFAS No. 157 will have a material effect on its financial
statements.
NOTE 3 - AGREEMENT AND PLAN OF MERGER
BETWEEN ARROW RESOURCES DEVELOPMENT, LTD. AND CNE GROUP,
INC.
In August 2005, the Company entered into
an Agreement and Plan of Merger (“the Agreement”) with CNE Group, Inc. (“CNE”)
under which, CNE was required to issue 10 million shares of Series AAA
convertible preferred stock (“the Preferred Stock”) to the Company, representing
96% of all outstanding equity of CNE on a fully diluted basis for the Marketing
and Distribution Agreement provided to the Company, Empire, as agent. Under the
Agreement, the Company changed its name to Arrow Resources Development, Inc. and
divested all operations not related to Arrow Ltd. The Preferred Stock contained
certain liquidation preferences and each share of the Preferred Stock was
convertible to 62.4 shares of common stock.
The transaction was consummated upon the
issuance of the Preferred Stock on November 14, 2005, which was used to settle
the senior secured note payable for $125,000,000 and $1,161,000 of cash advances
from Empire. The Preferred Stock was subsequently converted to common stock on
December 2, 2005, for a total of approximately 649 million shares of common
stock outstanding. This was recorded as a change of control transaction that was
accounted for as a recapitalization of CNE.
The operations of the Company's
wholly-owned subsidiary, Career Engine, Inc. were discontinued prior to the
recapitalization transaction. The net assets of Career Engine had no value as of
December 31, 2005.
During the period from November 15, 2005
to December 31, 2005, the Company incurred $249,252 of expenses incurred as part
of recapitalization transaction.
NOTE 4 - INCOME
TAXES
In August 2005, the Company entered into
an Agreement and Plan of Merger (“the Agreement”) with CNE Group, Inc. (“CNE”).
Under the Agreement, the Company changed its name to Arrow Resources
Development, Inc. and divested all operations not related to Arrow Ltd. The
transaction was consummated upon the issuance of the Preferred Stock on November
14, 2005. (See Note 3 for a detailed description of the
transaction.)
Consequently, as of November 14, 2005
the predecessor CNE entity had a net operating loss carryforward available to
reduce future taxable income for federal and state income tax purposes of the
successor entity of approximately zero, because those losses arose from the
predecessor CNE exiting previous business lines that had generated operating
losses.
For tax purposes, all expenses incurred
by the re-named entity now known as Arrow Resources Development, Inc. after
November 14, 2005 have been capitalized as start up costs in accordance with
Internal Revenue Code Section (“IRC”) No. 195. Pursuant to IRC 195, the Company
will be able to deduct these costs by amortizing them over a period of 15 years
for tax purposes once the Company commences operations. Accordingly for tax
purposes, except for Delaware franchise taxes, none of the Company's post November
14, 2005 losses are as yet reportable in Company income tax returns to be filed
for the years ended December 31, 2005 or 2006.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4 - INCOME TAXES
(Continued)
The significant components of the
Company's deferred tax assets are as follows:
Net operating loss
carryforward
|
|
$ |
63,079 |
|
Differences resulting from use of
cash basis for tax purposes
|
|
|
- |
|
|
|
|
|
|
Total deferred tax
assets
|
|
|
63,079 |
|
Less valuation
allowance
|
|
|
(63,079 |
) |
|
|
|
|
|
Net deferred tax
assets
|
|
$ |
— |
|
The net operating losses expire as
follows:
|
|
$ |
127,349 |
|
December 31,
2027
|
|
|
57,652 |
|
December 31,
2028
|
|
|
420 |
|
December 31,
2029
|
|
|
105 |
|
Net Operating Loss
Carryover
|
|
$ |
185,526 |
|
Reconciliation of net loss for income
tax purposes to net loss per financial statement purposes:
Reconciliation of net loss for
income tax purposes to net loss per financial statement
purposes:
|
|
Costs capitalized under IRC
Section 195 which will be amortizable over 15 years for tax purposes once
the Company commences operations
|
|
$ |
141,289,922 |
|
Delaware franchise taxes
deductible on Company's tax return
|
|
|
185,526 |
|
Net loss for the period from
inception (November 15, 2005) to March 31, 2009
|
|
$ |
141,475,448 |
|
NOTE 5 - NOTES
PAYABLE
As of March 31, 2009 and December 31,
2008, the Company had notes payable outstanding as
follows:
Holder
|
Terms
|
|
March 31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Barry Blank
(1)
|
Due on demand, 10%
interest
|
|
$ |
200,000 |
|
|
$ |
200,000 |
|
Accrued interest
(1)
|
|
|
|
20,000 |
|
|
|
20,000 |
|
H. Lawrence
Logan
|
Due on demand, non-interest
bearing
|
|
|
25,000 |
|
|
|
25,000 |
|
John Marozzi
(2)
|
Due on demand, non-interest
bearing
|
|
|
200,000 |
|
|
|
150,000 |
|
James R. McConnaughy
(3)
|
Due on demand, non-interest
bearing
|
|
|
53,000 |
|
|
|
53,000 |
|
Christopher T. Joffe
(4)
|
Due on demand, non-interest
bearing
|
|
|
63,000 |
|
|
|
63,000 |
|
John E. McConnaughy III
(5)
|
Due on demand, non-interest
bearing
|
|
|
12,000 |
|
|
|
12,000 |
|
Frank Ciolli
(6)
|
Due on demand, non-interest
bearing
|
|
|
550,000 |
|
|
|
550,000 |
|
Barry Weintraub
(7)
|
Due on demand, non-interest
bearing
|
|
|
- |
|
|
|
- |
|
John Frugone
(8)
|
Due on demand, non-interest
bearing
|
|
|
130,000 |
|
|
|
100,000 |
|
Money Info LLC
(9)
|
Due on demand, non-interest
bearing
|
|
|
5,000 |
|
|
|
5,000 |
|
Scott Neff
(10)
|
Due on demand, non-interest
bearing
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
1,308,000 |
|
|
$ |
1,228,000 |
|
(1)
|
The Company has a note payable
outstanding for $200,000, plus $20,000 in accrued interest. Although the
predecessor company (CNE) reserved 456,740 shares of its common stock to
retire this debt pursuant to a settlement agreement, the stock cannot be
issued until the party to whom the note was assigned by its original
holder emerges from bankruptcy or reorganization. During the year ended March 31, 2009, no interest expense was
recorded on the note as the number of shares to be issued was
determined in the settlement agreement, executed prior to the
recapitalization.
|
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 5 - NOTES PAYABLE
(Continued)
(2)
|
On March 31,
2008, the Company received a $150,000 non-interest bearing advance from
John Marozzi, which is due on demand. As payment for
his services, the Company
will repay the full amount of the note plus 1,000,000 shares of
unregistered restricted common stock. The Company recorded $40,000 of debt
issue costs related to the 1,000,000 shares of common stock that are now
issuable John Marozzi as of March 31, 2008 (See Note
8). On May 5, 2008,
John Marozzi received repayment of $50,000 from the Company. On October 13,
2008, the Company received another
$50,000 interest
bearing advance from John Marozzi. The Company
was
to
repay the full amount of the October 31, 2008
$50,000 note in
cash
within 60 calendar days from the date the note was executed plus interest
paid in the form of 1,000,000 shares of unregistered Company
common stock.
During the year
ended December, 31, 2008, the Company
recorded $60,000 of debt issue costs related to the 1,000,000 shares of
common stock that were
issuable to John Marozzi as
of December 31, 2008 (See Note 5). On March 5,
2009, the Company
received another
$50,000 interest
bearing advance from John Marozzi. The
Company is to repay the full amount of the March 5, 2009 $50,000 note in
cash within 60 calendar days from the date the note was executed plus
interest paid in the form of 1,000,000 shares of unregistered Company
common stock. This leaves a balance of $200,000
unpaid principal as of
March 31,
2009. This
note is currently in default. The Company is currently in the process of
negotiating an extension on this
note.
|
(3)
|
On
April 24, 2008, the Company received another $38,000 non-interest bearing
advance from James R. McConnaughy, which is due on demand. In repayment,
the Company will repay the full amount of the note plus 304,000 shares of
the Company’s unregistered restricted common stock. The Company recorded $24,320 in debt issue
costs related to the 304,000 shares of common stock that are issuable
to James R. McConnaughy as of December 31, 2008. On December 23, 2008, the
Company received another $15,000 non-interest bearing advance from James
R. McConnaughy, which is due on demand. James McConnaughy is a relative of
John E. McConnaughy Jr., a Company Director discussed in Note 7
[3].
|
(4)
|
On
April 24, 2008, the Company received a $38,000 non-interest bearing
advance from Christopher T. Joffe, which is due on demand. In repayment,
the Company will repay the full amount of the note plus 304,000 shares of
the Company’s unregistered restricted common stock. The Company recorded $24,320 in
debt issue costs related to the 304,000 shares of common stock that are
issuable to Christopher T. Joffe as of December 31, 2008.
On June 13, 2008, the Company received another $25,000 non-interest
bearing advance from Christopher T. Joffe, which is due on demand. In
repayment, the Company will repay the full amount of the
note.
|
(5)
|
On April 25, 2008, the Company
received $12,000 non-interest bearing advance from John E. McConnaughy
III, which is due on demand. In repayment, the Company will repay the full
amount of the note plus 96,000 shares of the Company’s unregistered
restricted common stock. The Company recorded $7,680 in debt issue costs
related to the 96,000 shares of common stock that are issuable to John E.
McConnaughy III as of December 31,
2008.
|
(6)
|
On April 30, 2008, the Company
received a $500,000 non-interest bearing advance from Frank Ciolli. In
repayment, the Company promised to pay Frank Ciolli the principal sum of
$550,000 on or before October 31, 2008. On October 31, 2008,
the Company entered into a 60 day loan extension with Frank
Ciolli. In payment, the Company issued 1,000,000 shares
of the Company’s unregistered restricted common stock to Frank Ciolli and 1,000,000
shares of the Company’s unregistered restricted common stock to Donna Alferi on behalf of
Michael Alferi as designated by Frank Ciolli. As of December
31, 2008, the Company recorded $100,000 and $100,000, respectively, in
debt issue costs related to the 1,000,000 and 1,000,000, respectively, of
shares of common stock that were issued to Frank Ciolli and Donna Alferi
as of December 31, 2008. On January 15, 2009, the
Company entered into the thirty-one day extension from December 31, 2008
for the Convertible Loan Agreement and Convertible Note with Frank Ciolli
for the loan amount of $550,000 dated as of April 30, 2008. The Company
issued 500,000 shares of restricted, unregistered common stock each for
Michael Alferi and Frank Ciolli, which resulted in Company debt issue
costs of $80,000 as of March 31, 2009. The Company is currently
negotiating an additional extension for the Convertible Loan Agreement and
Convertible Note. This
note is currently in default. The Company is currently in the process of
negotiating an extension on this
note.
|
(7)
|
On
April 8, 2008, the Company
received a $50,000 non-interest bearing advance from Barry Weintraub,
which was due on demand and was repaid by the Company on April 30, 2008.
In repayment, the Company was to repay the full amount of the note plus
2,000,000 shares of the Company’s unregistered restricted common stock.
The Company recorded $120,000 in debt issue costs related to the 2,000,000
shares of common stock that are issuable to Barry Weintraub as of
September 30, 2008.
|
(8)
|
On
September 10, 2008, the Company received a $100,000 non-interest bearing
advance from John Frugone, which is due on demand. In repayment, the
Company will repay the full amount of the note in cash over two years from
the date the note is executed. On February 25, 2009, the Company received
a $30,000 non-interest bearing advance from John Frugone, which is due on
demand. In repayment, the Company will repay the full amount of the note
in cash over two years from the date the note is
executed. This
leaves a balance of $130,000 unpaid principal as of March 31, 2009. John
Frugone is a relative of Peter Frugone, the Company’s CEO and also a
Company Director.
|
(9)
|
On
October 30, 2008, the Company received a $2,500 non-interest bearing
advance from Money Info, LLC. On December 23, 2008, the Company
received another $2,500 non-interest bearing advance from Money Info,
LLC. On January 21, 2009, the Company repaid the full amount of
both notes in cash. On January 15, 2009, the Company received a
$5,000 non-interest bearing advance from Money Info, LLC. In
repayment, the Company will repay the full amount of the note in cash
within 60 calendar days from the date the note is executed. This
note is currently in default. The Company is currently in the process of
negotiating an extension on this
note.
|
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(10)
|
On October 13, 2008, the Company
received a $50,000 interest bearing advance from Scott Neff, the Company
was to repay the full amount of the note in cash within 60 calendar days
from the date the note is executed plus interest expense paid in the form
of 1,000,000 shares of Company common stock. During the year
ended December 31, 2008, the Company
recorded $60,000 in debt issue
costs related to
the 1,000,000
shares of common stock
that are issuable to Scott
Neff
as of December
31,
2008. This
note is currently in default. The Company is currently in the process of
negotiating an extension on this
note.
|
NOTE 6 – IMPAIRMENT OF MARKETING AND
DISTRIBUTION AGREEMENT AND RELATED SENIOR NOTE PAYABLE DUE TO EMPIRE ADVISORY,
LLC
As discussed in Note 1, in August 2005,
the Company executed a marketing and distribution agreement with Arrow Pte. This
agreement was valued at fair value as determined based on an independent
appraisal, which approximates the market value of 96% of the CNE public stock
issued in settlement of the note.
The marketing and distribution agreement
would have been amortized over the remainder of 99 years (the life of the
agreement) once the Company commenced sales. As of December 31, 2005, the
Company had recorded a $125,000,000 amortizable intangible asset for this
agreement and corresponding credits to common stock and additional paid-in
capital in conjunction with the stock settlement of the senior secured note
payable to Empire Advisory, LLC and related cash advances in the same aggregate
amount. The senior secured note payable was non-interest bearing and was repaid
in the form of the preferred stock, which was subsequently converted to common
stock (See Note 3). Any preferred stock issued under the senior secured note
payable is considered restricted as to the sale thereof under SEC Rule 144 as
unregistered securities.
The Company’s only intangible asset was
comprised of this marketing and distribution agreement with Arrow Pte. In
accordance with SFAS 142, “Goodwill and Other Intangible Assets” this intangible
agreement is no longer amortized; instead the intangible is tested for
impairment on an annual basis. The Company assesses the impairment of
identifiable intangibles and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers to be important which could trigger an impairment review
include the following:
|
·
|
Significant inability to achieve
expected projected future operating results;
|
|
·
|
Significant changes in the manner
in which the work is able to be performed what increases
costs;
|
|
·
|
Significant negative impact on the
environment.
|
We perform goodwill impairment tests on
an annual basis and on an interim basis if an event or circumstance indicates
that it is more likely than not that impairment has occurred. We assess the
impairment of other amortizable intangible assets and long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an impairment
review include significant underperformance to historical or projected operating
results, substantial changes in our business strategy and significant negative
industry or economic trends.
The World Bank and World Wildlife
Federation have adopted forest management guidelines to ensure economic, social
and environmental benefits from timber and non-timber products and the
environmental services provided by forests. Most countries, including Indonesia
as of 2007, have adopted these guidelines as law in order to promote economical
development while combating the ongoing crisis of worldwide
deforestation.
It has always been the policy of Arrow
Pte to follow the international guidelines for the harvesting of timber in
virgin forests. In December 2007, Arrow Pte. assessed that it would be unable to
harvest the timber products in Papua, New Guinea due to the fact that the widely
accepted international guidelines of the World Wildlife Federation had not been
adopted by Papua, New Guinea. This fact is adverse to the economic, social and
environmental goals of Arrow Pte. because with the amount of land that the
project was allotted combined with the agreed upon previous guidelines of the
marketing and distribution agreement, yields would be significantly reduced.
Given the significant change in the economics of the harvesting of the timber in
Papua, New Guinea, Arrow Pte. has decided not to pursue any further operations
in Papua, New Guinea given that the above restrictions cause a significant
reduction in the volume of harvesting, which results in a disproportionate cost
to yield ration at the Papua, New Guinea site which makes the project not
economically feasible in the foreseeable future.
Based on the fact that Arrow Pte. is
unable to fulfill their part of the agreement, the Company reached the
conclusion that the marketing and distribution agreement had no value.
Therefore, the Company fully impaired the value of the agreement and recorded a
loss on write-off of the marketing and distribution agreement of $125,000,000 at
December 31, 2007.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 7 - RELATED PARTY
TRANSACTIONS
[1] Management Agreement with Empire
Advisory, LLC:
Effective August 1, 2005, the Company
entered into a Management Agreement with Empire Advisory, LLC (“Empire”) under
which Empire provides chief executive officer and administrative services to the
Company in exchange for a) an annual fee of $300,000 for overhead expenses, b)
$25,000 per month for rent, c) $1,000,000 per annum (subject to increases in
subsequent years) for executive services, and d) a one-time fee of $150,000 for
execution of the proposed transaction. In addition, the Board authorized a
one-time payment of $500,000 to Empire upon closing the
transaction.
As of March 31, 2009 and December 31,
2008, the Company had short-term borrowings of $4,204,933 and
$3,933,679, respectively,
due to Empire, consisting of cash advances to the Company and working capital
raised by Empire, as agent, on behalf of the Company. These amounts are
non-interest bearing and due on demand.
Peter Frugone is a member of the Board
of Directors of the Company and is the owner of Empire. Empire, as agent, was
the holder of the $125 million senior secured note payable settled in December
2005.
Consulting fees and services charged in
the Statement of Operations for the three months ended March 31, 2009 and 2008
incurred to Empire totaled $614,519 and $513,613, respectively. Consulting fees and services charged in
the Statement of Operations for the year ended December 31, 2008 incurred to
Empire totaled $2,223,711.
Consulting fees and services charged to the Statement of Operations for the
years ended December 31, 2007, December 31, 2006 and for the period from
November 15, 2005 to December 31, 2005 incurred to Empire totaled
$1,858,386, $1,591,016 and
$698,834, respectively.
During the three months ended March 31,
2009, the Company incurred Director’s compensation expense of $13,750 to Mr.
Frugone, consisting of cash compensation of $12,500 and stock based compensation
of $1,250 based upon the Company’s share trading price on March 31,
2009. During
the year ended December 31, 2008, the Company also incurred Director’s
compensation expense of $69,375 to Mr. Frugone, consisting of cash compensation
of $50,000 and stock based compensation of $19,375 based upon the Company’s
share trading price on the date of the grant. During the year ended December 31, 2007,
the Company also incurred Director’s compensation expense of $65,000 to Mr.
Frugone, consisting of cash compensation of $50,000 and stock based compensation
of $15,000 based upon the Company’s share trading price on the date of the grant
of December 3, 2007. At
March 31, 2009, the Company is obligated to issue 562,500 Common Stock shares to
him, and “Accounts payable and accrued liabilities” includes $112,500 due to him
for the cash based portion of his 2007, 2008 and 2009 director’s compensation (See Note
7[4]).
During the three months ended March 31,
2009, the Company made cash payments of $340,653 to Empire under the agreement.
During the three months ended March 31, 2008 the Company made cash payments of
$94,500 to Empire under the agreement.
[2] Engagement and Consulting Agreements
entered into with individuals affiliated with Arrow PNG:
Consulting fees and services charged in
the Statement of Operations for the three months ended March 31, 2009 and 2008
incurred to Hans Karundeng and Rudolph Karundeng under Engagement and Consulting
Agreements totaled $375,000 and $375,000, respectively. In addition, as of March
31, 2009 and December 31, 2008, the Company owed them a total of $5,303,991 and
$4,819,491, respectively,
under these agreements. These agreements are discussed in detail in Note
11.
During the three months ended March 31,
2009, the Company incurred Director’s compensation expense of $13,750 to Rudolph Karundeng,
consisting of cash compensation of $12,500 and stock based compensation of
$1,250 based upon the Company’s share trading price on March 31,
2009. During the year ended December 31, 2008, the Company
also incurred Director’s compensation expense $69,375 to Rudolph Karundeng,
consisting of cash compensation of $19,375 and stock based compensation of
$50,000 based upon the Company’s share trading price on the date of the
grant. During the year
ended December 31, 2007, the Company also incurred Director’s compensation
expense of $65,000 to Rudolph Karundeng, consisting of cash compensation of
$50,000 and stock based compensation of $15,000 based upon the Company’s share
trading price on the date of the grant of December 3, 2007. At March 31, 2009,
the Company is obligated to issue 562,500 Common Stock shares to
him, and “Accounts payable and accrued liabilities” includes $112,500 due to him
for the cash based portion of his 2007, 2008 and 2009 director’s compensation
(See Note 7[4]).
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS
CONTINUED
[3] Non-Interest Bearing Advance Received
from Company Director:
In July 2006, the Company received a
$150,000 non-interest bearing advance from John E. McConnaughy, Jr., a Director
of the Company, which is due on demand. In October 2006, the Company received an
additional $200,000 non-interest bearing advance from Mr. McConnaughy, Jr. which
is also due on demand. In February and March 2007, the Company received an
additional $200,000 non-interest bearing advance from John E. McConnaughy, Jr.,
which is due on demand. In May and June 2007, the Company received an additional
$250,000 non-interest bearing advance from John E. McConnaughy, Jr., which is
due on demand. In July 2007, the Company received $250,000 of additional
non-interest bearing advances from John E. McConnaughy, Jr., which is due on
demand. In August 2007, the Company received a $50,000 non-interest bearing
advance from John E.McConnaughy, Jr., which is due on demand. In October 2007
the Company received a $200,000 non-interest bearing advance from John E.
McConnaughy, Jr., which is due on demand. In December 2007, the Company received
a $250,000 non-interest bearing advance from John E. McConnaughy, Jr., which is
due on demand. In March 2008, the Company received an additional $110,000
non-interest bearing advance from John E. McConnaughy,
Jr. In May and
June 2008, the Company received $75,000 non-interest bearing advance from John
E. McConnaughy, Jr, which is due on demand. In July 2008, the Company received
$90,000 non-interest bearing advance from John E. McConnaughy, Jr, which is due
on demand. In August 2008, the Company received
$240,000 non-interest bearing advance from John E. McConnaughy, Jr, which is due
on demand. In September 2008, the Company received $90,000 non-interest bearing
advance from John E. McConnaughy, Jr, which is due on demand. In October 2008, the Company received
$50,000 non-interest
bearing advance from John E. McConnaughy, Jr, which is due on demand. In November 2008, the Company received
$10,000 non-interest
bearing advance from John E. McConnaughy, Jr, which is due on demand. In December 2008, the Company received
$5,000 non-interest bearing advance from John
E. McConnaughy, Jr, which is due on demand. On January 15, 2009,
the Company received a $5,000 non-interest bearing advance from John E.
McConnaughy Jr. In repayment, the Company will repay the full amount of the note
in cash over two years from the date the note is executed. On January 27, 2009,
the Company repaid $5,000 to John
E. McConnaughy, Jr against
the outstanding balance owed to him. As of March 31, 2009 and December 31,
2008, the Company had
$1,957,000 and
$1,957,000, respectively,
left to be repaid to Mr. McConnaughy, which is included in “Due to Related
Parties.”
During the three months ended March 31,
2009, the Company incurred Director’s compensation expense of $13,750 to Mr.
McConnaughy, consisting of cash compensation of $12,500 and stock
based compensation of $1,250 based upon the Company’s share trading price on
March 31, 2009. During the year ended December 31, 2008, the Company
also incurred Director’s compensation expense $$69,375 to Mr. McConnaughy, consisting of cash
compensation of $50,000 and stock based compensation of $19,375 based upon the
Company’s share trading price on the date of grant. At March 31, 2009, the
Company is obligated to issue 562,500 Common Stock shares to him, and “Accounts
payable and accrued liabilities” includes $112,500 due to him for the cash based
portion of his 2007, 2008 and 2009 director’s compensation (See Note
7[4]).
[4] Directors’
Compensation:
On December 3, 2007, the Board of
Directors approved a plan to compensate all members of the Board of Directors at
a rate of $50,000 per year and 250,000 shares of Company common stock effective
January 1, 2007. This compensation plan applies to any board member that belonged to the Board as of
and subsequent to January 1, 2007. Those board members that were only on the
Board for part of the year will received pro-rata compensation based on length
of service. As of March 31, 2009 and December 31, 2008, none of the shares under
this plan have been issued and the Company has an accrued liability of $450,137
and $400,137, respectively, of cash-based compensation and recorded additional
paid-in capital through those dates of $142,538 and $137,541, respectively, for
stock-based compensation based on the fair value of 2,250,685 and
2,000,685 shares to be
issued to the members of the Board, respectively.
NOTE 8 - STOCKHOLDERS'
EQUITY
Arrow Ltd. was incorporated in May 2005
as a Bermuda corporation. Upon incorporation, 1,200,000 shares of $.01 par value
common stock were authorized and issued to CNE.
On November 14, 2005, the Company
increased its authorized shares to 1 billion and reduced the par value of its
common stock to $0.00001 per share, resulting in a common stock conversion rate
of 1 to 62.4.
On November 14, 2005, the Company
completed a reverse merger with CNE Group, Inc. by acquiring 96% of the
outstanding shares of CNE's common stock in the form of convertible preferred
stock issued in settlement of the senior note payable.
During 2005, CNE divested or
discontinued all of its subsidiaries in preparation for the reverse merger
transaction. Accordingly, the results of operations for the divested or
discontinued subsidiaries are not included in the consolidated results presented
herein. In conjunction with the divestitures, CNE repurchased and retired all
preferred stock and made certain payments to related
parties.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY
CONTINUED
In conjunction with the reverse merger
transaction, the Company retired 1,238,656 shares of Treasury
Stock.
On August 2, 2006, the Company entered
into a stock purchase agreement with APR wherein APR agreed to purchase up to an
aggregate amount of 15,000,000 shares of common stock in the Company for $1.00
per share, making this a capital contribution of $15,000,000 in total. The stock
will be delivered at the time the Company files for registration. During the
third and fourth quarters of 2006, the Company received a total of $985,000 in
capital contribution towards the stock purchase agreement with APR to purchase
up to an aggregate amount of 15,000,000 shares of common stock in the Company
for $1.00 per share. During the year ended December 31, 2007, the Company
received an additional $500,000 in capital contribution towards the stock
purchase agreement with APR to purchase up to an aggregate amount of 15,000,000 shares of common
stock in the Company for $1.00 per share.
On November 20, 2007, the Board of
Directors approved a private placement offering (the "Offering") approximating
$2,000,000 to accredited investors at $1.00 per share of Series A Convertible
Preferred Stock. The Offering will consist of the Company's Series A Convertible
Preferred Stock that will be convertible into our common stock. These securities
are not required to be and will not be registered under the Securities Act of
1933. Shares issued under this placement will not be sold in the United States,
absent registration or an applicable exemption from registration. As of March 31, 2009, the
Company has received $355,000 from investors towards the fulfillment of the
financing agreement.
On December 3, 2007, the Board of
Directors approved a plan to compensate all members of the Board of Directors at
a rate of $50,000 per year and 250,000 shares of Company common stock effective
January 1, 2007. This compensation plan applies to any board member that
belonged to the Board as of
and subsequent to January 1, 2007. Those board members that were only on the
Board for part of the year will received pro-rata compensation based on length
of service. As of March 31, 2009 and December 31, 2008, none of the shares under
this plan have been issued and the Company has accrued $450,137 and $$400,137 of
cash-based compensation and recorded additional paid-in capital of
$142,538 and $137,541 for stock-based
compensation based on the fair value of 2,250,685 shares and 2,000,685 to be
issued to the members of
the Board.
On
February 1, 2008, the Company entered into Independent Contractor Agreement with
Charles A. Moskowitz of MoneyInfo. Inc. to provide consulting services to the
Company in the lumber market development, ethanol market development, and
compilation of market prices associated with lumber and ethanol and development
of a database for the ongoing analysis of these markets. The term of this
agreement is February 1, 2008 through July 31, 2008. As payment for the
Consultant’s services, the Company will issue 2,600,000 shares of common stock
to Charles A. Moskowitz. During the year ended December 31, 2008, the Company recorded consulting fees and
services of $208,000 related to the 2,600,000 shares of common stock that are
now issuable to Charles A. Moskowitz. As of March 31,
2009, none of these shares have been issued to Charles A.
Moskowitz.
On March
13, 2008, the Company and Micro-Cap Review, Inc. (“Micro-Cap”) executed an
Advertising Agreement wherein the Company will pay Micro-Cap Review, Inc.
1,000,000 of restricted common shares to display advertisements and advertorial
in the Micro-cap Review magazine and on http://www.microcapreview.com
website on a rotating basis. The services began on March 13, 2008 and expired on
June 30, 2008. On April 29, 2008, the Company issued 1,000,000 shares
of unregistered restricted common stock to Micro-Cap Review,
Inc. The Company
recorded a marketing expense of $70,000 in General and Administration Expenses
related to the issuance of the 1,000,000 shares of common stock as of December
31, 2008.
On March 15, 2008, the Company and
Seapotter Corporation (“Seapotter”) executed a Consulting Agreement
wherein Seapotter would provide information technology support from March 15,
2008 to July 15, 2008 in exchange for $9,000 per month and 250,000 shares of common
stock. On April 29, 2008, the Company issued 250,000 shares of
unregistered restricted common stock to Charles Potter per the Consulting
Agreement entered into by the Company on March 15, 2008. The Company recorded consulting fees and
services of $17,500 related to the 250,000 shares of common stock that
were issued to Seapotter on April 29, 2008.
On April
30, 2008, the Company entered into Independent Contractor Agreement with Ciolli
Management Consulting, Inc. to provide advisory services in the land
development, construction management, equipment acquisition and project
management industries. As payment for the Consultant’s services, the Company
will issue a one-time, non-refundable fee of 1,000,000 unrestricted shares of
common stock. As of December 31, 2008, the Company has expensed
$60,000 for the 1,000,000 shares of common stock that were issued to Ciolli
Management Consulting, Inc.
On April
30, 2008, the Company received a $500,000 non-interest bearing advance from
Frank Ciolli. In repayment, the Company promises to pay Frank Ciolli the
principal sum of $550,000 on or before October 31, 2008.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY
CONTINUED
On
January 15, 2009, the Company entered into the thirty-one day extension December
31, 2008 for the Convertible Loan Agreement and Convertible Note with Frank
Ciolli for the loan amount of $550,000 dated as of April 30, 2008. The Company
issued 500,000 shares of restricted, unregistered common stock each for Michael
Alferi and Frank Ciolli, which resulted in Company debt issue costs of $80,000
as of March 31, 2009. The Company is currently negotiating an
additional extension for the Convertible Loan Agreement and Convertible Note.
This note
is currently in default. The Company is currently in the process of negotiating
an extension on this note.
On March 31, 2008, the Company received
a $150,000 non-interest bearing advance
from John Marozzi, which is due on demand. As payment for his
services, the Company will repay
the full amount of the note plus 1,000,000 shares of unregistered
restricted common stock.
The Company recorded $40,000 of debt issue costs related to the 1,000,000 shares
of common stock that are now issuable John Marozzi as of March 31,
2008 (See Note 5). On May 5, 2008, John Marozzi received
repayment of $50,000 from the Company. On October 13, 2008, the Company
received another $50,000 interest bearing advance from
John Marozzi. The Company was to repay the full amount of the note in
cash within 60 calendar
days from the date the note
is executed plus interest expense paid in the form of 1,000,000 shares of
unregistered Company
common stock. The Company recorded $60,000 of debt
issue costs related to the 1,000,000 shares of common stock that
were issuable John Marozzi as of December 31, 2008 (See Note 5). On
March 5, 2009, the Company received another $50,000 interest bearing advance
from John Marozzi. The Company is to repay the full amount of the
March 5, 2009 $50,000 note in cash within 60 calendar days from the date the
note was executed plus interest paid in the form of 1,000,000 shares of
unregistered Company common stock. The Company recorded $70,000 of
debt issue costs related to the 1,000,000 shares of common stock that are now
issuable John Marozzi as of March 31, 2009 (See Note 5). This leaves
a balance of $200,000 unpaid principal as of March 31, 2009. This note
is currently in default. The Company is currently in the process of negotiating
an extension on this note.
On April
8, 2008, the Company received a $50,000 non-interest bearing advance from Barry
Weintraub, which was due on demand. In repayment, the Company repaid the full
amount of the note on April 30, 2008 and is obligated to issue 2,000,000 shares
of the Company’s unregistered restricted common stock to Barry
Weintraub. The Company recorded $120,000 in debt issue costs related
to the 2,000,000 shares of common stock that were issuable to Barry Weintraub as
of December 31, 2008 (See Note 5).
On April
24, 2008, the Company received a $38,000 non-interest bearing advance from
Christopher T. Joffe, which is due on demand. In repayment, the Company will
repay the full amount of the note plus 304,000 shares of the Company’s
unregistered restricted common stock. The Company recorded $24,320 in debt issue
costs related to the 304,000 shares of common stock that are issuable to
Christopher T. Joffe as of December 31, 2008 (See Note 5).
On April
24, 2008, the Company received another $38,000 non-interest bearing advance from
James R. McConnaughy, which is due on demand. In repayment, the Company will
repay the full amount of the note plus 304,000 shares of the Company’s
unregistered restricted common stock. The Company recorded $24,320 in
debt issue costs related to the 304,000 shares of common stock that are issuable
to James R. McConnaughy as of December 31, 2008 (See Note 5).
On April
25, 2008, the Company received a $12,000 non-interest bearing advance from John
E. McConnaughy, III, which is due on demand. In repayment, the Company will
repay the full amount of the note plus 96,000 shares of unregistered restricted
common stock. The Company recorded $7,680 in debt issue costs related
to the 96,000 shares of common stock that are issuable to John E. McConnaughy,
III as of December 31, 2008 (See Note 5).
On May
15, 2008, the Board of Directors approved a private placement offering (the
"Offering") approximating $2,000,000 to accredited investors at $1.00 per share
of Series C Convertible Preferred Stock. The Offering will consist of the
Company's Series C Convertible Preferred Stock that will be convertible into our
common stock. These securities are not required to be and will not be registered
under the Securities Act of 1933. Shares issued under this placement will not be
sold in the United States, absent registration or an applicable exemption from
registration. As of March 31, 2009, the Company received $25,000 from investors
towards the fulfillment of the financing agreement.
Also on
May 15, 2008, the Board of Directors approved the issuance of 50,000 shares of
unregistered restricted common stock to Sheerin Alli and 50,000 shares of
unregistered restricted common stock to Lori McGrath for consulting services
provided. As of September 30, 2008, the Company has not yet issued
these shares. The Company recorded $6,500 and $6,500, respectively,
in consulting fees related to the 100,000 shares of common stock that are
issuable to Sheerin Alli and Lori McGrath as of September 30, 2008.
On June
24, 2008, Arrow Resources Development, Inc. entered into a Subscription
Agreement with Timothy J. LoBello (“Purchaser”) in which the Purchaser
subscribed for and agreed to purchase 1,000,000 shares of the Company’s common
stock on June 13, 2008 for the purchase price of $50,000 ($0.05 per
share). As of March 31, 2009, the Company has not yet issued these
shares to the Purchaser. On the date of the purchase, the fair value
of these shares was $140,000. As of December 31, 2008, the Company
recorded 49,990 to Additional Paid-in Capital to be issued related to this
transaction.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY
CONTINUED
On
October 13, 2008, the Company received a $50,000 interest bearing advance from
Scott Neff. The Company was to repay the full amount of the note in cash within
60 calendar days from the date the note is executed plus interest expense paid
in the form of 1,000,000 shares of unregistered Company common
stock. The Company recorded $60,000 in costs related to the 1,000,000
shares of common stock that are issuable to Scott Neff as of December 31,
2008. This note
is currently in default. The Company is currently in the process of negotiating
an extension on this note.
On
October 29, 2008, the Company entered into a Subscription Agreement with James
Fuchs by which he purchased 250,000 shares of common stock in the amount of
$0.10 per share for total of $25,000. On November 24, 2008, the Company issued
250,000 shares of restricted, unregistered common stock to James
Fuchs.
On
October 31, 2008, the Company entered into a 60 day loan extension with Frank
Ciolli related to the $550,000 in principal loan incurred by the Company on
April 30, 2008. The Company issued 1,000,000 shares of the Company’s
unregistered restricted common stock to Frank Ciolli and 1,000,000 shares of the
Company’s unregistered restricted common stock to Donna Alferi on behalf of
Michael Alferi as Frank Ciolli’s designee. The Company recorded
$200,000 in debt issue costs related to the 1,000,000 and 1,000,000,
respectively, of shares of common stock that were issued to Frank Ciolli and
Donna Alferi as of December 31, 2008 (See Note 5).
On
November 14, 2008, the Company entered into a Subscription Agreement with Peter
Benolie Lane, Jacques Benolie Lane, and Christopher Benoliel Lane for the
purchase of 250,000 shares of common stock in the amount of $0.10 per share for
total of $25,000.
On
December 11, 2008, the Company received $55,000 from Han Karundeng and Arrow
Pacific Resources Group Limited for the purchase of 55,000 shares of common
stock at $1.00 per share pursuant to the Stock Purchase Agreement that was
executed on August 2, 2006.
On January 15, 2009, the Company entered
into a stock purchase agreement with APR wherein APR agreed to purchase up to an
aggregate amount of 15,000,000 shares of common stock in the Company for $.10
per share. On January 15, 2009, the Company received $85,000
from Hans Karundeng and Arrow Pacific Resources Group Limited for the purchase
of 850,000 shares of common stock at $.10 per share pursuant to the APR to purchase up to an aggregate
amount of 15,000,000 shares of common stock in the Company for $.10 per
share. On January 20, 2009, the Company received $165,000 from
Hans Karundeng and Arrow Pacific Resources Group Limited for the purchase of
1,650,000 shares of common stock at $.10 per share pursuant to the APR to purchase up to an aggregate amount of 15,000,000 shares
of common stock in the Company for $.10 per share. (See Note 10 [5] - Stock Purchase
Agreement.)
Reset
of 2005 Subscription Agreement
On
February 5, 2009 the Company agreed to issue 1,248,094 shares of common stock to
certain investors as settlement for the reset of their August 3, 2005
subscription agreements. As of March 31, 2009 138,095 shares had been
issued.
NOTE 9 -
GAIN ON WRITE OFF OF PREDECESSOR ENTITY LIABILITIES
During
the fourth quarter of 2006, the Company wrote off accounts payable and accrued
expenses in the amount of $395,667 associated with CNE, the predecessor entity
in the reverse merger transaction, which will not be paid. This resulted in the
recognition of a gain reflected in the Statement of Operations for the year
ended December 31, 2006 in the same amount.
NOTE 10 - COMMITMENTS AND OTHER
MATTERS
[1] Engagement and Consulting
Agreements entered into with individuals affiliated with APR
Effective May 20, 2005, the Company
entered into an Engagement Agreement with Hans Karundeng for business and
financial consulting services for fees of $1,000,000 per annum. The term of the
agreement is five years. Payments under the agreement are subject to the
Company's cash flow.
Effective August 1, 2005, the Company
entered into a Consulting Agreement with Rudolph Karundeng for his services as
Chairman of the Board of the Company for fees of $1,000,000 per annum. The term
of the agreement was five years. Rudolph Karundeng is a son of Hans Karundeng.
However, on May 1, 2006, the Company accepted the resignation of Rudolph
Karundeng as Chairman of the Board, but he continues to be a director of the
Company. Peter Frugone has been elected as Chairman of the Board until his
successor is duly qualified and elected. Subsequent to his resignation, it was
agreed that Rudolph Karundeng's annual salary is to be $500,000 as a
director.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 10 - COMMITMENTS AND OTHER MATTERS
CONTINUED
[1] Engagement and Consulting
Agreements entered into with individuals affiliated with APR
Continued
During the three months ended March 31,
2009, the Company made cash payments to Hans Karundeng of $15,500
under his agreement. During
the three months ended March 31, 2009, the Company made no cash payments to
Rudolph Karundeng under his agreement. During the year ended December 31, 2008,
the Company made cash payments to Hans Karundeng of $320,000 under
his agreement. During the
year ended December 31, 2008, the Company made no cash payments to Rudolph Karundeng under
his agreement. During the
year ended December 31, 2007, the Company received additional advances of
$100,000 from Hans Karundeng under his agreement and made cash payments to him
of $556,000. During the year ended December 31, 2007, the Company made cash
payments of $7,000 to Rudolph Karundeng under his agreement. During the year
ended December 31, 2006, the Company received additional advances of $61,787
from Hans Karundeng under his agreement. During the year ended December 31,
2006, the Company made cash payments of $62,174 to Rudolph Karundeng under his
agreement. During the period from November 15, 2005 to December 31, 2007, the
Company made cash payments to Hans Karundeng and Rudolph Karundeng of $563,000
under the agreements.
[2] Management Agreement with Empire
Advisory, LLC
Effective August 1, 2005, the Company
entered into a Management Agreement with Empire Advisory, LLC (“Empire”) under
which Empire provides chief executive officer and administrative services to the
Company in exchange for a) an annual fee of $300,000 for overhead expenses, b)
$25,000 per month for reimbursable expenses, c) $1,000,000 per annum (subject to
increases in subsequent years) for executive services, and d) a one-time fee of
$150,000 for execution of the proposed transaction.
During the three months ended March 31,
2009, the Company made cash payment of $340,653 to Empire under the agreement.
During the year ended December 31, 2008, the Company made cash payment
of $1,319,216 to Empire under the
agreement. During the year ended
December 31, 2007, the Company made cash payments of $1,140,529 to Empire under
the agreement. During the year ended December 31, 2006, the Company made cash
payments of $562,454 to Empire under the agreement. During the period from
November 15, 2005 to December 31, 2005, the Company made cash payments of
approximately $364,000 to Empire under this agreement.
[3] Litigation- predecessor entity
stock holders
The Company was a party to a lawsuit
where the plaintiff alleged that he was entitled to $60,000 and 1,300,000 of
common stock based upon CNE’s failure to compensate him for services
related to identifying financing for CNE, based upon an agreement that was
entered into between CNE and the plaintiff in April 2005. On November 28, 2007,
the Company settled the lawsuit with the plaintiff. In full and final settlement
of the claims asserted in the action, the Company has paid the plaintiff $10,000
in cash and issued the plaintiff 200,000 shares of the Company’s common stock
having a fair value of $12,000, based on the public traded share price on
December 21, 2007. The settlement resulted in a loss on debt conversion of
$2,000 during the year ended December 31, 2007 because an estimated liability
had been recognized prior to 2007.
In May 2006, the Company was advised
that it was alleged to be in default of a settlement agreement entered into in
January of 2005 by CNE, its predecessor company, related to the release of
unrestricted, freely-tradable, non-legend shares of stock. In August 2006, the
plaintiffs, alleging the default, obtained a judgment in the 17th Judicial
Circuit Court Broward County, Florida for approximately $1,000,000. On November
13, 2007, legal counsel engaged by Management commenced an action on the
Company’s behalf in the above Circuit Court seeking to vacate and set aside the
2006 judgment asserting claims under Rule 1.540(b) of the Florida Rules of Civil
Procedure. Our counsel’s evaluation is that the Company has only a
limited chance of having the 2006 judgment opened by the Court because Florida
law provides very narrow grounds for opening a judgment once a year has passed
from its entry. The Courts are generally reluctant to disturb final
judgments and the Company’s grounds for opening the judgment depend on the
Court’s adopting a somewhat novel argument regarding such
matters. If, however, the Court does open the default judgment, the
Company will then have the opportunity to defend the 2006 action and, in such
event, our counsel believes that the Company has a reasonable chance of
succeeding in defending that claim, at least in part, based on the documents he
has reviewed. As of March 31, 2009, the Company had accrued $1,219,293,
including accrued interest of $165,908, related to this matter.
[4] Consulting/Marketing and Agency
Agreements
On April 4, 2006, the Company entered
into a consulting agreement with Dekornas GMPLH (“Dekornas”) (a non-profit
organization in Indonesia responsible for reforestation in areas that were
destroyed by illegal logging) in which the Company will provide financial
consultancy services to Dekornas for an annual fee of $1.00 for the duration of
the agreement. The term of the agreement is effective upon execution, shall remain in effect
for ten (10) years and shall not be terminated until the expiration of at least
one (1) year. As of March 31, 2009, the Company has not recovered any revenue
from this agreement.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 10 - COMMITMENTS AND OTHER MATTERS
CONTINUED
[4] Consulting/Marketing and Agency
Agreements Continued
In April of 2006, Arrow Resources
Development, Ltd. entered into an agency agreement with APR to provides
marketing and distribution services for timber resource products and currently
has an exclusive marketing and sales agreement with APR to market lumber and
related products from land leased by GMPLH which is operated by APR and it's
subsidiaries, located in Indonesia. Under the agreement Arrow Ltd. will receive
a commission of 10% of
gross sales derived from lumber and related products. As of
December 31, 2008, the Company has recovered $52,000 of revenue from this
agreement.
On April 14, 2006, the Company entered
into a consulting agreement with P.T. Eucalyptus Alam Lestari (“Lestari”) in
which the Company will provide financial consultancy services to P.T. Eucalyptus
for an annual fee, payable quarterly, equal to 10% of P.T. Eucalyptus' gross
revenue payable commencing upon execution. The term of the agreement is
effective upon execution, shall remain in effect for ninety-nine (99) years and
shall not be terminated until the expiration of at least ten (10) years. As of
March 31, 2009, the Company has not recovered any revenue from this
agreement.
On
February 1, 2008, the Company entered into Independent Contractor Agreement with
Charles A. Moskowitz of MoneyInfo. Inc. to provide consulting services to the
Company in the lumber market development, ethanol market development, and
compilation of market prices associated with lumber and ethanol and development
of a database for the ongoing analysis of these markets. The term of this
agreement is February 1, 2008 through July 31, 2008. As payment for the
Consultant’s services, the Company will issue 2,600,000 shares of common stock
to Charles A. Moskowitz. The Company recorded consulting fees and services of
$208,000 related to the 2,600,000 shares of common stock that are issuable to
Charles A. Moskowitz as of December 31, 2008. As of March 31, 2009,
none of these shares have been issued to Charles A. Moskowitz.
On March
13, 2008, the Company and Micro-Cap Review, Inc. (“Micro-Cap”) executed an
Advertising Agreement wherein the Company will pay Micro-Cap Review, Inc.
1,000,000 of restricted common shares to display advertisements and advertorial
in the Micro-cap Review magazine and on http://www.microcapreview.com
website on a rotating basis. The services began on March 13, 2008 and expire on
June 30, 2008. On April 29, 2008, the Company issued 1,000,000 shares
of unregistered restricted common stock to Micro-Cap Review, Inc. The
Company recorded a marketing expense of $70,000 in consulting fees and services
related to the issuance of the 1,000,000 shares of common stock as of December
31, 2008.
On March 15, 2008, the Company and
Seapotter Corporation (“Seapotter”) executed a Consulting Agreement
wherein Seapotter would provide information technology support from March 15,
2008 to July 15, 2008 in exchange for $9,000 per month and 250,000 shares of common stock. On April 29,
2008, the Company issued 250,000 shares of unregistered restricted common stock
to Charles Potter per the Consulting Agreement entered into by the Company on
March 15, 2008. The Company recorded consulting fees and services of
$17,500 related to the 250,000 shares of common stock that were issued to
Seapotter on April 20, 2008.
On April
30, 2008, the Company entered into Independent Contractor Agreement with Ciolli
Management Consulting, Inc. to provide advisory services in the land
development, construction management, equipment acquisition and project
management industries. As payment for the Consultant’s services, the Company
will issue a one-time, non-refundable fee of 1,000,000 unrestricted shares of
common stock. As of December 31, 2008, the Company has expensed
$60,000 related to the 1,000,000 shares of common stock that are were issued to
Ciolli Management Consulting, Inc. on November 26, 2008.
On
September 15, 2008, the Company entered into a Consulting Agreement with
Infrastructure Financial Services, Inc. to assist and advise the Company in
obtaining equity financing up to $5,000,000. As payment for the
Consultant’s services, the Company will pay a cash transaction fee of 7% upon
closing of any equity financing the Consultants assist in
obtaining.
[5] Stock Purchase
Agreement
On August 2, 2006, the Company entered
into a stock purchase agreement with APR wherein APR agreed to purchase up to an
aggregate amount of 15,000,000 shares of common stock in the Company for $1.00
per share, making this a capital contribution of $15,000,000 in total. The stock
will be delivered at the time the Company files for registration. APR is
currently the principal shareholder of the Company, owning 349,370,000 shares or 53%. As of March
31, 2009, the Company has received $1,540,000 from APR towards the fulfillment
of this agreement.
On January 15, 2009, the Company entered
into a stock purchase agreement with APR wherein APR agreed to purchase up to an
aggregate amount of 15,000,000 shares of common stock in the Company for $.10
per share. On January 15, 2009, the Company received $85,000
from Hans Karundeng and Arrow Pacific Resources Group Limited for the purchase
of 850,000 shares of common stock at $.10 per share pursuant to the APR to purchase up to an aggregate
amount of 15,000,000 shares of common stock in the Company for $.10 per
share. On January 20, 2009, the Company received $165,000 from
Hans Karundeng and Arrow Pacific Resources Group Limited for the purchase of
1,650,000 shares of common stock at $.10 per share pursuant to the APR to purchase up to an aggregate
amount of 15,000,000 shares of common stock in the Company for $.10 per
share.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 10 - COMMITMENTS AND OTHER MATTERS
CONTINUED
[5] Stock Purchase Agreement
Continued
(b) Private Placement Offering- Series A
Convertible Preferred Stock
On November 20, 2007, the Board of
Directors approved a private placement offering (the "Offering") approximating
$2,000,000 to accredited investors at $1.00 per share of Series A Convertible
Preferred Stock. The Offering was to consist of the Company's Series A
Convertible Preferred Stock that will be convertible into our common stock.
These securities are not required to be and will not be registered under the
Securities Act of 1933 and will not be sold in the United States. Each Series A
Convertible Preferred Stock is convertible into 20 shares of the Company’s
Common Stock. The holders of the preferred stock have no voting rights except as
may be required by Delaware law, no redemption rights, and no liquidation
preferences over the Common Stock holders absent registration or an applicable
exemption from registration. On January 31, 2008, the Board of Directors
approved an extension of the private placement offering until February 15,
2008, after which the offer was closed. As of March 31, 2009, the Company has
raised $355,000 from investors under this financing
agreement.
(c) Private Placement Offering- Series C
Convertible Preferred Stock
On May
15, 2008, the Board of Directors approved a private placement offering (the
"Offering") approximating $2,000,000 to accredited investors at $1.00 per share
of Series C Convertible Preferred Stock. The Offering will consist of the
Company's Series C Convertible Preferred Stock that will be convertible into our
common stock. These securities are not required to be and will not be registered
under the Securities Act of 1933. Shares issued under this placement will not be
sold in the United States, absent registration or an applicable exemption from
registration. As of March 31, 2009, the Company received $25,000 from investors
towards the fulfillment of the financing agreement.
[6] Delaware Corporate
Status
The Company is delinquent in its filing
and payment of the Delaware Franchise Tax Report and, accordingly, is not in
good standing.
At March 31, 2009, the Company has
accrued an additional $105
for estimated unpaid
Delaware franchise taxes incurred to date reportable during the year ending
December 31, 2009. The Company had estimated unpaid Delaware franchise taxes for
the years ended December 31, 2008, 2007, 2006 and 2005 in the amount
of $58,072, $57,650, $57,650 and $69,699, respectively.
Accordingly, as of March
31, 2009, accounts and accrued expenses payable includes aggregate estimated
unpaid Delaware Franchise taxes of $185,526. The Company hopes to file the delinquent
tax returns in the
third quarter of 2009 and pay the amount
owned in full during the fourth quarter of 2009.
[7] Table of annual obligations under [1]
and [2] above:
The minimum future obligations for
consulting fees and services under agreements outlined in [1] and [2] are as
follows:
Years
Ending March 31,
|
|
Amounts
|
|
2009
|
|
$ |
4,378,646 |
|
2010
|
|
|
1,314,715 |
|
|
|
$ |
5,693,361 |
|
The Company also engages certain
consultants to provide services including management of the corporate
citizenship program and investor relation services. These
agreements contain cancellation clauses with notice periods ranging from zero to
sixty days.
NOTE 11 – SPIN OFF AGREEMENT
On March
12, 2009, the Company entered into an agreement with a third party company to
reinstate a Letter Agreement dated March 13, 2006 (the “Original Agreement”) and
extend time to close on a contemplated spin-off. Pursuant to the
Original Agreement, the Company will incorporate a new 100% owned Bermudan
subsidiary that will be spun out to the Company’s shareholders. The
third party company will put assets into the new subsidiary and assume 90% of
the new subsidiary. The third party company paid the Company $250,000
for anticipated closing and transactional costs in March 2006 pursuant to the
Original Agreement. It costs $50,000 to the Company to reinstate the
Letter Agreement and to disclose reinstatement in its public filings by
amendment. Therefore, the third party company paid the Company an additional
$25,000 upon acceptance of the agreement and $25,000 on March 30,
2009.
ARROW RESOURCES DEVELOPMENT, INC. AND
SUBSIDIARIES
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 12 - SUBSEQUENT EVENTS
On April 17, 2009, the Company received a $12,500 non-interest bearing advance from John
Marozzi. The
Company is to repay the full amount of the April 17, 2009 $12,500 note in cash within 60 calendar days
from the date the note was executed.
On May 8, 2009, the Company received a $20,000 non-interest bearing advance from John
Marozzi. The
Company is to repay the full amount of the May 8, 2009 $20,000 note in cash within 30 calendar days from the date the note
was executed.
Item 2.
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations
|
GENERAL
We are a holding company whose only
operating subsidiary as of March 31, 2009 is Arrow Ltd. The principal business
of Arrow is to provide marketing, sales, distribution, corporate operations and
corporate finance services for the commercial exploitation of natural resources
around the world. Prior to November 2005, we used to be a telecommunications and
recruiting company formally known as CNE Group, Inc. The company elected to
shift its business focus to the worldwide commercial exploitation of natural
resources.
ARROW RESOURCES DEVELOPMENT,
LTD.
In August 2005, Arrow entered into an
Agreement and Plan of Merger (“the Agreement”) with its wholly-owned subsidiary,
Arrow Ltd., in which Arrow (formerly CNE) was required to issue 10 million
shares of Series AAA convertible preferred stock (“the Preferred Stock”) to
Arrow Ltd.'s designees, representing 96% of all outstanding equity of CNE on a
fully diluted basis in exchange for the Marketing and Distribution Agreement
provided to the Company by Arrow. Under the Agreement, the Company discontinued
all former operations (CareerEngine, Inc., SRC and US Commlink.) and changed its
name to Arrow Resources Development, Inc.
On August 1, 2005, Arrow Ltd.
entered into the Marketing Agreement with Arrow Pte. and its subsidiaries in
consideration for Arrow issuing a non-interest bearing note (the “Note”) in the
principal amount of $125,000,000 to Empire Advisory, LLC, (“Empire”), acting as
agent, due on or before December 31, 2005. Empire is Arrow Pte.'s merchant
banker. The Note permitted the Company, as Arrow's sole stockholder, to cause
Arrow to repay the Note in cash or with 10,000,000 shares of the Company's
non-voting Series AAA Preferred Stock. However, in December 2007, Arrow Pte.
assessed that it would be unable to harvest the timber products in Papua, New
Guinea due to the fact that the widely accepted international guidelines of the
World Wildlife Federation had not been adopted by Papua, New
Guinea.
This fact is adverse to the economic,
social and environmental goals of Arrow Pte. because with the amount of land
that the project was allotted combined with the agreed upon previous guidelines
of the marketing and distribution agreement, yields would be significantly
reduced. Given the significant change in the economics of the harvesting of the
timber in Papua, New Guinea, Arrow Pte. has decided not to pursue any further
operations in Papua, New Guinea given that the above restrictions cause a
significant reduction in the volume of harvesting, which results in a
disproportionate cost to yield ration at the Papua, New Guinea site which makes
the project not economically feasible in the foreseeable
future.
Based on the fact that Arrow Pte. is
unable to fulfill their part of the agreement, the Company has reached the
conclusion that the marketing and distribution agreement has no value.
Therefore, the Company has fully impaired the value of the agreement and
recorded a loss on write-off of the marketing and distribution agreement of
$125,000,000 at December 31, 2007. (See Note 6.)
On April 4, 2006 Arrow Resource
Development Ltd. (the Company's Bermuda subsidiary) entered into an agency
agreement with APR in which the Company will provide financial consultancy
services to APR for an annual fee, payable as collected, equal to 10% of APR's
gross revenue payable commencing upon execution. This agreement provides for the
company to collect all revenues from all operations, retain its 10% fee and
disperse the remaining 90% to APR and its subsidiaries. The term of the
agreement is effective upon execution, shall remain in effect for ninety-nine
(99) years and shall not be terminated until the expiration of at least ten (10)
years. As of March 31, 2009, the Company has recovered $52,000 of revenue under
this agreement.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
The preparation of financial statements
in accordance with U.S. generally accepted accounting principles requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
net revenue and expenses during the reporting period. On an ongoing basis, we
evaluate our estimates, including those related to our allowance for doubtful
accounts, inventory reserves, and goodwill and purchased intangible asset
valuations, and asset impairments. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies, among others, affect the
significant judgments and estimates we use in the preparation of our
consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS, REVENUE
RECOGNITION
We evaluate the collectibility of our
accounts receivable based on a combination of factors. In circumstances where we
are aware of a specific customer's inability to meet its financial obligations
to us, we record a specific allowance to reduce the net receivable to the amount
we reasonably believe will be collected. For all other customers, we record
allowances for doubtful accounts based on the length of time the receivables are
past due, the prevailing business environment and our historical experience. If
the financial condition of our customers were to deteriorate or if economic
conditions were to worsen, additional allowances may be required in the
future.
We recognize product revenue when
persuasive evidence of an arrangement exists, the sales price is fixed, the
service is performed or products are shipped to customers, which is when title
and risk of loss transfers to the customers, and collectibility is reasonably
assured.
VALUATION OF GOODWILL, PURCHASED
INTANGIBLE ASSETS AND LONG-LIVED ASSETS
The Company’s only intangible asset was
comprised of a marketing and distribution agreement with Arrow Pte. In
accordance with SFAS 142, “Goodwill and Other Intangible Assets” this intangible
agreement is no longer amortized; instead the intangible is tested for
impairment on an annual basis. The Company assesses the impairment of
identifiable intangibles and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers to be important which could trigger an impairment review
include the following:
· Significant inability to achieve
expected projected future operating results;
· Significant changes in the manner in
which the work is able to be performed what increases costs;
· Significant negative impact on the
environment.
We perform goodwill impairment tests on
an annual basis and on an interim basis if an event or circumstance indicates
that it is more likely than not that impairment has occurred. We assess the
impairment of other amortizable intangible assets and long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an impairment
review include significant underperformance to historical or projected operating
results, substantial changes in our business strategy and significant negative
industry or economic trends. If such indicators are present, we evaluate the
fair value of the goodwill. For other intangible assets and long-lived assets we
determine whether the sum of the estimated undiscounted cash flows attributable
to the assets in question is less than their caring value. If less, we recognize
an impairment loss based on the excess of the carrying amount of the assets over
their respective fair values.
Fair value of goodwill is determined by
using a valuation model based on market capitalization. Fair value of other
intangible assets and long-lived assets is determined by future cash flows,
appraisals or other methods. If the long-lived asset determined to be impaired
is to be held and used, we recognize an impairment charge to the extent the
anticipated net cash flows attributable to the asset are less than the asset's
carrying value. The fair value of the long-lived asset then becomes the asset's
new carrying value, which we depreciate over the remaining estimated useful life
of the asset.
RECENT ACCOUNTING
PRONOUNCEMENTS
In April
2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,” which further clarifies the
principles established by SFAS No. 157. The guidance is effective for the
periods ending after June 15, 2009 with early adoption permitted for the periods
ending after March 15, 2009. The adoption of FSP FAS 157-4 is not expected to
have a material effect on the Company’s financial position, results of
operations, or cash flows.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active”, (“FSP 157-3”),
to clarify the application of the provisions of SFAS 157 in an inactive market
and how an entity would determine fair value in an inactive market. FSP 157-3
was effective upon issuance and applies to the Company’s current financial
statements. The application of the provisions of FSP 157-3 did not materially
affect the Company’s results of operations or financial condition for the three
months ended March 31, 2009.
Other
accounting standards have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.
In June
2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock” effective for financial
statements issued for fiscal years and interim periods beginning after December
15, 2008. EITF No.07-5 provides guidance for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock. The adoption of EITF No. 07-5 is not expected to have a
material effect on the Company’s consolidated financial statements.
In June
2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” Under the FSP, unvested share-based payment awards
that contain rights to receive nonforfeitable dividends (whether paid or unpaid)
are participating securities, and should be included in the two-class method of
computing EPS. The FSP is effective for fiscal years beginning after December
15, 2008, and interim periods within those years, and is not expected to have a
significant impact on the Company’s results of operations, financial condition
or cash flows.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity
exists in practice in accounting for financial guarantee insurance contracts by
insurance enterprises under FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises. This results in inconsistencies in the recognition and
measurement of claim liabilities. This Statement requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deterioration has occurred in an
insured financial obligation. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. The adoption of FASB 163 is not expected to
have a material impact on the Company’s financial position.
In May 2008, the FASB issued SFAS No.
162, “The Hierarchy of Generally Accepted Accounting Principles.” The
current GAAP hierarchy, as set forth in the American Institute of Certified
Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles,
has been criticized because (1) it is directed to the auditor rather than the
entity, (2) it is complex, and (3) it ranks FASB Statements of Financial
Accounting Concepts. The FASB believes that the GAAP hierarchy should be
directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. Accordingly, the FASB concluded that the
GAAP hierarchy should reside in the accounting literature established by the
FASB and is issuing this Statement to achieve that result. This Statement is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The adoption of FASB 162 is not expected to have a material
impact on the Company’s financial position.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities—an amendment of FASB Statement No. 133.” Constituents have expressed concerns
that the existing disclosure requirements in FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, do not provide adequate
information about how derivative and hedging activities affect an entity’s
financial position, financial performance, and cash flows. SFAS No. 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. The adoption of
FASB 161 is not expected to
have a material impact on the Company’s financial position.
In December 2007, the FASB issued SFAS
No.160, “Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51”. SFAS No.160 requires that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, in the amount of consolidated net income attributable to
the parent and to the noncontrolling interest on the face of the consolidated
statement of income, and that Entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No.160 is effective for
fiscal years, beginning on or after December 15, 2008 and cannot be applied
earlier.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141(revised 2007), “Business
Combinations,” (“FASB 141R”). This standard requires that entities recognize the
assets acquired, liabilities assumed, contractual contingencies and contingent
consideration measured at their fair value at the acquisition date for any
business combination consummated after the effective date. It further requires
that acquisition-related costs are to be recognized separately from the
acquisition and expensed as incurred. FASB 141R is effective for fiscal years
beginning after December 15, 2008.
The Company does not anticipate that the
adoption of SFAS No. 141R and No. 160 will have an impact on the Company's
overall results of operations or financial position, unless the Company makes a
business acquisition in which there is a noncontrolling
interest.
In December 2007, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB
110 expresses the current view of the staff that it will accept a company’s
election to use the simplified method discussed in Staff Accounting Bulletin
107, Share
Based Payment , (“SAB
107”), for estimating the expected term of “plain vanilla” share options
regardless of whether the company has sufficient information to make more
refined estimates. SAB 110 became effective for the Company on January 1, 2008.
The adoption of SAB 110 is not expected to have a material impact on the
Company’s financial position.
In February 2007, the Financial
Accounting Standards Board (“FASB”) issued SFAS No.159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No.115”. SFAS No.159 permits entities to choose to measure eligible
financial instruments and other items at fair value at specified election dates.
A business entity shall report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting
date. The fair value option may be applied instrument by instrument but only
upon the entire instrument - not portions of the instrument. Unless a new
election date occurs, the fair value option is irrevocable. SFAS No.159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company does not expect that the adoption of SFAS No. 159
will have a material effect on the Company's consolidated financial
statements.
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements”. The statement standardizes the definition of
fair value, establishes a framework for measuring in generally accepted
accounting principles and sets forth the disclosures about fair value
measurements. SFAS No. 157 is effective for the beginning of an entity's
fiscal year that begins after November 15, 2007. The Company does not expect
SFAS No. 157 will have a material effect on its financial
statements.
RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008
In November 2005, we discontinued and
disposed of our subsidiaries except for Arrow Ltd. in conjunction with the
recapitalization of the Company. The Company had no revenue during this period
as Arrow Ltd. is still in the development stage. For the three months ended
March 31, 2009, we incurred consulting fees of $1,011,227 of which, $989,519 was related
to services provided by the Management Agreement with Empire under which Empire
provides the services of Chief Executive Officer and administrative services to
the Company and consulting services provided by Hans Karundeng and Rudolph
Karundeng under Engagement and Consulting Agreements. For the three
months ended March 31, 2008, we incurred consulting fees of $1,001,059 of which, $888,613 was related
to services provided by the Management Agreement with Empire under which Empire
provides the services of Chief Executive Officer and administrative services to
the Company and consulting services provided by Hans Karundeng and Rudolph
Karundeng under Engagement and Consulting Agreements.
REVENUES
There was no revenue for the three months ended March 31, 2009 and
March 31, 2008 as the Company is in its development stage.
COST OF GOODS SOLD
There was no cost of good sold for the three months ended March 31,
2009 and March 31, 2008 as the Company is in its development
stage.
OTHER EXPENSES
Compensation, consulting and related
costs increased to
$1,011,227 for the three months ended
March 31, 2009 as compared to $1,001,059 for the three months ended
March 31, 2008, $12,184,862 for the period from inception (November 15,
2005) to December 31, 2008, and $13,196,089 for the accumulated during the
development stage for the period from inception (November 15, 2005) to March 31,
2009. The increase was
mostly due to consulting
fees for services provided by the Management Agreement with Empire under which
Empire provides the services of Chief Executive Officer and administrative
services to the Company and consulting services provided by Hans Karundeng and
Rudolph Karundeng under Engagement and Consulting
Agreements.
General and administrative expenses decreased to $19,423 for the three months ended
March 31, 2009 as compared to $42,503 for the three months ended
March 31, 2008, and increased to $722,610 for the period from inception
(November 15, 2005) to December 31, 2008, and $742,033 for the accumulated
during the development stage for the period from inception (November 15, 2005)
to March 31, 2009. This was
primarily due to a change
in advertising and accounting expense.
Directors’ compensation decreased
to $55,000 for the three months ended March 31,
2009, and increased to $60,000 for the three months ended March 31,
2008, $537,678 for the for the period from inception (November
15, 2005) to December 31, 2008 and $592,678 accumulated during the development
stage for the period from inception (November 15, 2005) to March 31,
2009. The change was due to a December 3, 2007
resolution to compensate all members of the Board of Directors on an annualized
basis of $50,000 in
cash and 250,000 shares in
the Company’s restricted
common stock, effective
January 1, 2007. The change is also due to
fluctuating share prices.
Delaware franchise taxes amount was
$105 for the three months ended
March 31, 2009 and March 31, 2008, $185,421 for the period from
inception (November 15, 2005) to December 31, 2008 and $185,526 for the period
from inception (November 15, 2005) to March 31, 2009. The Company is delinquent
in its filing and payment of the Delaware Franchise Tax report and, accordingly,
is not in good standing. At March 31, 2009, the Company has estimated unpaid
Delaware franchise taxes for the years ended December 31, 2008, 2007, 2006 and
2005 in the amount of $58,072, $57,650, $57,650 and $69,699,
respectively. The Company did not file their tax returns on time due to an
administrative oversight. The Company hopes to file the delinquent tax returns
in the second quarter of 2009 and pay the amount owned in full during the fourth
quarter of 2009.
Total operating expenses during the
development stage
decreased to $1,085,755 for the three months ended March 31,
2009 as compared to, $1,103,667 for the three months ended March 31,
2008, and increased to $13,630,571 for the period from inception (November 15,
2005) to December 31, 2008, and $14,716,326 accumulated during the development
stage for the period from inception (November 15, 2005) to March 31,
2009.
On March 31, 2008, the Company received
a $150,000 non-interest bearing advance
from John Marozzi, which is due on demand. In repayment, the Company will repay
the full amount of the note plus 1,000,000 shares of unregistered
restricted common stock.
The Company recorded $40,000 debt issue costs related to the 1,000,000 shares of
common stock that are now issuable to John Marozzi as of March 31,
2008. On May 5,
2008, John Marozzi received repayment of $50,000 from the Company. On October 13, 2008, the Company
received another
$50,000 interest bearing
advance from John Marozzi. The Company was to repay the full amount of the
October 31, 2008 $50,000
note in cash within 60 calendar days from the
date the note was executed plus interest paid in the form of 1,000,000 shares of
unregistered Company common
stock. During the year
ended December, 31, 2008, the Company recorded $60,000 of debt
issue costs related to the 1,000,000 shares of common stock that were issuable to John Marozzi as of December 31, 2008
(See Note 5). On March 5, 2009, the Company
received another
$50,000 interest bearing
advance from John Marozzi. The Company is to
repay the full amount of the March 5, 2009 $50,000 note in cash within 60
calendar days from the date the note was executed plus interest paid in the form
of 1,000,000 shares of unregistered Company common stock. This leaves
a balance of $200,000 unpaid principal as of March 31, 2009. This note
is currently in default. The Company is currently in the process of negotiating
an extension on this note.
On
January 15, 2009, the Company entered into the thirty-one day extension from
December 31, 2008 for the Convertible Loan Agreement and Convertible Note with
Frank Ciolli for the loan amount of $550,000 dated as of April 30, 2008. The
Company issued 500,000 shares of restricted, unregistered common stock each for
Michael Alferi and Frank Ciolli, which resulted in Company debt issue costs of
$80,000 as of March 31, 2009. The Company is currently negotiating an
additional extension for the Convertible Loan Agreement and Convertible Note.
This note
is currently in default. The Company is currently in the process of negotiating
an extension on this note.
In December 2007, Arrow Pte. assessed
that it would be unable to harvest the timber products in Papua, New Guinea due
to the fact that the widely accepted international guidelines of the World
Wildlife Federation had not been adopted by Papua, New Guinea. This fact is
adverse to the economic, social and environmental goals of Arrow Pte. because
with the amount of land that the project was allotted combined with the agreed
upon previous guidelines of the marketing and distribution agreement, yields
would be significantly reduced. Given the significant change in the economics of
the harvesting of the timber in Papua, New Guinea, Arrow Pte. has decided not to
pursue any further operations in Papua, New Guinea given that the above
restrictions cause a significant reduction in the volume of harvesting, which
results in a disproportionate cost to yield ration at the Papua, New Guinea site
which makes the project not economically feasible in the foreseeable future.
Based on the fact that Arrow Pte. is unable to fulfill their part of the
agreement, the Company has reached the conclusion that the marketing and
distribution agreement has no value. Therefore, the Company has fully impaired
the value of the agreement and recorded a loss on write-off of the marketing and
distribution agreement of
$125,000,000 at December
31, 2007. (See Note 6.)
The Company was a party to a lawsuit
where the plaintiff alleged that he was entitled to $60,000 and 1,300,000 of
common stock based upon CNE’s failure to compensate him for services
related to identifying financing for CNE, based upon an agreement that was
entered into between CNE and the plaintiff in April 2005. On November 28, 2007,
the Company settled the lawsuit with the plaintiff. In full and final settlement
of the claims asserted in the action, the Company has paid the plaintiff $10,000
in cash and issued the plaintiff 200,000 shares of the Company’s common stock
having a fair value of $12,000, based on the public traded share price on
December 21, 2007. The settlement resulted in a loss on debt conversion of
$2,000 during the year ended December 31, 2007 because an estimated liability
had been recognized prior to 2007.
In May 2006, the Company was advised
that it was alleged to be in default of a settlement agreement entered into in
January of 2005 by CNE, its predecessor company, related to the release of
unrestricted, freely-tradable, non-legend shares of stock. In August 2006, the
plaintiffs, alleging the default, obtained a judgment in the 17th Judicial
Circuit Court Broward County, Florida for approximately $1,000,000. On November
13, 2007, legal counsel engaged by Management commenced an action on the
Company’s behalf in the above Circuit Court seeking to vacate and set aside the
2006 judgment asserting claims under Rule 1.540(b) of the Florida Rules of Civil
Procedure. Our counsel’s evaluation is that the Company has only a
limited chance of having the 2006 judgment opened by the Court because Florida
law provides very narrow grounds for opening a judgment once a year has passed
from its entry. The Courts are generally reluctant to disturb final
judgments and the Company’s grounds for opening the judgment depend on the
Court’s adopting a somewhat novel argument regarding such
matters. If, however, the Court does open the default judgment, the
Company will then have the opportunity to defend the 2006 action and, in such
event, our counsel believes that the Company has a reasonable chance of
succeeding in defending that claim, at least in part, based on the documents he
has reviewed. As of March 31, 2009, the Company had accrued $1,219,293,
including accrued interest of $165,908, related to this matter.
LIQUIDITY AND CAPITAL
RESOURCES
In November 2005, we discontinued and
disposed of our subsidiaries except for Arrow Ltd. in conjunction with the
recapitalization of the Company. The Company was recapitalized by the conversion
of $125,000,000 preferred convertible note related to the purchase of the
Marketing Agreement. As part of the recapitalization plan, the Company settled
all outstanding debt except for $220,000. As of March 31, 2009 and
December 31, 2008 the Company had $45 and $16 of cash, respectively. We had
losses of $1,251,480 for the three months ended March 31, 2009, and do not
currently generate any revenue. We had losses of $1,143,667 for the three months
ended March 31, 2008. In order for us to survive during the next twelve months
we will need to secure approximately $350,000 of debt or equity financing. We
expect to raise the additional financing in the future but there can be no
guarantee that we will be
successful.
OFF-BALANCE SHEET
ARRANGEMENTS
At March 31, 2009, we had no off-balance sheet
arrangements.
OPERATING ACTIVITIES
We used $585,717 of cash in our
operating activities during the three months ended March 31, 2009. We had a net
loss of $1,251,480. We had an increase in stock-based directors’ compensation
to be issued of $5,000, common stock issued for reset of previous subscription
agreement of $49,924, accounts payable and accrued expenses payable of $445,039
mostly related to compensation and management fees, and debt issue costs related
to a note payable of $150,000. In addition, we had a working capital deficiency
of $14,706,460 at March 31, 2009. We did not have any material commitments for
capital expenditures as of March 31, 2009.
INFLATION
We believe that inflation does not
significantly impact our current operations.
RECENT TRANSACTIONS
On January 15, 2009, the Company entered
into a stock purchase agreement with APR wherein APR agreed to purchase up to an
aggregate amount of 15,000,000 shares of common stock in the Company for $.10
per share. On January 15, 2009, the Company received $85,000
from Hans Karundeng and Arrow Pacific Resources Group Limited for the purchase
of 850,000 shares of common stock at $.10 per share pursuant to the APR to purchase up to an aggregate
amount of 15,000,000 shares of common stock in the Company for $.10 per
share. On January 20, 2009, the Company received $165,000 from
Hans Karundeng and Arrow Pacific Resources Group Limited for the purchase of
1,650,000 shares of common stock at $.10 per share pursuant to the APR to purchase up to an aggregate amount of 15,000,000 shares
of common stock in the Company for $.10 per
share.
On April 17, 2009, the Company received a $12,500 non-interest bearing advance from John
Marozzi. The
Company is to repay the full amount of the April 17, 2009 $12,500 note in cash within 60 calendar days
from the date the note was executed.
On May 8, 2009, the Company received a $20,000 non-interest bearing advance from John
Marozzi. The
Company is to repay the full amount of the May 8, 2009 $20,000 note in cash within 30 calendar days from the date the note
was executed.
Item 3.
|
Quantitative and Qualitative
Disclosures About Market
Risk
|
We conduct no hedging activity. We have
no derivative contracts.
Item 4.
|
Controls and
Procedures
|
Evaluation of Disclosure Controls and
Procedures
The Company’s Chief Executive
Officer and acting Chief Financial Officer has evaluated the effectiveness of
the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the fiscal period ending
March 31, 2009 covered by this Quarterly Report on Form 10-Q. Based upon
such evaluation, the Chief Executive Officer and acting Chief Financial Officer
has concluded that, as of the end of such period, the Company’s disclosure
controls and procedures were not effective as required under Rules 13a-15(e) and
15d-15(e) under the Exchange Act. The Company is currently in the
process of evaluating its options to fix the deficiency in internal
controls.
Management’s Report on Internal Control
Over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the
Company. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.
The Company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. 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.
Management, under the supervision of the
Company’s Chief Executive Officer and acting Chief Financial Officer, conducted
an evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management concluded that the Company’s internal
control over financial reporting was not effective as of March 31, 2009
under the criteria set forth in the in Internal Control—Integrated
Framework.
A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
Company's annual or interim financial statements will not be prevented or
detected on a timely basis. Management has determined that
material weaknesses exist due to a lack of segregation of duties, resulting from
the Company's limited resources.
This quarterly report does not include
an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not
subject to attestation by our registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management’s report in
this Quarterly Report on Form 10-Q.
Changes in Internal Control Over
Financial Reporting
No change in the Company’s internal
control over financial reporting occurred during the quarter ended
March 31, 2009, that materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Item 1.
|
Legal
Proceedings
|
The Company was a party to a lawsuit
where the plaintiff alleged that he was entitled to $60,000 and 1,300,000 of
common stock based upon CNE’s failure to compensate him for services
related to identifying financing for CNE, based upon an agreement that was
entered into between CNE and the plaintiff in April 2005. On November 28, 2007,
the Company settled the lawsuit with the plaintiff. In full and final settlement
of the claims asserted in the action, the Company has paid the plaintiff $10,000
in cash and issued the plaintiff 200,000 shares of the Company’s common stock
having a fair value of $12,000, based on the public traded share price on
December 21, 2007. The settlement resulted in a loss on debt conversion of
$2,000 during the year ended December 31, 2007 because an estimated liability
had been recognized prior to 2007.
In May 2006, the Company was advised
that it was alleged to be in default of a settlement agreement entered into in
January of 2005 by CNE, its predecessor company, related to the release of
unrestricted, freely-tradable, non-legend shares of stock. In August 2006, the
plaintiffs, alleging the default, obtained a judgment in the 17th Judicial
Circuit Court Broward County, Florida for approximately $1,000,000. On November
13, 2007, legal counsel engaged by Management commenced an action on the
Company’s behalf in the above Circuit Court seeking to vacate and set aside the
2006 judgment asserting claims under Rule 1.540(b) of the Florida Rules of Civil
Procedure. Our counsel’s evaluation is that the Company has only a
limited chance of having the 2006 judgment opened by the Court because Florida
law provides very narrow grounds for opening a judgment once a year has passed
from its entry. The Courts are generally reluctant to disturb final
judgments and the Company’s grounds for opening the judgment depend on the
Court’s adopting a somewhat novel argument regarding such
matters. If, however, the Court does open the default judgment, the
Company will then have the opportunity to defend the 2006 action and, in such
event, our counsel believes that the Company has a reasonable chance of
succeeding in defending that claim, at least in part, based on the documents he
has reviewed. As of March 31, 2009, the Company had accrued $1,219,293,
including accrued interest of $165,908, related to this matter.
Item 1A. “Risk Factors” of our
Annual Report on Form 10-KSB for the year ended December 31,
2008 includes a detailed discussion of our
risk factors. There have been no significant changes to our risk factors as set
forth in our 2008 Form 10-KSB.
Item 2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds
|
None.
Item 3.
|
Defaults Upon Senior
Securities
|
None.
Item 4.
|
Submission of Matters to a Vote of
Security Holders
|
On November 20, 2007, the Board of
Directors approved a private placement offering (the "Offering") approximating
$2,000,000 to accredited investors at $1.00 per share of Series A Convertible
Preferred Stock. The Offering will consist of the Company's Series A Convertible
Preferred Stock that will be convertible into our common stock. These securities
are not required to be and will not be registered under the Securities Act of
1933. Shares issued under this placement will not be sold in the United States,
absent registration or an applicable exemption from registration. As of March
31, 2009, the Company has received $355,000 from investors towards the
fulfillment of this financing agreement. The holders of the preferred stock have
no voting rights except as may be required by Delaware law, no redemption
rights, and no liquidation preferences over the Common Stock
holders.
On April
20, 2008, the Board of Directors approved a private placement offering (the
"Offering") approximating $2,000,000 to accredited investors at $1.00 per share
of Series C Convertible Preferred Stock. The Offering will consist of the
Company's Series C Convertible Preferred Stock that will be convertible into our
common stock. These securities are not required to be and will not be registered
under the Securities Act of 1933. Shares issued under this placement will not be
sold in the United States, absent registration or an applicable exemption from
registration. As of March 31, 2009, the Company has received $25,000 from
investors towards 25,000 Series C Convertible Preferred Stock shares issuable
under subscription agreements covering the placement offering. Each Series C
Convertible Preferred Stock is convertible into 20 shares of the Company’s
Common Stock. The holders of the preferred stock have no voting rights except as
may be required by Delaware law, no redemption rights, and no liquidation
preferences over the Common Stock holders.
On December 3, 2007, the Board of
Directors approved a plan to compensate all members of the Board of Directors at
a rate of $50,000 per year and 250,000 shares of Company common stock effective
January 1, 2007. This compensation plan applies to any board member that
belonged to the Board as of and subsequent to January 1, 2007. Those board
members that were only on the Board for part of the year will received pro-rata
compensation based on length of service. As of March 31, 2009, none of the shares under this plan have been
issued and the Company has accrued $450,137 of cash and recorded additional
paid-in capital of $142,538 for stock compensation based on the fair
value of 2,250,685 shares to be issued to the members of the
Board.
Item 5.
|
Other
Information
|
None
31.1 Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a)
Certification of the Principal Accounting Officer
32.1 Certification Pursuant to 18
U.S.C. §1350 of Chief Executive Officer
32.2 Certification Pursuant to 18
U.S.C. §1350 of the Principal Accounting Officer