UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934.
or
[X] Annual Report Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
for the Fiscal Year Ended December 31,
2010.
or
[ ] Transition Report Pursuant to Section 13 OR
15(d) of the Securities Exchange Act pf 1934. F
or the transition period from
_______ to ________.
Commission file number 000-52145
RAINCHIEF ENERGY INC.
(Exact name of Registrant as specified in its charter)
__________________________________________________________
(Translation
of Registrant's name into English)
Business Corporations Act (British Columbia)
(Jurisdiction of incorporation or organization)
Suite 900 – 925 West Georgia Street, Vancouver, BC,
Canada, V6C 3L2
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Name of each exchange on which registered |
| __________________________________________ | __________________________________________ |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock, without par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
______________________________________________
(Title of
Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 37,573,908 as at December 31, 2010.
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
[
] Yes [X] No
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to filed reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
[ ]
Yes [X] No
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) [X] Yes [ ] No; and
(2) has been subject to such filing requirements for the past 90 days.
[X]
Yes [ ] No.
Indicate which financial statement item the registrant elects to
follow:
[X] Item 17 [ ] Item 18.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [X] |
If this is an annual report, indicated by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
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Rainchief Energy Inc.
Table of Contents
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PART I
Introduction. Rainchief Energy Inc. (referred to as “Rainchief,” the “Company”), is a British Columbia corporation incorporated on December 28, 2000. The business endeavor will seek to identify for evaluation undervalued energy assets worldwide for possible development and / or acquisition.
Item 1. Identity of Directors, Senior Management and Advisors.
The President of the Company is Bradley J. Moynes, and the directors of the Company are Paul E. Heney, Robin Lecky and J. Robert Moynes, all of Suite 900 – 925 West Georgia Street, Vancouver, BC, Canada, V6C 3L2. Mr. Heney also serves as our Chairman and Chief Executive Officer.. See Item 6 for further information.
The Company’s registered independent auditors are Watson Dauphinee & Masuch, Chartered Accountants, Suite 420, 1501 West Broadway, Vancouver, British Columbia, Canada, V6J-4Z6. For further information, see Item 16C and the consolidated financial statements under Item 8.
Item 2. Offer Statistics and Expected Timetable. Not applicable.
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Item 3. Key Information
A. Selected Financial Data.
The following selected information should be read in conjunction with the Company’s financial statements, and notes, filed with this Form 20-F. This information, and all other financial information in this Form 20-F, is stated in Canadian dollars unless otherwise noted.
The financial information is presented on the basis of generally accepted accounting principles in Canada. With respect to the Company’s consolidated financial statements, there are no material differences from applying these principles compared to applying United States generally accepted accounting principles. Please see note 16 of the consolidated financial statements.
Selected Consolidated Financial and Operating Data.
| Year Ended December 31, | |||||
| Operating Data | 2010 | 2009 | 2008 | 2007 | 2006 |
| $ | $ | $ | $ | $ | |
| Sales | - | 3,838 | 14,767 | 3,965 | 5,105 |
| Gross profit, net cost of sales | - | 597 | (28,584) | 1,000 | 3,204 |
| (Net loss) | (398,327) | (480,025) | (485,973) | (524,780) | (440,672) |
| (Loss) per common share – basic & diluted | (0.02) | (0.19)* | (0.27)* | (0.30)* | (0.32)* |
| Number of shares outstanding | 18,560,292 | 2,495,843* | 1,804,562* | 1,741,885* | 1,357,722* |
| As at December 31, | |||||
| Balance Sheet Data | 2010 | 2009 | 2008 | 2007 | 2006 |
| $ | $ | $ | $ | $ | |
| Current Assets | 204,815 | 13,843 | 34,205 | 79,862 | 104,245 |
| Current Liabilities | 129,940 | 282,429 | 315,430 | 451,077 | 269,931 |
| Total assets | 205,148 | 14,284 | 35,345 | 112,313 | 113,145 |
| Share Capital | 2,786,932 | 2,241,445 | 2,031,174 | 1,567,600 | 1,025,342 |
| Accumulated Shareholder’s deficit | (3,280,089) | (2,881,762) | (2,401,737) | (1,915,764) | (1,390,984) |
| Dividends per common share | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
* Adjusted to reflect the consolidation of the Company’s stock on March 22, 2010 in the the ratio of 1 new common share for 10 old common shares.
Exchange Rates.
The Company’s consolidated financial statements are stated in Canadian dollars. The Company realized losses on foreign exchange of $9,917 and $30,773 for the years ended December 31, 2010 and 2008 respectively, and a gain of $20,315 for the year ended December 31, 2009. These gains, and the loss, were due to currency exchange rate fluctuations between the Canadian and United States dollar.
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In this Form 20-F/A, references to “dollars”, “$” or “Cdn$” are to Canadian dollars, unless otherwise specified. Reference to “US$” refers to United States dollars. Since June 1, 1970, the Government of Canada has permitted a floating exchange rate to determine the value of the Canadian dollar as compared to the United States dollar.
The Bank of Canada closing exchange rate on December 31, 2010 was Cdn$0.9946 per US$1.00. For the past five fiscal years ended December 31, and for the period between January 1, 2010 and December 31, 2010, the following exchange rates were in effect for Canadian dollars exchanged for United States dollars, expressed in terms of United States dollars (based on the nominal exchange rates provided by the Bank of Canada):
| Year Ended | Average per US$1 |
| December 31, 2006 | $ 1.13 |
| December 31, 2007 | $ 1.07 |
| December 31, 2008 | $ 1.07 |
| December 31, 2009 | $ 1.14 |
| December 31, 2010 | $ 1.03 |
| Month ended | per US$1 | |
| High | Low | |
| January 31, 2010 | $ 1.05 | $ 1.04 |
| February 28, 2010 | $ 1.06 | $ 1.05 |
| March 31, 2010 | $ 1.03 | $ 1.02 |
| April 30, 2010 | $ 1.01 | $ 1.00 |
| May 31, 2010 | $ 1.05 | $ 1.03 |
| June 30, 2010 | $ 1.04 | $ 1.03 |
| July 31, 2010 | $ 1.05 | $ 1.04 |
| August 31, 2010 | $ 1.05 | $ 1.04 |
| September 30, 2010 | $ 1.04 | $ 1.03 |
| October 31, 2010 | $ 1.02 | $ 1.01 |
| November 30, 2010 | $ 1.02 | $ 1.01 |
| December 31, 2010 | $ 1.01 | $ 1.01 |
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B. Capitalization and Indebtedness.
The following table sets forth our capitalization as of December 31, 2010, using:
December 31, |
As adjusted |
|||||
2010 |
April 29, 2011 |
|||||
(audited) |
(unaudited) |
|||||
| $ | $ | |||||
| Cash and cash equivalents | 171,237 | 104,447 | ||||
| Long-term obligations, less current portion | - | - | ||||
| Shareholders’ (deficiency) surplus | ||||||
| Share capital, without par value (December 31, 2009 $2,241,445 ) | 2,786,932 | 2,945,606 | ||||
| Share Subscription Advance | 196,263 | - | ||||
| Contributed Surplus | 372,102 | 372,102 | ||||
| Accumulated deficit | (3,280,089 | ) | (3,242,753 | ) | ||
| Shareholders’ surplus | 75,208 | 74,955 | ||||
| Total Capitalization (long-term debt plus shareholders’ surplus) | 75,208 | 74,955 |
On March 22, 2010, we completed a private placement of 50,000 units at a price of US$0.10 per unit, raising total gross proceeds of $5,384 (US$5,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$1.00 per share until March 22, 2011.
On May 19, 2010, we completed a private placement of 9,110,000 units at a price of US$0.02 per unit, raising gross proceeds of $191,505 (US$182,200). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.02 per share until March 30, 2015.
On October 5, 2010 we completed a private placement of 500,000 units at a price of US$0.04 per unit, raising gross proceeds of $20,276 (US$20,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.04 per share until October 15, 2015.
On November 22, 2010 we completed a private placement of 1,000,000 units at a price of US$0.02 per unit, raising gross proceeds of $20,373 (US$200,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.02 per share until October 28, 2015. The subscription proceeds owing by a director of the Company was received subsequently on April 21, 2011.
On May 19, 2010, we issued 15,000,000 common shares with a fair value of $150,000 for settlement of debts totalling $97,710, and accordingly recorded a loss of $52,290 on debt settlement. These debts were owed, on the date of settlement, to arm’s length parties who acquired the debts from related parties of the Company on March 2, 2010 for a nominal consideration of $10.
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On November 2, 2010, we paid $5,000 in cash and issued 130,000 common shares with a fair value of $2,600 for settlement of accounts payable totalling $46,558 owing to arm’s length parties. We recorded a gain of $38,958 on debt settlement.
On January 24, 2011, we completed a private placement of 1,300,001 shares at a price of US$0.15 per share, raising gross proceeds of $196,263 (US$195,000). The proceeds were received as of December 31, 2010 and were recorded as share subscription advance in equity.
On March 14, 2011, we completed a private placement of 403,333 shares at a price of US$0.15 per share, raising gross proceeds of $59,747 (US$60,500).
On March 4, 2011, we entered into a Stock Surrender, Settlement and Voluntary Pooling Agreement with the vendors on March 4, 2011, who agreed to surrender 50% of the common shares received for the sale of Jaydoc and 50% of the common shares received upon the exercise of share rights. A total of 4,500,000 common shares were returned to the treasury of the Company as final settlement of deficiencies identified by us in certain representations arising out of the Jaydoc acquisition. In connection to the settlement, the vendors agreed to hold in escrow the remaining 4,500,000 common shares received from the Jaydoc sale and the private placement. 12.5% of these shares will be released at a 90-day interval with the first release on May 30, 2011.
You should read this information together with our consolidated financial statements, including the related notes, and Item 5, “Operating and Financial Review and Prospects.”
None of the capitalization referred to above is secured or guaranteed. All amounts in respect of capitalization including long term debt are unsecured and not guaranteed.
C. Reasons for the Offer and Use of Proceeds. Not applicable.
D. Forward Looking-Statements and Risk Factors.
Forward-looking Statements. In this document, we are showing you a picture which is part historical (events which have happened) and part predictive (events which we believe will happen). Except for the historical information, all of the information in this document comprises "forward looking" statements. Specifically, all statements (other than statements of historical fact) regarding our financial position, business strategy and plans and objectives are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to management. These statements involve known and unknown risks, including the risks resulting from economic and market conditions, accurately forecasting operating and capital expenditures and capital needs, successful anticipation of competition which may not yet be fully developed, and other business conditions. Our use of the words "anticipate", "believe", "estimate", "expect", "may", "will", "continue" and "intend", and similar words or phrases, are intended to identify forward-looking statements (also known as "cautionary statements"). These statements reflect our current views with respect to future events. They are subject to the realization in fact of assumptions, but what we now believe will occur may turn out to be inaccurate or incomplete. We cannot assure you that our expectations will prove to be correct. Actual operating results and financial performance may prove to be very different from what we now predict or anticipate. The "risk factors" below specifically address all of the factors now identifiable by us that may influence future operating results and financial performance.
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Risk Factors.
Risks Related to the Business.
We have a history of operating losses and need additional capital to implement our business plan. For the year ended December 31, 2010, we recorded a net loss of $398,327 from operations compared to a net loss of $480,025 for the year ended December 31, 2009. The financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern. However, as shown in note 1 to the consolidated financial statements, our ability to continue operations is uncertain.
We continue to incur operating losses, and have a consolidated deficit of $3,280,089 as at December 31, 2010. Operations for the year ended December 31, 2010 have been funded primarily from the issuance of share capital and the continued support of creditors. Historically, we have met working capital needs primarily by selling equity to Canadian residents, and from loans (including loans from relatives of principal shareholders).
We estimate that we will require at least $1,500,000 to begin a series of alternative energy property acquisitions. A full implementation of our business plan for these property acquisitions will be delayed until the necessary capital is raised. See Item 5, “Operating and Financial Review and Prospects.”
Our entry into the alternative energy property acquisition business may not be successful and there are risks attendant on these activities
The alternative energy property acquisition business is highly competitive, and is populated with many companies, large and small, with the capital and expertise to evaluate, purchase, and exploit producing and non-producing opportunities. Even with capital and experience, industry risks are significant. Environmental compliance is an increasingly complex and costly obstacle to many new projects, and often times, and even if permits are obtained, they may be sufficiently restrictive that a property cannot be exploited to its full potential.
We may not be able to locate acquisition opportunities, or finance those we can identify. We offer no assurance that our entry into this business activity will be successful.
Risks Related to Our Stock.
If we have to raise capital by selling securities in the future, your rights and the value of your investment in the Company could be reduced. If we issue debt securities, the lenders would have a claim to our assets that would be superior to the stockholder rights. Interest on the debt would increase costs and negatively impact operating results. If we issue more common stock or any preferred stock, your percentage ownership will decrease and your stock may experience additional dilution, and the holders of preferred stock (called preference securities in Canada) may have rights, preferences and privileges which are superior to (more favorable) the rights of holders of the common stock. It is likely the Company will sell securities in the future. The terms of such future transactions presently are not determinable.
If the market for our common stock is illiquid in the future, you could encounter difficulty if you try to sell your stock. Our stock trades on the “OTC.BB” but it is not actively traded. If there is no active trading market, you may not be able to resell your shares at any price, if at all. It is possible that the trading market in the future will continue to be "thin" or "illiquid," which could result in increased price volatility. Prices may be influenced by investors' perceptions of us and general economic conditions, as well as the market for energy generally. Until our financial performance indicates substantial success in executing our business plan, it is unlikely that there will be coverage by stock market analysts will be extended. Without such coverage, institutional investors are not likely to buy the stock. Until such time, if ever, as such coverage by analysts and wider market interest develops, the market may have a limited capacity to absorb significant amounts of trading. As the stock is a “penny stock,” there are additional constraints on the development of an active trading market – see the next risk factor.
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The penny stock rule operates to limit the range of customers to whom broker-dealers may sell our stock in the market. In general, "penny stock" (as defined in the SEC’s rule 3a51-1 under the Securities Exchange Act of 1934) includes securities of companies which are not listed on the principal stock exchanges, or the Nasdaq National Market or the Nasdaq Capital Market, and which have a bid price in the market of less than $5.00; and companies with net tangible assets of less than $2 million ($5 million if the issuer has been in continuous operation for less than three years), or which has recorded revenues of less than $6 million in the last three years.
As "penny stock" our stock therefore is subject to the SEC’s rule 15g-9, which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worth in excess of $1 million or annual incomes exceeding $200,000, or $300,000 together with their spouses, or individuals who are the officers or directors of the issuer of the securities). For transactions covered by rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. This rule may adversely affect the ability of broker-dealers to sell our stock, and therefore may adversely affect our stockholders' ability to sell the stock in the public market.
Your legal recourse as a United States investor could be limited. The Company is incorporated under the laws of British Columbia. Most of the assets now are located in Canada. Our directors and officers and the audit firm are residents of Canada. As a result, if any of our shareholders were to bring a lawsuit in the United States against the officers, directors or experts in the United States, it may be difficult to effect service of legal process on those people who reside in Canada, based on civil liability under the Securities Act of 1933 or the Securities Exchange Act of 1934. In addition, we have been advised that a judgment of a United States court based solely upon civil liability under these laws would probably be enforceable in Canada, but only if the U.S. court in which the judgment were obtained had a basis for jurisdiction in the matter. We also have been advised that there is substantial doubt whether an action could be brought successfully in Canada in the first instance on the basis of liability predicated solely upon the United States' securities laws.
Item 4. Information on the Company.
A. History and Development of the Company.
The Company is a British Columbia corporation (organized on December 28, 2000, incorporation number BC 0619991, which is the incorporation number reflecting transition to the new corporate statute (the British Columbia Business Corporations Act)). The registered office is at Suite 1825 – 900 West Georgia Street, Vancouver, British Columbia, V6C-3L2. We do not have an agent in the United States.
The Company’s legal name is Rainchief Energy Inc. and business is carried on in this name in Canada at this time. On November 21, 2008 the Company changed its corporate name from Black Diamond Brands Corporation to Rainchief Energy Inc.
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B. Overview.
Rainchief Energy Inc. (the “Company”) was incorporated on December 28, 2000 under the Company Act of the Province of British Columbia, Canada. We are engaged in the financing and development of photovoltaic solar energy projects in Europe. Prior to January 1, 2010, we had operations in oil and gas exploration, and wine and spirit distribution.
On December 7, 2010 we signed a Memorandum of Understanding (MOU) with Prometea Partners Ltd. for the joint development of a 1MW photovoltaic (PV) solar plant to be located on the rooftop of one of Italy’s leading industrial corporations. Prometea is a London-based corporation with its primary operations office and subsidiary operating companies based in Italy. It is anticipated that the initial project MOU will be expanded into a long-term agreement between the two companies for the joint development of as many as 60 MW of PV solar capacity in Italy over the next 24 month period. Prometea and its subsidiary operating companies are experienced turn-key facilitators of PV solar power projects, currently focused on development opportunities in Italy. The group brings together a highly professional organization with expertise in all the relevant aspects of renewable energy project development. Prometea has extensive experience in this specialized sector and combines technical and financial expertise with on-the-ground knowledge and regulatory awareness. ENERGYKA, ENERGYKA Engineering and ENERGYKA Electrosystems (“Prometea Group”) provides design and installation services, including EPC and subcontracting for ground or roof mounted PV systems. Prometea also provides RainChief with in-depth knowledge of the incentive framework and the approval process required for officially authorized PV projects in Italy. Additionally, the group has the professional background to identify ideal authorized rooftop or field sites for potential project development and to source and manage bankable engineering, procurement and construction (EPC) contractors with a proven record of PV project completion. Prometea has advised the Company that it has been involved in the development of over 175MW of PV solar projects in Italy.
The Company’s Organization Structure.
On September 30, 2009, we disposed of two subsidiaries, Black Diamond Importers Inc., a British Columbia, Canada, corporation and Liberty Valley Wines, LLC., a Delaware, U.SA., limited liability company. On December 30, 2009, we disposed of our remaining subsidiary, Point Grey Energy Inc., an Alberta, Canada corporation.
Effective December 22, 2010, we acquired all of the issued and outstanding common shares of Jaydoc Capital Corp (“Jaydoc”), a company incorporated under the Business Corporations Act of the Province of British Columbia, Canada. Jaydoc was acquired to facilitate our business venture in solar energy development. The assets of Jaydoc are its business plan and strategic business relationship with operational partners that offer experience and knowledge in the development, engineering and construction of solar energy projects in Italy and the European Union.
On December 18, 2010 we incorporated a wholly-owned subsidiary, Rainchief Renewable-1 S.R.L under the laws of Italy.
Commitments.
In April 2008, we entered into a royalty and licensing agreement with an arm’s length party for the exclusive right to use copyrighted photographs for a term of 3 years. In the first quarter of 2009, we were served a Notice of Termination of the licensing agreement citing breach by us as a result of our default on the royalty payment due on January 01, 2009. The total amount of claim against us is US$50,625 which represents the guaranteed royalty payments payable for the remaining term of the agreement. We are pursuing a resolution to the dispute. As at December 31, 2009, we have recorded a provision of $60,750 for this contingent liability. The outcome of the legal claim is uncertain, and management is of the opinion that the claim has no merit and seeks to recover all costs.
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We own computer and office furniture and equipment with a depreciated cost of $333 as at December 31, 2010. See note 5 to the consolidated financial statements.
Item 5. Operating and Financial Review
For the years ended December 31, 2010, 2009, and 2008, we had net losses of $398,397, $480,025 and $485,973, respectively.
Accounting, Audit and Legal expenses decreased by $7,201 from $51,226 in 2009 to $44,025 in 2010 as additional legal fees relative to the restructuring of the Company, the roll back of our stock and review of various acquisition opportunities were not incurred in 2010. Accounting audit and legal fees for the year ended December 31, 2009 decreased by $38,858 to $51,226 from $90,084 for the year ended December 31, 2008, as a result of adjustments to accruals for professional services made in 2008.
Expenditure on Advertising, Promotion and Website Development costs increased by $14,684 from $1,816 in the year ended December 31, 2009 to $16,500 during the year ended December 31, 2010 as a result of the redesign of our website. Advertising, Promotion and Website Development costs for the year ended December 31, 2009 decreased by $36,744 to $1,816 from $38,560 for the year ended December 31, 2008 as a result of the discontinuance of our activities in the wine and spirit business.
Consulting and Investor Relations Expense for the year ended December 31, 2010 amounted to $148,050 a decrease of $26,141 as compared with $174,191 for the year ended December 31, 2009 as we terminated certain investor relation services and engaged the services of the former Chief Executive Officer as a Consultant after his management contract with the Company was terminated by mutual agreement in December 2009. In addition, we engaged a business development consultant (who is also a shareholder of the Company). Consulting and investor relations expenses increased by $71,029 to $174,191 for the year ended December 31, 2009 from $103,162 for the year ended December 31, 2008, as a result of additional business development and investor relations activity during 2009.
During the year ended December 31, 2010, we incurred Development Costs of $3,480 in connection with our efforts to enter the solar energy market in Italy (years ended December 31, 2009 and 2008 - $Nil)
Filing and Transfer Agents Fees for the year ended December 31, 2010 increased by $3,544 to $17,639 from $14,095 for the year ended December 31, 2009 as a result of continued corporate activity during the year. Filing and Transfer Agents Fees for the year ended December 31, 2009 increased by $10,967 to $14,095 from $3,128 for the year ended December 31, 2008 as a result of additional corporate activity related to the reorganization of the Company during 2009.
Interest and Bank Charges for the year ended December 31, 2010 decreased by $3,095 to $283 from $3,378 for the year ended December 31, 2009 as a result of a reduction in bank transaction volumes. Bank Charges for the year ended December 31, 2009 were almost unchanged as compared with the expense incurred for the year ended December 31, 2008.
No management fees were paid during the year ended December 31, 2010, following the termination of the management agreements with our President and Vice-president during 2009. Management fees charged by our President and Vice-President for the year ended December 31, 2009, reduced by US$15,000 to US$105,000 as compared with the year ended December 31, 2008 as a result of the early termination of the management contract of our Vice-President. In addition, we paid management fees in the amount of $3,100 to a company controlled by a director. Management fees for the year ended December 31, 2008 were fixed at US$120,000. Other changes in the amounts recorded in the years ended December 31, 2009 and 2008 resulted from fluctuations in the exchange rate between the US and Canadian Dollars.
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Office and Telephone expenses, and Office and Warehouse Rent expense decreased by $9,011 and $6,586 respectively to $1,036 and $4,635 for the year ended December 31, 2010 from $10,047 and $11,221 for the year ended December 31, 2009 as a result of cost saving initiatives initiated by management. Office and Telephone expenses, and Office and Warehouse Rent expense remained substantially unchanged for the years ending December 31, 2009 and 2008.
Travel expenses for the year ended December 31, 2010 increased by $6,150 to $9,177 as compared with $3,027 expended during the year ended December 31, 2009 as a result of travel undertaken in connection with our entry into the PV solar industry in Italy. Travel expenses for the year ended December 31, 2009 decreased by $10,904 to $3,027 from $13,931 during the year ended December 31, 2008. These expenses were incurred in connection with our involvement in the oil and gas sector.
We incurred a loss on foreign exchange of $9,917 for the year ended December 31, 2010, as compared with a foreign exchange gain of $20,315 for the year ended December 31, 2009, and a loss of $30,773 for the year ended December 31, 2008. The losses in the years ending December 31, 2010 and 2008, and the gain in the year ended December 31, 2009, respectively, resulted from changes in the foreign currency exchange rate between the Canadian and US Dollars.
During the year ended December 31, 2010, we realized a net loss on the settlement of certain debts in the amounts of $13,332. During the year ended December 31, 2008, we realized a net gain of $21,505 on the settlement of certain debts.
On December 31, 2010, we wrote down the intangible asset acquired as a result of the acquisition of Jaydoc, due to the lack of reliable measurement of the future cash flows of the solar energy project and recorded a charge of $124,246.
During the year ended December 31, 2009 we disposed of our loss-making subsidiaries realizing a gain of $222,555.
During the year ended December 31, 2009 we issued warrants with a fair value of $194,281 to consultants, officers and directors of the Company for services provided to the Company.
We are the respondent in a lawsuit filed in the Supreme Court of British Columbia. The Plaintiff seeks damages in the amount of $60,750, claiming breach of a licensing agreement relating to our use of certain photographs, the copyright to which is held by the plaintiff. We recorded a contingent liability for this amount as at December 31, 2009. The outcome of this legal claim is uncertain, and management is of the opinion that the claim has no merit.
During the year ended December 31, 2009, we acquired a five-year petroleum and natural gas lease in the Peace River area of Alberta, Canada for a total consideration of $10,501. We subsequently disposed of its interest in the property to an arm’s length party on December 30, 2009 for settlement of the outstanding principal and interest totaling $7,783 of a short-term promissory note and recorded a loss of $2,718 on the disposition of the lease.
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During the year ended December 31, 2008, through a then-subsidiary, Point Grey Energy Inc., we entered into a purchase agreement to acquire a 10% working interest in certain oil and gas interests in a property located in the Province of Alberta, Canada for a total purchase price of $40,500. The vendor is involved in a legal action with the underlying owner and operator of the property with respect to the vendor’s entitlement to a working interest in the property. Our interest in the property was wholly derived from the purchase agreement with the vendor, and in the event that the vendor’s interest in the property should have been determined to be nil, our interest would also have been determined to be nil. As such, we wrote off $40,499 in acquisition costs due to the uncertainty over ownership of the working interest.
Financial position
For the year ended December 31, 2010 we had a working capital surplus of $74,875 as compared with a working capital deficiency of $268,586 as at December 31, 2009.
The increase in working capital during the year ended December 31, 2010 is due reductions in Accounts Payable and Accrued Liabilities of $49,693, Amounts owed to Related Parties of $91,810; and a reduction in GST/HST Recoverable of $639; and an increase in Subscriptions Receivable of $20,374. Total cash balances increased by $182,223 from an overdraft of $10,986 as at December 31, 2009 to cash on hand as at December 31, 2010 of $171,237.
Liquidity and Capital Resources
Cash provided from private placements in the year ended December 31, 2010 was $475,490 (year ended December 31, 2009 - Cash provided from private placements, promissory note, related parties and the disposal of subsidiaries - $287,638). Changes in working capital accounts during the year ended December 31, 2010 consumed $12,880 (year ended December 31, 2009 – provided $53,921).
The uses of cash during the year ended December 31, 2010 were $254,741 to fund our continuing operations, and $25,646 to acquire Jaydoc. The uses of cash during the year ended December 31, 2009 were $10,501 for the purchase of the oil and gas assets and $352,325 to fund our continuing operations. We realized cash proceeds in the amount of $10,001 and disposed of $283 in cash as a result of the sale of our subsidiaries Black Diamond Importers, Liberty Valley Wines and Point Grey Energy.
Subsequent events
Private Placements
On January 24, 2011 we completed a private placement of 1,300,001 shares at US$0.15 for total proceeds of $196,263 (US$195,000). These securities are subject to resale restrictions in accordance with applicable securities legislation.
On March 14, 2011, we completed a private placement of 403,333 shares at a price of US$0.15 per share, raising gross proceeds of $59,747 (US$60,500).
Shares Surrendered and Returned to Treasury
Subsequent to year-end, we entered into a Stock Surrender, Settlement and Voluntary Pooling Agreement with the vendors on March 4, 2011, who agreed to surrender 50% of the common shares received for the sale of Jaydoc and 50% of the common shares received upon the exercise of share rights.
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A total of 4,500,000 common shares were returned to the treasury of the Company as final settlement of deficiencies identified by us in certain representations arising out of the Jaydoc acquisition. The Company will record the book value of the shares surrendered in the amount of $97,336 as a recovery in the statement of operations upon settlement in 2011.
In connection to the settlement, the vendors agreed to hold in escrow the remaining 4,500,000 common shares received from the Jaydoc sale and the private placement. 12.5% of these shares will be released at a 90-day interval with the first release on May 30, 2011.
Investor relations contract
On February 10, 2011, we entered into an agreement with another company for the provision of investor relations consulting services for a three month period commencing on the date of the agreement. For the services to be rendered by the Consultant under this Agreement, we shall pay to the consultant company a total fee in the amount of $15,000 and issue to the consultant company 200,000 stock options at a price to be mutually agreed upon.
C. Research and Development, Patents and Licenses, Etc. Not applicable.
D. Trend Information.
Management is not aware of any trend, commitment, event or uncertainty that is expected to have a material effect on our business, financial condition or results of operations.
E. Off-Balance Sheet Arrangements. Not applicable.
F. Contractual Obligations.
On November 1, 2010, we entered into a consulting contract with the President of the Company for general management and operational services for a period of 2 years.
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Item 6. Directors, Senior Management and Employees
A. Directors, Senior Management, and Employees.
The following table sets forth the name, positions held and principal occupation of each of our directors, senior management and employees upon whose work the Company is dependent. Information on such persons’ share ownership is under Item 7.
| Name and Positions Held | Experience and Principal Business Activities | |
| Paul Heney (51) Chairman, Chief Executive Officer and Director | Director of the Company since Nov 18, 2010. | |
| Bradley J. Moynes (41) President, and Director | President and Director of the Company since December 2000. | |
| J. Robert Moynes (66) Director | Director of the Company since July 2008. | |
| Robin Lecky (65) Director | Director of the Company since Nov 9, 2010 |
B. Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to the executive officers of the Company in each of the years ended December 31, 2010, 2009 and 2008. The table includes compensation paid for service by such persons to subsidiaries. All amounts are stated in US dollars.
| Annual Compensation | Long Term Compensation | |||||||
| Awards | Payouts | |||||||
(a) |
(b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) |
| Restricted | ||||||||
| Name and Current | Stock | Options or | LPIT | All Other | ||||
| Principal Position | Year | Salary | Bonus | Other | Awards | SAR’s | Payouts | Compensation |
| (US$) | (US$) | (US$) | (US$) | (#) | (US$) | (US$) | ||
| Paul Heney | 2010 | $ - | $ - | $ - | $ - | - | $ - | $ - |
| Chairman and CEO | 2009 | $ - | $ - | $ - | $ - | - | $ - | $ - |
| 2008 | $ - | $ - | $ - | $ - | - | $ - | $ - | |
| Bradley J. Moynes, | 2010 | $ - | $ - | $ - | $ - | - | $ - | $ 99,817 |
| President and | 2009 | $60,000 | $ - | $ - | $ - | - | $ - | $ - |
| former CEO | 2008 | $60,000 | $ - | $ - | $ - | - | $ - | $ - |
| J. Robert Moynes, | 2010 | $ - | $ - | $ - | $ - | - | $ - | $ - |
| Vice-President and | 2009 | $45,000 | $ - | $ - | $ - | - | $ - | $ - |
| interim CFO | 2008 | $60,000 | $ - | $ - | $ - | - | $ - | $ - |
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Executive Compensation Plans and Employment Agreements.
Management Agreements.
On January 1, 2008, we signed ten-year Management Agreements with Bradley J. Moynes and J. Robert Moynes. Under the Management Agreements, we agreed to pay each officer US$60,000 annually.
On September 30, 2009, the management agreement with our Vice-President was terminated by mutual agreement. On December 30, 2009 the management agreement with our President was terminated by mutual agreement. Both the President and Vice-President waived their entitlements to severance payments as provided for in their management agreements.
Equity Compensation Plans.
Effective December 31, 2010, our Board of Directors adopted the 2010 Stock Option Incentive Plan (“the Stock Option Plan”). The purpose of the Stock Option Plan is to enhance the long-term stockholder value of the Company by offering opportunities to directors, officers, key employees and eligible consultants of the Company to acquire and maintain stock ownership in the Company, in order to give these persons the opportunity to participate in the Company's growth and success, and to encourage them to remain in the service of the Company. A maximum of 10% of the issued and outstanding shares of common stock are available for issuance under the Stock Option Plan.
C. Board Practices.
Each director holds office until the next annual general meeting of the Company unless his office is earlier vacated in accordance with the Articles of the Company or the Canada Business Corporations Act.
During the most recently completed fiscal year, there are no arrangements (standard or otherwise) under which directors of the Company were compensated by the Company or its subsidiaries for services rendered in their capacity as directors, nor were any amounts paid to the directors for committee participation or special assignments, other than the granting of stock options. There were no arrangements under which the directors would receive compensation or benefits in the event of the termination of that office.
The Company does not have audit, compensation, or corporate governance committees at the present time. The Company is listed for trading on the OTC.BB as a reporting issuer under registration statement Form 20-F (Foreign Private Issuer) and as such we believe that we are not required to have such committees.
D. Employees.
The Company currently has two officers and no employees. Employees will be added as required.
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E. Share Ownership.
Our directors and officers own the indicated shares of common stock as at the date hereof; percentages are based on 34,777,242 shares outstanding on April 29, 2011.
| Percentage of | ||
| outstanding at | ||
| Name | No. of Shares |
April 29, 2011 |
| Paul Heney | 1,000,000 | 2.88% |
| Bradley James Moynes | 651,586 | 1.87% |
| J. Robert Moynes | 461,039 | 1.33% |
| Robin Lecky | 250,000 | 0.72% |
Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders
To our knowledge, no persons beneficially own, directly or indirectly, or exercise control or direction over, common shares carrying more than 5% of the voting rights attached to the 34,777,242 shares outstanding at April 29, 2011.
The Company has approximately 200 shareholders of record at April 29, 2011. The number of shareholders holding securities beneficially through street name nominees, as reflected in the record position of Cede & Co. and other intermediaries, is approximately 2.42% . None of the major shareholders, if any, have different voting rights.
To the best of our knowledge, approximately 86.2% of the Company’s common shares are owned by residents of Canada or residents of countries other than residents of the United States. The number of shareholders holding securities beneficially through street name nominees, as reflected in the record position of Cede & Co. and other intermediaries, who may be residents of other countries, is approximately 2.42% . These assumptions are based on our shareholder registry issued by Presidents Stock Transfer Company as of April 29, 2011
To our knowledge, we are not owned or controlled directly or indirectly by another corporation or by any foreign government, nor by any other natural or legal person, nor are there any arrangements which may result in a change of control of the Company. The directors of the Company own approximately 6.8%% as a result of the March 22, 2010 share consolidation and the subsequent private placement and debt settlement issues. As a direct result of these treasury orders and subsequent non-brokered private placements the percentage of shares controlled by the directors no longer represents voting control of the Company.
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B. Related Party Transactions.
We had the following amounts due from (to) related parties as at December 31, 2010 and 2009:
| 2010 | 2009 | ||||||
| $ | $ | ||||||
| Due (to) from Directors and Officers | - | (81,896 | ) | ||||
| Due to Companies with Common Directors and Officers | - | (4,414 | ) | ||||
| Due to a Person Related to the Directors and Officers | - | (5,500 | ) | ||||
| - | (91,810 | ) |
Balances due from (to) related parties are unsecured, non-interest bearing and have no specific terms of repayment.
We had the following transactions with related parties for the years ended December 31, 2010, 2009 and 2008:
| 2010 | 2009 | 2008 | ||||||||
| $ | $ | $ | ||||||||
| Management fees charged by officers of the Company for management, administration, supervision and company development services | - | 125,515 | 129,279 | |||||||
| Consulting fees charged by directors of the Company and companies controlled by them for management and administration services | 105,817 | - | - | |||||||
| Bad debt on amount owed by related parties | 5,900 | 71,000 | - | |||||||
| 111,717 | 196,515 | 129,279 |
C. Interest of Experts and Counsel. None.
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Item 8. Financial Information. See the consolidated financial statements under Item 18.
Item 9. The Offer and Listing.
A. Offer and Listing Details.
The Company's common shares are traded on the “OTC.BB” under the symbol RCFEF; the shares are not listed on any exchange or traded on any other medium. Trading commenced in the first quarter 2004 on the Pink Sheets and then became a reporting issuer and was listed for trading on the OTC.BB during the second quarter of 2007.
The following table sets forth the high and low closing prices on the OTC Markets and the OTC.BB for the periods indicated, adjusted for the consolidation of the Company’s stock on March 22, 2010. See Item 10A below.
| By Quarters in 2006, 2007, 2008, 2009 & 2010 |
High Sales Price US$ |
Low Sales Price US$ |
| Fourth Quarter 2010 | $ 0.30 | $ 0.10 |
| Third Quarter 2010 | $ 0.22 | $ 0.13 |
| Second Quarter 2010 | $ 0.20 | $ 0.11 |
| First Quarter 2010 | $ 0.40 | $ 0.10 |
| Fourth Quarter 2009 | $ 1.00 | $ 0.20 |
| Third Quarter 2009 | $ 1.00 | $ 0.50 |
| Second Quarter 2009 | $ 1.20 | $ 0.50 |
| First Quarter 2009 | $ 1.20 | $ 0.30 |
| Fourth Quarter 2008 | $ 1.50 | $ 0.40 |
| Third Quarter 2008 | $ 2.50 | $ 0.90 |
| Second Quarter 2008 | $ 2.50 | $ 1.00 |
| First Quarter 2008 | $ 2.00 | $ 1.00 |
| Fourth Quarter 2007 | $ 1.40 | $ 1.00 |
| Third Quarter 2007 | $ 3.50 | $ 0.60 |
| Second Quarter 2007 | $ 3.80 | $ 0.70 |
| First Quarter 2007 | $ 3.00 | $ 2.60 |
| Fourth Quarter 2006 | $ 2.60 | $ 2.00 |
| Third Quarter 2006 | $ 2.50 | $ 1.60 |
| Second Quarter 2006 | $ 3.00 | $ 1.40 |
| First Quarter 2006 | $ 2.20 | $ 1.60 |
On December 31, 2010, the closing price was US$0.22 per share.
B. Plan of Distribution. Not applicable.
C. Markets. See "Offer and Listing Details" above.
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D. Selling Shareholders. Not applicable.
E. Dilution. Not applicable.
F. Expenses of the Issue. Not applicable.
Item 10. Additional Information.
A. Share Capital.
Authorized.
Unlimited number of common shares without par value
Issued and Outstanding.
| Number of | ||||||
| Common | Amount | |||||
| Shares | $ | |||||
| Balance, December 31, 2008 (Pre-Share Consolidation) | 23,818,852 | 2,031,174 | ||||
| Shares Issued for Cash, Net of Share Issue Costs (i) | 4,020,000 | 210,271 | ||||
| Balance, December 31, 2009 (Pre-Share Consolidation) | 27,838,852 | 2,241,445 | ||||
| Share Consolidation (ii) | (25,054,944 | ) | - | |||
| Balance, March 22, 2010 (Post-Share Consolidation) | 2,783,908 | 2,241,445 | ||||
| Shares Issued for Cash, Net of Share Issue Costs (iii) | 10,660,000 | 198,215 | ||||
| Shares Issued for Debt (iv) | 15,130,000 | 152,600 | ||||
| Shares Issued for Exercise of Share Rights (Note 4) | 5,000,000 | 101,386 | ||||
| Fair Value of Share Rights Exercised (Note 4) | - | 13,286 | ||||
| Shares Issued for Acquisition of Subsidiary (Note 4) | 4,000,000 | 80,000 | ||||
| Balance, December 31, 2010 (Post-Share Consolidation) | 37,573,908 | 2,786,932 |
On June 26, 2009 we completed a private placement of 3,050,000 pre-share consolidation units at a price of US$0.05 per unit, raising gross proceeds of $179,463 (US$152,500). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.10 per share expiring from March 27, 2010 to May 29, 2010.
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On December 2, 2009 we completed a private placement of 970,000 pre-share consolidation units at a price of US$0.05 per unit, raising gross proceeds of $51,747 (US$48,500). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.10 per share expiring from May 29, 2010 to August 5, 2010. We incurred share issue costs totalling $20,939.
On March 22, 2010, we consolidated our share capital ration the basis of 1 new common share for 10 old common shares.
On March 22, 2010, we completed a private placement of 50,000 units at a price of US$0.10 per unit, raising total gross proceeds of $5,384 (US$5,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$1.00 per share until March 22, 2011.
On May 19, 2010, we completed a private placement of 9,110,000 units at a price of US$0.02 per unit, raising gross proceeds of $191,505 (US$182,200). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.02 per share until March 30, 2015.
On October 5, 2010 we completed a private placement of 500,000 units at a price of US$0.04 per unit, raising gross proceeds of $20,276 (US$20,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.04 per share until October 15, 2015.
On November 22, 2010 we completed a private placement of 1,000,000 units at a price of US$0.02 per unit, raising gross proceeds of $20,373 (US$200,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.02 per share until October 28, 2015. The subscription proceeds owing by a director of the Company was received subsequently on April 21, 2011.
On May 19, 2010, we issued 15,000,000 common shares with a fair value of $150,000 for settlement of debts totalling $97,710, and accordingly recorded a loss of $52,290 on debt settlement. These debts were owed, on the date of settlement, to arm’s length parties who acquired the debts from related parties of the Company on March 2, 2010 for a nominal consideration of $10.
On November 2, 2010, we paid $5,000 in cash and issued 130,000 common shares with a fair value of $2,600 for settlement of accounts payable totalling $46,558 owing to arm’s length parties. We recorded a gain of $38,958 on debt settlement.
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Share Purchase Warrants
We have the following warrants outstanding as at December 31, 2010 which expire on various dates between March 21, 2011 and October 28, 2015:
| Weighted Average | ||||||
| Number of | Exercise Price | |||||
| Warrants | US$ | |||||
| Balance, December 31, 2008 (Pre-Share Consolidation) | 2,800,000 | 0.17 | ||||
| Issued | ||||||
| Private Placements (Note 6(b)(i)) | 4,020,000 | 0.10 | ||||
| Consulting and Investor Relations Services (i) | 1,700,000 | 0.08 | ||||
| Management Services (ii) | 1,500,000 | 0.08 | ||||
| Expired | (2,300,000 | ) | 0.19 | |||
| Balance, December 31, 2009 (Pre-Share Consolidation) | 7,720,000 | 0.09 | ||||
| Share Consolidation (Note 6(b)(ii)) | (6,948,000 | ) | - | |||
| Balance, March 22, 2010 (Post-Share Consolidation) | 772,000 | 0.92 | ||||
| Issued – Private Placements (Note 6(b)(iii)) | 10,660,000 | 0.03 | ||||
| Expired | (452,000 | ) | 1.00 | |||
| Balance, December 31, 2010 (Post-Share Consolidation) | 10,980,000 | 0.05 |
As a consequence of the consolidation of our share capital on March 19, 2010, the outstanding warrants were also consolidated in the ratio of 1 new warrant for 10 warrants issued. As of April 29, 2011, we had 10,980,000 warrants outstanding at an average exercise price of US$0.05.
B. Memorandum and Articles of Association.
The Company is registered under the Canada Business Corporations Act (BC 0619991).
With respect to directors, under the by-laws, a director who is a party to a material contract or proposed material contract with us, or is a director or officer of or has a material interest in any person who is a party to a material contract or proposed material contract with us, must disclose to us in writing the nature and extent of such interest. An interested director can vote on only a limited number of such matters (securing a loan from the director to the Company, his remuneration, indemnity or insurance, or a contract with an affiliate) provided the interest is disclosed. Otherwise, even with disclosure of the interest, such a director cannot vote on a material contract or proposed material contract. A contract approved by the board of directors is not voidable because one or more directors has a conflict of interest, if the conflict is disclosed and the interested director(s) do not vote on the matter. Subject to the conflict of interest provisions summarized above, there is no restriction in the by-laws on the power of the board of directors to have the Company borrow money, issue debt obligations, or secure debt or other obligations of the Company. The by-laws contain no provision for the retirement or non-retirement of directors under an age limit requirement. A director is not required to hold any shares of the Company in order to be a director.
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The Articles of the Company provide for the issuance of unlimited number of shares of common stock, without par value. All holders of common stock have equal voting rights, equal rights to dividends when and if declared, and equal rights to share in assets upon liquidation of the corporation. The common shares are not subject to any redemption or sinking fund provisions. Directors serve from year to year, there being no provision for a staggered board; cumulative voting for directors is not allowed. Between annual general meetings, the existing board can appoint one or more additional directors to serve until the next annual general meeting, but the number of additional directors shall not at any time exceed one-third of the number of directors who held office at the expiration of the last annual meeting. All issued and outstanding shares are fully paid and non-assessable securities.
In order to change the rights of the holders of common stock, the passing of a special resolution by such shareholders is required, being the affirmative vote of not less than 2/3 of the votes cast in person or by proxy at a duly called meeting of shareholders.
An annual meeting of shareholders must be called by the board of directors not later than 15 months after the last annual meeting. The board at any time may call a special meeting of shareholders. Notice of any meeting must be sent not less than 21 and not more than 50 days before the meeting, to every shareholder entitled to vote at the meeting. All shareholders entitled to vote are entitled to be present at a shareholders meeting. A quorum is the presence in person or by proxy of the holders of at least 5% of the issued and outstanding shares of common stock.
Except under the Investment Canada Act, there are no limitations specific to the rights of non-Canadians to hold or vote our shares under the laws of Canada or our charter documents. The Investment Canada Act ("ICA") requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business, the gross value of the assets of which exceed certain threshold levels or the business activity of which is related to Canada's cultural heritage or national identity, to either notify, or file an application for review with, Investment Canada, the federal agency created by the ICA. The notification procedure involves a brief statement of information about the investment on a prescribed form which is required to be filed with Investment Canada by the investor at any time up to 30 days after implementation of the investment. It is intended that investments requiring only notification will proceed without intervention by government unless the investment is in a specific type of business related to the scope of the ICA. If an investment is reviewable under the ICA, an application for review in the prescribed form normally is required to be filed with Investment Canada before the investment is made and it cannot be implemented until completion of review and Investment Canada has determined that the investment is likely to be of net benefit to Canada. If the agency is not so satisfied, the investment cannot be implemented if not made, or if made, it must be unwound.
C. Material Contracts.
Except as otherwise disclosed in this Form 20-F, we have no material contracts.
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D. Exchange Controls.
There are no laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of our shares of common stock.
E. Taxation.
Canada.
Canadian Federal Income Tax Information for United States Residents.
The following is a discussion of material Canadian federal income tax considerations generally applicable to holders of our common shares who acquire such shares in this offering and who, for purposes of the Income Tax Act (Canada) and the regulations thereunder, or the Canadian Tax Act:
TAX MATTERS ARE VERY COMPLICATED AND THE CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON SHARES WILL DEPEND UPON THE STOCKHOLDER’S PARTICULAR SITUATION. THE SUMMARY OF MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS INTENDED TO PROVIDE ONLY A GENERAL SUMMARY AND IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES.
THIS DISCUSSION DOES NOT INCLUDE A DESCRIPTION OF THE TAX LAWS OF ANY PROVINCE OR TERRITORY WITHIN CANADA. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF OUR COMMON SHARES ARE ENCOURAGED TO CONSULT WITH THEIR OWN TAX ADVISERS ABOUT THE TAX CONSEQUENCES TO THEM HAVING REGARD TO THEIR OWN PARTICULAR CIRCUMSTANCES, INCLUDING ANY CONSEQUENCES OF PURCHASING, OWNING OR DISPOSING OF OUR COMMON SHARES ARISING UNDER CANADIAN FEDERAL, CANADIAN PROVINCIAL OR TERRITORIAL, U.S. FEDERAL, U.S. STATE OR LOCAL TAX LAWS OR TAX LAWS OF JURISDICTIONS OUTSIDE THE UNITED STATES OR CANADA.
This summary is based on the current provisions of the Canadian Income Tax Act, proposed amendments to the Canadian Income Tax Act publicly announced by the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”), and the provisions of the Convention as in effect on the date hereof. No assurance can be given that the Proposed Amendments will be entered into law in the manner proposed, or at all. No advance income tax ruling has been requested or obtained from the Canada Revenue Agency to confirm the tax consequences of any of the transactions described herein.
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This summary is not exhaustive of all possible Canadian federal income tax consequences for U.S. Residents, and other than the Proposed Amendments, does not take into account or anticipate any changes in law, whether by legislative, administrative, governmental or judicial decision or action, nor does it take into account Canadian provincial, U.S. or foreign tax considerations which may differ significantly from those discussed herein. No assurances can be given that subsequent changes in law or administrative policy will not affect or modify the opinions expressed herein.
A U.S. Resident will not be subject to tax under the Canadian Tax Act in respect of any capital gain on a disposition of our common shares unless such shares constitute “taxable Canadian property”, as defined in the Canadian Tax Act, of the U.S. Resident and the U.S. Resident is not eligible for relief pursuant to the Convention. Our common shares will not constitute “taxable Canadian property” if, at any time during the 60-month period immediately preceding the disposition of the common shares, the U.S. Resident, persons with whom the U.S. Resident did not deal at arm’s length, or the U.S. Resident together with all such persons, did not own 25% or more of the issued shares of any class or series of shares of our capital stock. In addition, the Convention generally will exempt a U.S. Resident who would otherwise be liable to pay Canadian income tax in respect of any capital gain realized by the U.S. Resident on the disposition of our common shares, from such liability provided that the value of our common shares is not derived principally from real property situated in Canada. The Convention may not be available to a U.S. Resident that is a U.S. LLC which is not subject to tax in the U.S.
Amounts in respect of our common shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a U.S. Resident will generally be subject to Canadian non-resident withholding tax at the rate of 25%. Currently, under the Convention the rate of Canadian nonresident withholding tax will generally be reduced to:
United States Federal Income Tax Information for United States Holders.
The following is a general discussion of material U.S. federal income tax consequences of the ownership and disposition of our common shares by U.S. Holders (as defined below). This discussion is based on the United States Internal Revenue Code of 1986, as amended, Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect at the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion only addresses the tax consequences for U.S. Holders that will hold their common shares as a “capital asset” and does not address U.S. federal income tax consequences that may be relevant to particular U.S. Holders in light of their individual circumstances or U.S. Holders that are subject to special treatment under certain U.S. federal income tax laws, such as:
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As used herein, the term “U.S. Holder” means a beneficial owner of our common shares that is:
TAX MATTERS ARE VERY COMPLICATED AND THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON SHARES WILL DEPEND UPON THE STOCKHOLDER’S PARTICULAR SITUATION. THE SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS INTENDED TO PROVIDE ONLY A GENERAL SUMMARY AND IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.
NOTE THAT THIS DISCUSSION DOES NOT INCLUDE A DESCRIPTION OF THE TAX LAWS OF ANY STATE OR LOCAL GOVERNMENT WITHIN THE UNITED STATES. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF OUR COMMON SHARES ARE ENCOURAGED TO CONSULT THEIR TAX ADVISORS ABOUT THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON SHARES.
Ownership of Shares.
The gross amount of any distribution received by a U.S. Holder with respect to our common shares generally will be included in the U.S. Holder’s gross income as a dividend to the extent attributable to our current and accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent a distribution received by a U.S. Holder is not a dividend because it exceeds the U.S. Holder’s pro rata share of our current and accumulated earnings and profits, it will be treated first as a tax-free return of capital and reduce (but not below zero) the adjusted tax basis of the U.S. Holder’s shares. To the extent the distribution exceeds the adjusted tax basis of the U.S. Holder’s shares, the remainder will be taxed as capital gain (the taxation of capital gain is discussed under the heading “Sale of Shares” below).
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For taxable years beginning before January 1, 2009, dividends received by non-corporate U.S. Holders from a qualified foreign corporation are taxed at the same preferential rates that apply to long-term capital gains. A foreign corporation is a “qualified foreign corporation” if it is eligible for the benefits of a comprehensive income tax treaty with the United States (the income tax treaty between Canada and the United States is such a treaty) or the shares with respect to which such dividend is paid is readily tradable on an established securities market in the United States (such as the Nasdaq Capital Market). Notwithstanding satisfaction of one or both of these conditions, a foreign corporation is not a qualified foreign corporation if it is a passive foreign investment company (“PFIC”) for the taxable year of the corporation in which the dividend is paid or the preceding taxable year. (Whether a foreign corporation is a PFIC is discussed below under the heading “Passive Foreign Investment Companies”). A foreign corporation that is a PFIC for any taxable year within a U.S. person’s holding period generally is treated as a PFIC for all subsequent years in the U.S. person’s holding period. Although we have not been, are not now, and do not expect to be a PFIC, and we don’t expect to pay dividends, you should be aware of the following matters in the event that we do become a PFIC and do pay dividends.
If we were to become a PFIC, then U.S. Holders who acquire our common shares may be treated as holding shares of a PFIC throughout their holding period for the purpose of determining whether dividends received from us are dividends from a qualified foreign corporation. As a consequence, dividends received by U.S. Holders may not be eligible for taxation at the preferential rates applicable to long-term capital gains.
If a distribution is paid in Canadian dollars, the U.S. dollar value of such distribution on the date of receipt is used to determine the amount of the distribution received by a U.S. Holder. A U.S. Holder who continues to hold such Canadian dollars after the date on which they are received, may recognize gain or loss upon their disposition due to exchange rate fluctuations. Generally such gains and losses will be ordinary income or loss from U.S. sources.
U.S. Holders may deduct Canadian tax withheld from distributions they receive for the purpose of computing their U.S. federal taxable income (or alternatively a credit may be claimed against the U.S. Holder’s U.S. federal income tax liability as discussed below under the heading “Foreign Tax Credit”). Corporate U.S. Holders generally will not be allowed a dividend received deduction with respect to dividends they receive from us.
Foreign Tax Credit.
Generally, the dividend portion of a distribution received by a U.S. Holder will be treated as income in the passive income category for foreign tax credit purposes. Subject to a number of limitations, a U.S. Holder may elect to claim a credit against its U.S. federal income tax liability (in lieu of a deduction) for Canadian withholding tax deducted from its distributions. The credit may be claimed only against U.S. federal income tax attributable to a U.S. Holder’s passive income that is from foreign sources.
If we were to become a qualified foreign corporation with respect to a non-corporate U.S. Holder, dividends received by such U.S. Holder will qualify for taxation at the same preferential rates that apply to long-term capital gains. In such case, the dividend amount that would otherwise be from foreign sources is reduce by multiplying the dividend amount by a fraction, the numerator of which is the U.S. Holder’s preferential capital gains tax rate and the denominator of which is the U.S. Holder’s ordinary income tax rate. The effect is to reduce the dividend amount from foreign sources, thereby reducing the U.S. federal income tax attributable to foreign source income against which the credit may be claimed. Canadian withholding taxes that cannot be claimed as a credit in the year paid may be carried back to the preceding year and then forward 10 years and claimed as a credit in those years, subject to the same limitations referred to above.
28
The rules relating to the determination of the foreign tax credit are very complex. U.S. Holders and prospective U.S. Holders should consult their own tax advisors to determine whether and to what extent they would be entitled to claim a foreign tax credit.
Sale of Shares.
Subject to the discussion of the “passive foreign investment company” rules below, a U.S. Holder generally will recognize capital gain or loss upon the sale of our shares equal to the difference between: (a) the amount of cash plus the fair market value of any property received; and (b) the U.S. Holder’s adjusted tax basis in such shares. This gain or loss generally will be capital gain or loss from U.S. sources, and will be long-term capital gain or loss if the U.S. Holder held its shares for more than 12 months. Generally, the net long-term capital gain of a non-corporate U.S. Holder from the sale of shares is subject to taxation at a top marginal rate of 15%. A Capital gain that is not long-term capital gain is taxed at ordinary income rates. The deductibility of capital losses is subject to certain limitations.
Passive Foreign Investment Companies.
We will be a PFIC if, in any taxable year either: (a) 75% or more of our gross income consists of passive income; or (b) 50% or more of the value of our assets is attributable to assets that produce, or are held for the production of, passive income. Subject to certain limited exceptions, if we meet the gross income test or the asset test for a particular taxable year, our shares held by a U.S. Holder in that year will be treated as shares of a PFIC for that year and all subsequent years in the U.S. Holder’s holding period, even if we fail to meet either test in a subsequent year.
If we were a PFIC in the future, gain realized by a U.S. Holder from the sale of PFIC Shares and certain dividends received on such shares would be subject to tax under the excess distribution regime, unless the U.S. Holder made one of the elections discussed below. Under the excess distribution regime, federal income tax on a U.S. Holder’s gain from the sale of PFIC Shares would be calculated by allocating the gain ratably to each day the U.S. Holder held its shares. Gain allocated to years preceding the first year in which we were a PFIC in the U.S. Holder’s holding period, if any, and gain allocated to the year of disposition would be treated as gain arising in the year of disposition and taxed as ordinary income. Gain allocated to all other years would be taxed at the highest tax rate in effect for each of those years. Interest for the late payment of tax would be calculated and added to the tax due for each of the PFIC Years, as if the tax was due and payable with the tax return filed for that year. A distribution that exceeds 125% of the average distributions received on PFIC Shares by a U.S. Holder during the 3 preceding taxable years (or, if shorter, the portion of the U.S. Holder’s holding period before the taxable year) would be taxed in a similar manner.
A U.S. Holder may avoid taxation under the excess distribution regime by making a qualified electing fund (“QEF”) election. For each year that we would meet the PFIC gross income test or asset test, an electing U.S. Holder would be required to include in gross income, its pro rata share of our net ordinary income and net capital gains, if any. The U.S. Holder’s adjusted tax basis in our shares would be increased by the amount of such income inclusions. An actual distribution to the U.S. Holder out of such income generally would not be treated as a dividend and would decrease the U.S. Holder’s adjusted tax basis in our shares. Gain realized from the sale of our shares covered by a QEF election would be taxed as a capital gain. U.S. Holders will be eligible to make QEF elections, only if we agree to provide to the U.S. Holders, which we do, the information they will need to comply with the QEF rules. Generally, a QEF election should be made by the due date of the U.S. Holder’s tax return for the first taxable year in which the U.S. Holder held our shares that includes the close of our taxable year for which we met the PFIC gross income test or asset test. A QEF election is made on IRS Form 8621.
29
A U.S. Holder may also avoid taxation under the excess distribution regime by timely making a mark-to-market election. An electing U.S. Holder would include in gross income the increase in the value of its PFIC Shares during each of its taxable years and deduct from gross income the decrease in the value of its PFIC Shares during each of its taxable years. Amounts included in gross income or deducted from gross income by an electing U.S. Holder are treated as ordinary income and ordinary deductions from U.S. sources. Deductions for any year are limited to the amount by which the income inclusions of prior years exceed the income deductions of prior years. Gain from the sale of PFIC Shares covered by an election is treated as ordinary income from U.S. sources while a loss is treated as an ordinary deduction from U.S. sources only to the extent of prior income inclusions. Losses in excess of such prior income inclusions are treated as capital losses from U.S. sources. A mark-to-market election is timely if it is made by the due date of the U.S. Holder’s tax return for the first taxable year in which the U.S. Holder held our shares that includes the close of our taxable year for which we met the PFIC gross income test or asset test. A mark-to-market election is also made on IRS Form 8621.
As noted above, a PFIC is not a qualified foreign corporation and hence dividends received from a PFIC are not eligible for taxation at preferential long-term capital gain tax rates. Similarly, ordinary income included in the gross income of a U.S. Holder who has made a QEF election or a market-to-market election, and dividends received from corporations subject to such election, are not eligible for taxation at preferential long-term capital gain rates. The PFIC rules are extremely complex and could, if they apply, have significant, adverse effects on the taxation of dividends received and gains realized by a U.S. Holder. Accordingly, prospective U.S. Holders are strongly urged to consult their tax adviser concerning the potential application of these rules to their particular circumstances.
Controlled Foreign Corporation.
Special rules apply to certain U.S. Holders that own stock in a foreign corporation that is classified as a “controlled foreign corporation” (“CFC”). We do not expect to be classified as a CFC. However, future ownership changes could cause us to become a CFC. Prospective U.S. Holders are urged to consult their tax advisor concerning the potential application of the CFC rules to their particular circumstances.
Information Reporting and Backup Withholding.
United States information reporting and backup withholding requirements may apply with respect to distributions to U.S. Holders, or the payment of proceeds from the sale of shares, unless the U.S. Holder: (a) is an exempt recipient (including a corporation); (b) complies with certain requirements, including applicable certification requirements; or (c) is described in certain other categories of persons. The backup withholding tax rate is currently 28%. Any amounts withheld from a payment to a U.S. Holder under the backup withholding rules may be credited against any U.S. federal income tax liability of the U.S. Holder and may entitle the U.S. Holder to a refund.
F. Dividends and Paying Agents. Not applicable.
G. Statements by Experts. Not applicable.
H. Documents on Display. Not applicable.
30
I. Subsidiary Information. See the notes to the financial statements.
Item 11. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.
Item 12. Description of Securities Other Than Equity Securities. Not applicable
31
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies. Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. Not applicable.
Item 15T. Controls and Procedures.
Item 15. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and participation of the Chief Executive Officer, the Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2010, these disclosure controls and procedures were not effective to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, primarily due to the Company’s minimal financial staff which prevents us from segregating duties, which management believes is a material weakness in our internal controls and procedures. We intend to address such weakness and work with outside advisors to improve our controls and procedures as and when the circumstances of the Company permit this.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Forward looking statements regarding the effectiveness of internal controls during 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 and procedures may deteriorate.
Management completed an assessment of the effectiveness of the Company’s internal control over financial reporting (“ICFR”) as of December 31, 2009, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework as contemplated by Rule 13a-15(c). Based on this assessment, the Company concluded that it did not have effective internal controls over financial reporting as of December 31, 2009.
32
The Company’s assessment of the effectiveness of the ICFR as at December 31, 2010 identified certain material weaknesses as of that date:
1. Weakness: It is not possible to adequately segregate incompatible duties among the officers of the Company, because the Company has only two officers and one accounting consultant. Remediation: Appoint a new Chief Financial Officer, in addition to the current officers, to formally segregate the duties of maintaining accounting records and preparing financial statements, from the executive duties of the current officers. J. Robert Moynes, who has served as Interim Chief Financial Officer from July 2009, will cease to serve in that position upon appointment of a new individual as Chief Financial Officer.
2. Weakness: The Company is small, with only two officers, thereby creating a risk of override of existing controls by management. Remediation: Require the new Chief Financial Officer’s approval of all expenditures and other dispositions of assets.
3. Weakness: The Company maintains limited audit evidence in documentary form which is used to test the operating effectiveness of control activities. Remediation: Improve the documentation of expenditures and receipts, under the joint supervision of the new Chief Financial Officer and the Chief Executive Officer, to ensure received goods and third-party services conform to contract terms.
The Company appointed a third director on June 9, 2009. This director is independent as that term is defined by Rule 4200 (a) (15) of the Marketplace Rules of NASDAQ and Canadian National Instrument 52-110, and will not be involved in the day-to-day running of the Company. In addition the Company appointed a fourth director on November 22, 2010. However, these appointments did not result in the remediation of the weaknesses described above. The Company intends to appoint additional levels of executive management and personnel to remediate the weaknesses, in the specific manners described in paragraphs 1 through 3 above, as and when the Company has sufficient financial resources to effect the remediations.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
As disclosed above, the Company completed its assessment of its ICFR in place for the year ended December 31, 2010, using the COSO framework. There were no changes in ICFR during the 2010 fiscal year that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
Item 16A. Audit Committee Financial Experts. Not applicable.
Item 16B. Code of Ethics. Not applicable.
Item 16C. Principal Accountant Fees and Services. Not applicable.
Item 16D. Exemptions from the Listing Standards for Audit Committees. Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. None.
33
Item 16F Change in Registrant’s Certifying Accountant. Not applicable.
Item 16G. Corporate Governance . Not applicable.
34
PART III
Item 17. Financial Statements. Not applicable.
Item 18. Financial Statements
See the consolidated financial statements of the Company, the notes thereto, and the auditors’ reports thereon, which are filed as Exhibit 99.1 with this Form 20-F. All of the financial information is presented in accordance with Canadian GAAP; however, as stated in the notes, there are material differences between Canadian GAAP and United States GAAP as applied to our financial statements.
Item 19. Exhibits.
| Exhibit No. | Description of Exhibit | |
| 3.(i) | Articles of Incorporation (Notice of Articles and Transition Application) | |
| 3.(ii) | By-laws (Schedule “A”) | |
| 4. (1) | Management Agreement of January 1, 2008 (Bradley James Moynes) | |
| 4. (2) | Management Agreement of January 1, 2008 (James Robert Moynes) | |
| 4. (3) | Certifications (Paul E. Heney) | * |
| 4. (4) | Certifications (Brad J. Moynes) | * |
| 4. (5a) | Certification Pursuant 18 USC Section 1350 (Paul E. Heney) | * |
| 4. (5b) | Certification Pursuant 18 USC Section 1350 (Brad J. Moynes) | * |
| 4. (6) | Form of Warrant dated May 23, 2007 | |
| 23. (1) | Consent of Independent Auditors | * |
| 99. (1) | Consolidated Financial Statements for the years ended December 31, 2010 and 2009. | * |
* Filed herewith
35
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report.
| Rainchief Energy Inc. | |
| Date: May 6, 2011 | /s/ Paul E. Heney |
| Paul E. Heney, | |
| Chairman and Chief Executive Officer | |
| Date: May 6, 2011 | /s/ Bradley J. Moynes |
| Bradley J. Moynes, | |
| President |
36
CERTIFICATIONS
I, Paul E. Heney certify that:
| 1) |
I have reviewed this Annual Report on Form 20-F for Rainchief Energy Inc; | |
| 2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; | |
| 4) |
The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: | |
| a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under ur supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) |
evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) |
disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting; and | |
| 5) |
The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): | |
| a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and | |
| b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. | |
| Date: May 6, 2011 |
| /s/ Paul E. Heney |
| Paul E. Heney |
| Chief Executive Officer |
CERTIFICATIONS
I, Brad J. Moynes certify that:
| 1) |
I have reviewed this Annual Report on Form 20-F for Rainchief Energy Inc; | |
| 2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; | |
| 4) |
The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: | |
| a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under ur supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) |
evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) |
disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting; and | |
| 5) |
The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): | |
| a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and | |
| b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. | |
| Date: May 6, 2011 |
| /s/ Brad J. Moynes |
| Brad J. Moynes |
| President |
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report for Rainchief Energy Inc. (the “Company”) on Form 20-F for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report), the undersigned, Paul E. Heney, Chief Executive Officer do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that to the best of our knowledge:
| (1) |
The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and |
| (2) |
The information contained in the Report fairly presents, in all material respects, the Financial condition and results of operations of the Company. |
By:
/s/ Paul E. Heney
Paul E. Heney
Chief Executive Officer
May 6, 2011
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report for Rainchief Energy Inc. (the “Company”) on Form 20-F for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report), the undersigned, Brad J. Moynes, President of the Company do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that to the best of our knowledge:
| (1) |
The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and |
| (2) |
The information contained in the Report fairly presents, in all material respects, the Financial condition and results of operations of the Company. |
By:
/s/ Brad J. Moynes
Brad J. Moynes
President
May 6, 2011
Rainchief Energy Inc.
December 31, 2010
(Expressed in
Canadian Dollars)
Consolidated Financial Statements
| Management’s Responsibility for Financial Reporting |
These consolidated financial statements have been prepared by and are the responsibility of the management of the Company. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, using management’s best estimates and judgments based on currently available information. When alternative accounting methods exist, management has chosen those it considers most appropriate in the circumstances.
The Company maintains an appropriate system of internal controls to provide reasonable assurance that financial information is accurate and reliable and that the Company’s assets are appropriately accounted for and adequately safeguarded.
The Company’s independent auditors, Watson Dauphinee & Masuch, Chartered Accountants, were appointed by the shareholders to conduct an audit in accordance with generally accepted auditing standards in Canada and the Public Company Accounting Oversight Board (United States), and their report follows.
“Paul E.
Heney”
Paul
E. Heney
Director
“Bradley J.
Moynes”
Bradley J. Moynes
Director
2
| Independent Auditors’ Report |
To the Shareholders of:
RAINCHIEF ENERGY INC.
We have audited the accompanying consolidated financial statements of Rainchief Energy Inc. and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of operations, deficit, comprehensive loss, and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Rainchief Energy Inc. and its subsidiaries as at December 31, 2010 and 2009, and their financial performance and cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Emphasis of Matter – Going Concern
In forming our opinion, which is not qualified, we have considered the adequacy of the disclosures made in Note 1 to the consolidated financial statements concerning the ability of Rainchief Energy Inc. and its subsidiaries to continue as a going concern. The company incurred a net loss of $398,327 during the year ended December 31, 2010, and as of that date, had an accumulated deficit of $3,280,089 since inception. These conditions, along with the other matters explained in Note 1 to the consolidated financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if Rainchief Energy Inc. and its subsidiaries were unable to continue as a going concern.
“Watson Dauphinee & Masuch”
Chartered
Accountants
Vancouver, B.C., Canada
April 29, 2011
3
| RAINCHIEF ENERGY INC. |
| Consolidated Balance Sheets |
| As at December 31, 2010 and 2009 |
| (Expressed in Canadian Dollars) |
| 2010 | 2009 | |||||
| $ | $ | |||||
| ASSETS | ||||||
| CURRENT | ||||||
| Cash | 171,237 | - | ||||
| HST/GST Recoverable | 13,204 | 13,843 | ||||
| Subscription Receivable (Note 6(b)(iii)) | 20,374 | - | ||||
| 204,815 | 13,843 | |||||
| Property and Equipment (Note 5) | 333 | 441 | ||||
| 205,148 | 14,284 | |||||
| LIABILITIES | ||||||
| CURRENT | ||||||
| Bank Indebtedness | - | 10,986 | ||||
| Accounts Payable and Accrued Liabilities | 129,940 | 179,633 | ||||
| Due to Related Parties (Note 9(a)) | - | 91,810 | ||||
| 129,940 | 282,429 | |||||
| SHAREHOLDERS' EQUITY | ||||||
| Share Capital (Note 6(b)) | 2,786,932 | 2,241,445 | ||||
| Share Subscription Advance (Note 13(a)) | 196,263 | 5,384 | ||||
| Contributed Surplus (Note 6(e)) | 372,102 | 366,788 | ||||
| Accumulated Other Comprehensive Income | - | - | ||||
| Deficit | (3,280,089 | ) | (2,881,762 | ) | ||
| 75,208 | (268,145 | ) | ||||
| 205,148 | 14,284 | |||||
| Nature and Continuance of Operations (Note 1) | ||||||
| Segmented Information (Note 11) | ||||||
| Subsequent Events (Note 13) |
The accompanying notes are an integral part of these consolidated financial statements.
Approved on Behalf of the Board:
| “Paul E Heney” | “Bradley J. Moynes” | |
| Paul E. Heney | Bradley J. Moynes | |
| Director | Director |
4
| RAINCHIEF ENERGY INC. |
| Consolidated Statements of Operations and Deficit |
| As at December 31, 2010, 2009 and 2008 |
| (Expressed in Canadian Dollars) |
| 2010 | 2009 | 2008 | |||||||
| $ | $ | $ | |||||||
| SALES | - | 3,838 | 14,767 | ||||||
| COST OF SALES | - | 3,241 | 43,351 | ||||||
| GROSS PROFIT (LOSS) | - | 597 | (28,584 | ) | |||||
| EXPENSES | |||||||||
| Accounting, Audit and Legal | 44,025 | 51,226 | 90,084 | ||||||
| Advertising, Promotion and Website Development | 16,500 | 1,816 | 38,560 | ||||||
| Amortization | 107 | 227 | 519 | ||||||
| Bad Debt (Note 9(a)) | 5,900 | 71,000 | - | ||||||
| Consulting and Investor Relations (Note 9(b)) | 148,050 | 174,191 | 103,162 | ||||||
| Development Costs | 3,480 | - | - | ||||||
| Filing and Transfer Agent Fees | 17,639 | 14,095 | 3,128 | ||||||
| Interest and Bank Charges | 283 | 3,378 | 2,905 | ||||||
| Management Fees (Note 9(b)) | - | 125,515 | 129,279 | ||||||
| Office and Telephone | 1,036 | 10,047 | 10,189 | ||||||
| Office and Warehouse Rent | 4,635 | 11,221 | 15,865 | ||||||
| Stock-Based Compensation (Note 6(e)) | - | 194,281 | - | ||||||
| Travel and Automobile | 9,177 | 3,027 | 13,931 | ||||||
| 250,832 | 660,024 | 407,622 | |||||||
| LOSS BEFORE OTHER ITEMS | (250,832 | ) | (659,427 | ) | (436,206 | ) | |||
| Foreign Exchange (Loss) Gain | (9,917 | ) | 20,315 | (30,773 | ) | ||||
| Contingent Loss on Legal Claim (Note 10) | - | (60,750 | ) | - | |||||
| Net Gain on Sale of Subsidiaries (Note 3) | - | 222,555 | - | ||||||
| Net (Loss) Gain on Settlement of Debts (Note 6(b)(iv)) | (13,332 | ) | - | 21,505 | |||||
| Loss on Sale of Oil and Gas Interests (Note 7) | - | (2,718 | ) | - | |||||
| Write-Down Oil and Gas Interests | - | - | (40,499 | ) | |||||
| Write-Down Intangible Asset (Note 4) | (124,246 | ) | - | - | |||||
| NET LOSS FOR THE YEAR | (398,327 | ) | (480,025 | ) | (485,973 | ) | |||
| Deficit, Beginning of the Year | (2,881,762 | ) | (2,401,737 | ) | (1,915,764 | ) | |||
| DEFICIT, END OF THE YEAR | (3,280,089 | ) | (2,881,762 | ) | (2,401,737 | ) | |||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (POST-SHARE CONSOLIDATION) | 18,560,292 | 2,495,843 | 1,804,562 | ||||||
| BASIC AND DILUTED LOSS PER SHARE (POST-SHARE CONSOLIDATION) | (0.02 | ) | (0.19 | ) | (0.27 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
5
| RAINCHIEF ENERGY INC. |
| Consolidated Statements of Comprehensive Loss |
| As at December 31, 2010, 2009 and 2008 |
| (Expressed in Canadian Dollars) |
| 2010 | 2009 | 2008 | |||||||
| $ | $ | $ | |||||||
| NET LOSS FOR THE YEAR | (398,327 | ) | (480,025 | ) | (485,973 | ) | |||
| Other Comprehensive Income for the Year | - | - | - | ||||||
| COMPREHENSIVE LOSS FOR THE YEAR | (398,327 | ) | (480,025 | ) | (485,973 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
6
| RAINCHIEF ENERGY INC. |
| Consolidated Statements of Cash Flows |
| As at December 31, 2010, 2009 and 2008 |
| (Expressed in Canadian Dollars) |
| 2010 | 2009 | 2008 | |||||||
| $ | $ | $ | |||||||
| CASH PROVIDED BY (USED IN): | |||||||||
| OPERATING ACTIVITIES | |||||||||
| Net Loss for the Year | (398,327 | ) | (480,025 | ) | (485,973 | ) | |||
| Non-Cash Items | |||||||||
| Amortization | 107 | 227 | 519 | ||||||
| Bad Debt | 5,900 | 71,000 | - | ||||||
| Consulting and Investor Relations | - | 82,029 | 68,548 | ||||||
| Stock-Based Compensation | - | 194,281 | - | ||||||
| Unrealized Foreign Exchange Loss | - | - | 754 | ||||||
| Net (Gain) on Sale of Subsidiaries | - | (222,555 | ) | - | |||||
| Net Loss (Gain) on Settlement of Debts | 13,333 | - | (21,505 | ) | |||||
| Loss on Sale of Oil and Gas Interests | - | 2,718 | - | ||||||
| Write-Down Oil and Gas Property | - | - | 40,499 | ||||||
| Write-Down Intangible Asset | 124,246 | - | - | ||||||
| (254,741 | ) | (352,325 | ) | (397,158 | ) | ||||
| Change in Non-Cash Working Capital Accounts (Note 8(a)) | (12,880 | ) | 53,921 | 105,822 | |||||
| (267,621 | ) | (298,404 | ) | (291,336 | ) | ||||
| FINANCING ACTIVITIES | |||||||||
| Shares Issued for Cash, Net of Issuance Costs | 279,227 | 210,271 | 169,247 | ||||||
| Shares Subscription Advance | 196,263 | 5,384 | - | ||||||
| Advances from Related Parties | - | 64,199 | 145,838 | ||||||
| Net Proceeds from Promissory Note | - | 7,784 | - | ||||||
| 475,490 | 287,638 | 315,085 | |||||||
| INVESTING ACTIVITIES | |||||||||
| Acquisition of Oil and Gas Interests | - | (10,501 | ) | (30,500 | ) | ||||
| Acquisition of Subsidiary | (25,646 | ) | - | - | |||||
| Proceeds on Sale of Subsidiaries | - | 10,001 | - | ||||||
| Cash Disposed of on Sale of Subsidiaries | - | (283 | ) | - | |||||
| (25,646 | ) | (783 | ) | (30,500 | ) | ||||
| INCREASE (DECREASE) IN CASH | 182,223 | (11,549 | ) | (6,751 | ) | ||||
| (Bank Indebtedness) Cash, Beginning of the Year | (10,986 | ) | 563 | 7,314 | |||||
| CASH (BANK INDEBTEDNESS), END OF THE YEAR | 171,237 | (10,986 | ) | 563 | |||||
| Supplemental Cash Flow Information (Note 8) |
The accompanying notes are an integral part of these consolidated financial statements.
7
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 1 – NATURE AND CONTINUANCE OF OPERATIONS
Rainchief Energy Inc. (the “Company”) was incorporated on December 28, 2000 under the Company Act of the Province of British Columbia, Canada. The Company is engaged in the financing and development of photovoltaic solar energy projects in Europe (Note 4). Prior to January 1, 2010, the Company had operations in oil and gas exploration, and wine and spirit distribution (Note 3).
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles on a going concern basis, which assumes the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. The Company has incurred significant operating losses and negative cash flows from operations, and has been reliant on external financing of equity. As at December 31, 2010, the Company has an accumulated deficit of $3,280,089 since inception.
The Company’s ability to continue operations is uncertain and is dependent upon the support of its creditors, upon its ability to maintain current financing obligations and obtain necessary financing for its development projects, and upon future profitable operations. The outcome of these matters cannot be predicted at this time.
These consolidated financial statements do not reflect any adjustments to the amounts and classifications of assets and liabilities, which would be necessary should the Company be unable to continue as a going concern.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared using Canadian generally accepted accounting principles (“Canadian GAAP”) as summarized below.
| a) |
Basis of Presentation |
|
The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Jaydoc Capital Corp. from the date of acquisition on December 22, 2010 (Note 4) and Rainchief Renewable-1 S.R.L. All intercompany transactions and balances have been eliminated. | |
|
The Company disposed of its wholly-owned subsidiaries, Black Diamond Importers Inc., Liberty Valley Wines LLC and Point Grey Energy Inc., during the year ended December 31, 2009, and accordingly, these consolidated financial statements only include the accounts of these subsidiaries up to their date of disposal (Note 3). The wine and spirit distribution and oil and gas exploration activities of these subsidiaries comprised the Company’s principal business operations prior to January 1, 2010, and therefore has not been presented as a disposal of an operating segment of the Company or as discontinued operations in accordance with Emerging Issues Committee (“EIC”) 161 on discontinued operations of the Canadian Institute of Chartered Accountants (“CICA”) Handbook. The financial results of the Company’s reporting segments have been presented in Note 11. | |
| b) |
Property and Equipment |
|
Property and equipment are recorded at cost. Amortization is calculated using the following methods and annual rates, except in the year of acquisition when one-half the rate is used: |
| Computer Equipment | 30% Per Annum, Declining Balance Basis | |
| Furniture and Equipment | 20% Per Annum, Declining Balance Basis |
| c) |
Project Development Costs |
|
Project development costs are expensed as incurred. |
8
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued)
| d) |
Long-Lived Asset Impairment |
|
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability is assessed based on the carrying amount of a long-lived asset compared to the sum of the future undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value | |
| e) |
Share Capital |
|
The Company records proceeds from share issuances net of commissions and issuance costs. Shares issued for other than cash consideration are valued at the quoted price on the Over-the-Counter Bulletin Board in the United States based on the earliest of: (i) the date the shares are issued, and (ii) the date the agreement to issue the shares is reached. | |
| f) |
Stock-Based Compensation |
|
Employee stock options and other types of stock-based compensation are accounted for using the fair value based method. The Company estimates the fair value using the Black-Scholes option-pricing model. The fair value of an option is estimated on the date of grant and expensed over the vesting period. The fair value of a broker’s warrant is determined on the date of grant and recorded as share issuance costs. | |
|
Consideration received on the exercise of stock options or broker’s warrants is recorded as share capital and the related contributed surplus amount is transferred to share capital. | |
| g) |
Loss Per Share |
|
Basic loss per share is calculated using the weighted average number of common shares outstanding during the year. Diluted loss per share is the same as basic loss per share as the issuance of shares on the exercise of stock options and share purchase warrants is anti-dilutive. | |
| h) |
Income Taxes |
|
The Company uses the asset and liability method of accounting for income taxes, whereby future income tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts of assets and liabilities, and their respective tax bases. Future income tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which the differences are expected to reverse. Future income tax assets, including the benefit of income tax losses available for carry-forward, are only recognized to the extent that it is more likely than not that the Company will realize those assets. | |
| i) |
Foreign Currency Translation |
|
The Company’s reporting and functional currency is the Canadian dollar. Transactions in foreign currencies are translated to Canadian dollars at the rates in effect on the transaction date. Exchange gains or losses arising on translation or settlement of foreign currency denominated monetary items are charged to the statement of operations in the period they arise. |
9
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (Continued)
| j) |
Comprehensive Income |
|
Comprehensive income is the change in net assets from transactions related to non-shareholder sources. The Company presents gains and losses which would otherwise be recorded as part of net earnings in other comprehensive income until it is considered appropriate to recognize them into net earnings. | |
| k) |
Financial Instruments |
|
The Company’s financial instruments are classified into one of the following categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale assets or other financial liabilities. | |
|
Financial assets and liabilities held-for-trading are recorded at fair value with gains and losses recognized in net income. Financial assets and liabilities held-to-maturity, loans and receivables, and other financial liabilities are recorded at amortized cost using the effective interest method. Available-for-sale financial instruments are recorded at fair value with unrealized gains and losses recognized in other comprehensive income and reported in shareholders’ equity. | |
|
Cash are classified as held-for-trading and carried at their fair values. Subscription receivable is classified as loan and receivable and carried at its amortized cost. Accounts payable and accrued liabilities and amounts due to related parties are classified as other financial liabilities and carried at their amortized cost. | |
| l) |
Use of Estimates |
|
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates include the determination of the amortization period of property and equipment, the estimated amount of accrued liabilities, the realization of future income tax assets, the determination of the fair value of shares, share purchase warrants and share rights issued for debt, services and property. Actual results could differ from those estimates. | |
| m) |
Future Accounting Change – International Financial Reporting Standards (“IFRS”) |
|
In February 2008, the CICA announced that Canadian GAAP for publicly accountable enterprises will be replaced by IFRS for fiscal years beginning on or after January 1, 2011. Companies will be required to provide IFRS comparative information for the previous fiscal year. Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to the Company’s reporting for the first quarter ended March 31, 2011, with restatement of comparative information presented. | |
|
The conversion to IFRS will impact the Company’s accounting policies, information technology and data systems, internal control over financial reporting, and disclosure controls and procedures. The transition may also impact business activities, such as foreign currency activities, certain contractual arrangements, capital requirements and compensation arrangements. | |
|
The financial reporting impact of the transition to IFRS is not expected to have a material impact on the Company’s consolidated financial statements. |
10
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 3 – SALE OF SUBSIDIARIES
On September 30, 2009, the Company disposed of its interests in Black Diamond Importers Inc. (“BDI”) and Liberty Valley Wines LLC (“LVW”) to a Director of the Company for $10,000. These subsidiaries were in the business of distributing wine and spirit products in the Province of British Columbia, Canada and in the United States.
On December 30, 2009, the Company disposed of its interests in Point Grey Energy Inc. (“PGE”) to a Director of the Company for nominal consideration. The subsidiary was engaged in the acquisition, exploration, development and production of oil and gas interests in the Province of Alberta, Canada.
The Company recorded a net gain on the sale of these subsidiaries in 2009 as follows:
| BDI | LVW | PGE | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| Consideration | 5,000 | 5,000 | 1 | 10,001 | ||||||||
| Net Liabilities of Subsidiaries Disposed | 197,057 | 10,543 | 4,954 | 212,554 | ||||||||
| Gain on Sale of Subsidiaries | 202,057 | 15,543 | 4,955 | 222,555 |
The consolidated carrying amounts of the assets and liabilities of BDI and LVW as of September 30, 2009 and PGE as of December 30, 2009 were:
| Assets | ||||||||||||
| Current | ||||||||||||
| Cash | 566 | - | - | 566 | ||||||||
| Accounts Receivable | 1,350 | - | - | 1,350 | ||||||||
| GST Recoverable | 818 | - | - | 818 | ||||||||
| Inventory | 9,635 | - | - | 9,635 | ||||||||
| 12,369 | - | - | 12,369 | |||||||||
| Due from Related Party | - | 9,421 | - | 9,421 | ||||||||
| Property and Equipment | 470 | - | - | 470 | ||||||||
| Oil and Gas Interests | - | - | 1 | 1 | ||||||||
| 12,839 | 9,421 | 1 | 22,261 | |||||||||
| Liabilities | ||||||||||||
| Current | ||||||||||||
| Accounts Payable and Accrued Liabilities | 128,168 | 19,964 | - | 148,132 | ||||||||
| Due to Related Parties | 81,728 | - | 4,955 | 86,683 | ||||||||
| 209,896 | 19,964 | 4,955 | 234,815 | |||||||||
| Net (Liabilities) | (197,057 | ) | (10,543 | ) | (4,954 | ) | (212,554 | ) |
The operations of these former subsidiaries comprised the Company’s principal business operations, and therefore have not been segregated and presented as a disposal of an operating segment of the Company or as discontinued operations.
11
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 3 – SALE OF SUBSIDIARIES (Continued)
The accounts of these integrated foreign operations, which were recorded in United States dollars, were translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities were translated at the rate of exchange in effect as at the balance sheet date and non-monetary assets and liabilities were translated at their applicable historical rates. Revenues and expenses were translated at the average rates prevailing for the year, except for amortization which was translated at the historical rates associated with the assets being amortized. Foreign exchange gains and losses from the translation of foreign operations were reflected in the statement of operations.
NOTE 4 – ACQUISITION OF JAYDOC CAPITAL CORP.
Effective December 22, 2010 the Company acquired all of the issued and outstanding common shares of Jaydoc Capital Corp (“Jaydoc”), a company incorporated under the Business Corporations Act of the Province of British Columbia, Canada. The purchase consideration was satisfied by the Company issuing 4,000,000 common shares with a fair value of $80,000 and 7,000,000 share rights with a fair value of $18,600 valued at the date of the purchase agreement on October 12, 2010. Each share right was exercisable into one common share of the Company at a price of US$0.02 per share until November 22, 2010.
Jaydoc was acquired to facilitate the Company’s business venture in solar energy development. The assets of Jaydoc are its business plan and strategic business relationship with operational partners that offer experience and knowledge in the development, engineering and construction of solar energy projects in Italy and the European Union. Jaydoc had no other assets or liabilities as at the date of acquisition.
The acquisition has been accounted for by the purchase method with the fair value of the consideration being allocated to intangible asset comprising of the business plan and relationship for solar power project under development.
| $ | |||
| Fair Value of 4,000,000 Common Shares Issued | 80,000 | ||
| Fair Value of 7,000,000 Share Rights Issued | 18,600 | ||
| Legal Fees Incurred | 25,646 | ||
| Total Consideration Paid, Being the Fair Value of Intangible Asset Acquired | 124,246 |
On November 22, 2010, the former shareholders of Jaydoc (the “vendors”) subscribed to 5,000,000 common shares of the Company upon the exercise of share rights for gross proceeds totalling $101,386 (US$100,000) at an exercise price of US$0.02 per share. The fair value of these share rights in the amount of $13,286 was transferred from contributed surplus to share capital accordingly. The remaining 2,000,000 share rights expired unexercised.
On December 31, 2010, the Company wrote down the intangible asset due to the lack of reliable measurement of the future cash flows of the solar energy project.
On March 4, 2011, the Company entered into a Stock Surrender, Settlement and Voluntary Pooling Agreement with the former shareholders of Jaydoc who agreed to surrender 4,500,000 common shares of the Company as final settlement of deficiencies identified in certain representations arising out of the Jaydoc acquisition (Note 13(b)).
12
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 5 – PROPERTY AND EQUIPMENT
| Accumulated | Net Book | ||||||||
| Cost | Amortization | Value | |||||||
| $ | $ | $ | |||||||
| 2010 | |||||||||
| Computer Equipment | 3,890 | 3,757 | 133 | ||||||
| Furniture and Equipment | 1,656 | 1,456 | 200 | ||||||
| 5,546 | 5,213 | 333 | |||||||
| 2009 | |||||||||
| Computer Equipment | 3,890 | 3,699 | 191 | ||||||
| Furniture and Equipment | 1,656 | 1,406 | 250 | ||||||
| 5,546 | 5,105 | 441 |
NOTE 6 – SHARE CAPITAL
| a) |
Authorized Capital |
|
Unlimited number of common shares without par value. | |
| b) |
Issued and Outstanding Common Shares |
| Number of | Amount | ||||||
| Common Shares | $ | ||||||
| Balance, December 31, 2008 (Pre-Share Consolidation) | 23,818,852 | 2,031,174 | |||||
| Shares Issued for Cash, Net of Share Issue Costs (i) | 4,020,000 | 210,271 | |||||
| Balance, December 31, 2009 (Pre-Share Consolidation) | 27,838,852 | 2,241,445 | |||||
| Share Consolidation (ii) | (25,054,944 | ) | - | ||||
| Balance, March 22, 2010 (Post-Share Consolidation) | 2,783,908 | 2,241,445 | |||||
| Shares Issued for Cash, Net of Share Issue Costs (iii) | 10,660,000 | 198,215 | |||||
| Shares Issued for Debt (iv) | 15,130,000 | 152,600 | |||||
| Shares Issued for Exercise of Share Rights (Note 4) | 5,000,000 | 101,386 | |||||
| Fair Value of Share Rights Exercised (Note 4) | - | 13,286 | |||||
| Shares Issued for Acquisition of Subsidiary (Note 4) | 4,000,000 | 80,000 | |||||
| Balance, December 31, 2010 (Post-Share Consolidation) | 37,573,908 | 2,786,932 |
13
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 6 – SHARE CAPITAL (Continued)
| b) |
Issued and Outstanding Common Shares (Continued) | |
| i) |
On June 26, 2009 the Company completed a private placement of 3,050,000 pre-share consolidation units at a price of US$0.05 per unit, raising gross proceeds of $179,463 (US$152,500). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.10 per share expiring from March 27, 2010 to May 29, 2010. | |
|
|
||
|
On December 2, 2009 the Company completed a private placement of 970,000 pre-share consolidation units at a price of US$0.05 per unit, raising gross proceeds of $51,747 (US$48,500). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.10 per share expiring from May 29, 2010 to August 5, 2010. | ||
|
|
||
|
The Company incurred share issue costs totalling $20,939. | ||
|
| ||
| ii) |
On March 22, 2010, the Company consolidated its share capital on the basis of 1 new common share for 10 old common shares. | |
|
| ||
| iii) |
On March 22, 2010, the Company completed a private placement of 50,000 units at a price of US$0.10 per unit, raising total gross proceeds of $5,384 (US$5,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$1.00 per share until March 22, 2011. The proceeds were received by the Company during the year ended December 31, 2009. | |
|
| ||
|
On May 19, 2010, the Company completed a private placement of 9,110,000 units at a price of US$0.02 per unit, raising gross proceeds of $191,505 (US$182,200). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.02 per share until March 30, 2015. | ||
|
| ||
|
On October 5, 2010 the Company completed a private placement of 500,000 units at a price of US$0.04 per unit, raising gross proceeds of $20,276 (US$20,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.04 per share until October 15, 2015. | ||
|
| ||
|
On November 22, 2010 the Company completed a private placement of 1,000,000 units at a price of US$0.02 per unit, raising gross proceeds of $20,374 (US$20,000). Each unit consisted of one common share and one share purchase warrant exercisable into one common share at a price of US$0.02 per share until October 28, 2015. The subscription proceeds owing by a director of the Company was received subsequently on April 21, 2011. | ||
|
| ||
|
The Company incurred share issue costs totalling $39,324. | ||
|
| ||
| iv) |
On May 19, 2010, the Company issued 15,000,000 common shares with a fair value of $150,000 for settlement of debts totalling $97,710, and accordingly recorded a loss of $52,290 on debt settlement. These debts were owed, on the date of settlement, to arm’s length parties who acquired the debts from related parties of the Company on March 2, 2010 for a nominal consideration of $10. | |
|
| ||
|
On November 2, 2010, the Company paid $5,000 in cash and issued 130,000 common shares with a fair value of $2,600 for settlement of accounts payable totalling $46,558 owing to arm’s length parties. The Company recorded a gain of $38,958 on debt settlement. | ||
| c) |
Escrow Shares | |
|
As at December 31, 2010, the Company has no shares (2009 – Nil) held in escrow (Note 13(b)). | ||
14
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 6 – SHARE CAPITAL (Continued)
| d) |
Share Purchase Warrants |
|
The Company has the following warrants outstanding as at December 31, 2010 which expire on various dates between March 21, 2011 and October 28, 2015: |
| Weighted Average | |||||||
| Number of | Exercise Price | ||||||
| Warrants | US$ | ||||||
| Balance, December 31, 2008 (Pre-Share Consolidation) | 2,800,000 | 0.17 | |||||
| Issued | |||||||
| Private Placements (Note 6(b)(i)) | 4,020,000 | 0.10 | |||||
| Consulting and Investor Relations Services (i) | 1,700,000 | 0.08 | |||||
| Management Services (ii) | 1,500,000 | 0.08 | |||||
| Expired | (2,300,000 | ) | 0.19 | ||||
| Balance, December 31, 2009 (Pre-Share Consolidation) | 7,720,000 | 0.09 | |||||
| Share Consolidation (Note 6(b)(ii)) | (6,948,000 | ) | - | ||||
| Balance, March 22, 2010 (Post-Share Consolidation) | 772,000 | 0.92 | |||||
| Issued – Private Placements (Note 6(b)(iii)) | 10,660,000 | 0.03 | |||||
| Expired | (452,000 | ) | 1.00 | ||||
| Balance, December 31, 2010 (Post-Share Consolidation) | 10,980,000 | 0.05 |
| (i) |
During the year ended December 31, 2009, the Company issued a total of 1,700,000 warrants with a total fair value of $82,029 (Note 6(e)) for investor relations and consulting services. Each warrant is exercisable into one common share at US$0.08 per share and expires on June 30, 2014. Subsequent to the share consolidation (Note 6(b)(ii)), the number of warrants issued has been adjusted to 170,000 warrants exercisable at US$0.80 per share. | |
| (ii) |
During the year ended December 31, 2009, the Company issued a total of 1,500,000 warrants with a total fair value of $194,281 (Note 6(e)) to Directors and Officers of the Company for management services. Each warrant is exercisable into one common share at a price of US$0.08 per share and expires on June 30, 2014. Subsequent to the share consolidation (Note 6(b)(ii)), the number of warrants issued has been adjusted to 150,000 warrants exercisable at US$0.80 per share. |
| e) |
Contributed Surplus and Stock Based Compensation |
| 2010 | 2009 | ||||||
| $ | $ | ||||||
| Balance, Beginning of the Year | 366,788 | 90,478 | |||||
| Warrants Issued for Consulting and Investor Relations Services | - | 82,029 | |||||
| Warrants Issued for Management Services | - | 194,281 | |||||
| Shares Rights Issued for Acquisition of Subsidiary (Note 4) | 18,600 | - | |||||
| Fair Value of Exercised Share Rights Transferred to Share Capital | (13,286 | ) | - | ||||
| Balance, End of the Year | 372,102 | 366,788 |
15
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 6 – SHARE CAPITAL (Continued)
| e) |
Contributed Surplus and Stock Based Compensation (Continued) |
|
The weighted average unit fair value of share rights and warrants issued during the years ended December 31, 2010 and 2009 was $0.003 and $0.09 respectively. The fair value of these share rights and warrants was estimated on the grant date utilizing the Black-Scholes pricing model with the following assumptions: |
| 2010 | 2009 | |
| Risk-Free Annual Interest Rate | 0.89% | 2.6% |
| Expected Annual Dividend Yield | 0% | 0% |
| Expected Stock Price Volatility | 98% | 179% |
| Expected Life of Share Right or Warrant | 0.1 years | 5.0 years |
Option pricing models require the input of highly subjective assumptions. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models may not necessarily provide a single reliable measure of the fair value of the warrants issued.
NOTE 7 – DISPOSAL OF OIL AND GAS INTERESTS
On July 8, 2009 the Company acquired a five-year petroleum and natural gas lease in the Peace River area of Alberta, Canada for total consideration of $10,501. The Company subsequently disposed of its interest in the property to an arm’s length party on December 30, 2009 for settlement of the outstanding principal and interest totaling $7,783 of a short-term promissory note. Accordingly, the Company recorded a loss of $2,718 on the disposition of the lease.
NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION
| 2010 | 2009 | 2008 | ||||||||
| $ | $ | $ | ||||||||
| a) | Change in Non-Cash Working Capital Accounts | |||||||||
| Accounts Receivable | - | 9,699 | (11,050 | ) | ||||||
| HST/GST Recoverable | 639 | (11,548 | ) | 10,734 | ||||||
| Inventory | - | 9,844 | 38,456 | |||||||
| Accounts Payable and Accrued Liabilities | (13,519 | ) | 45,926 | 67,682 | ||||||
| (12,880 | ) | 53,921 | 105,822 | |||||||
| b) | Significant Non-Cash Financing Activities | |||||||||
| Shares Issued for Business Acquisition | 80,000 | - | - | |||||||
| Share Rights Issued for Business Acquisition | 18,600 | - | - | |||||||
| Shares Issued for Settlement of Debts | 152,600 | - | 17,664 | |||||||
| Shares Issued for Amounts Owed to Related Parties | - | - | 279,232 | |||||||
| 251,200 | - | 296,896 | ||||||||
| c) | Other Information | |||||||||
| Interest Paid | - | 1,787 | 1,115 |
16
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 9 – RELATED PARTIES TRANSACTIONS
In addition to those transactions disclosed elsewhere in these consolidated financial statements, the Company has the following related party balances and transactions. All related party transactions were in the normal course of operations and were measured at the exchange value, which represented the fair value established and agreed to by the related parties.
| a) |
Due to Related Parties |
| 2010 | 2009 | ||||||
| $ | $ | ||||||
| Due to Directors and Officers | - | 81,896 | |||||
| Due to Companies with Common Directors and Officers | - | 4,414 | |||||
| Due to a Person Related to the Directors and Officers | - | 5,500 | |||||
| - | 91,810 |
|
As at December 31, 2009, the Company had a net amount of $91,810 due to related parties which was unsecured, non-interest bearing and had no specific terms of repayment. During the year ended December 31, 2010, debts of $97,710 were assigned to arm’s length parties for a nominal consideration and were subsequently settled by the Company through the issuance of shares (Note 6(b)(iv)). Concurrent with the debt settlement, the Company wrote off $5,900 in an amount owed by a related party. | |
| b) |
Related Party Transactions |
| 2010 | 2009 | 2008 | ||||||||
| $ | $ | $ | ||||||||
| Management fees charged by Officers of the Company for management, administration, supervision and company development services | - | 125,515 | 129,279 | |||||||
| Consulting fees charged by Directors of the Company and companies controlled by them for management and administration services | 105,817 | - | - | |||||||
| Bad debt on amount owed by related parties | 5,900 | 71,000 | - | |||||||
| 111,717 | 196,515 | 129,279 |
Effective November 1, 2010, the Company entered into a consulting agreement with a company controlled by a Director (also an Officer) of the Company for general management and administration services at $5,000 per month for a term of 2 years.
NOTE 10 – CONTINGENCY
In March 2009, the Company was served a Notice of Termination citing breach of a licensing agreement by the Company as a result of its default on certain royalty payments. The total amount of claim against the Company was $60,750 which the Company has recorded a provision on December 31, 2009 for this contingent liability.
The outcome of this legal claim is uncertain, and management is of the opinion that the claim has no merit and seeks to recover all costs. Any recovery resulting from the resolution of this contingency will be accounted for in the period of settlement.
17
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 11 – SEGMENTED INFORMATION
Prior to 2010, the Company had operations in the exploration of oil and gas, and the distribution of wine and spirit (Note 3). Concurrent with the acquisition of Jaydoc on December 22, 2010 (Note 4), the Company commenced its operations in the financing and development of solar energy projects. As at December 31, 2010, the solar energy operation has no assets.
| Oil and Gas | Wine and Spirit | |||||||||||||||||||||||
| Total | Exploration | Distribution | Corporate | |||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Sales | - | 3,838 | - | - | - | 3,838 | - | - | ||||||||||||||||
| Gross Profit | - | 597 | - | - | - | 597 | - | - | ||||||||||||||||
| Amortization | 107 | 227 | - | - | - | 83 | 107 | 144 | ||||||||||||||||
| Total Assets | 205,148 | 14,284 | - | - | 205,148 | 14,284 | ||||||||||||||||||
| Capital Expenditures | - | 10,501 | - | 10,501 | - | - | - | - | ||||||||||||||||
NOTE 12 – INCOME TAXES
| a) |
Provision for Income Taxes |
|
A reconciliation of income taxes at the statutory tax rate is as follows: |
| 2010 | 2009 | 2008 | ||||||||
| Combined Federal and Provincial Income Tax Rates | 13.50% | 13.50% | 14.92% | |||||||
| $ | $ | $ | ||||||||
| Loss Before Income Taxes | (398,327 | ) | (480,025 | ) | (485,973 | ) | ||||
| Expected Income Tax Recovery | (53,774 | ) | (64,803 | ) | (72,495 | ) | ||||
| Permanent Differences | - | (2,223 | ) | 488 | ||||||
| Change in Valuation Allowance | 45,845 | 62,163 | (43,707 | ) | ||||||
| Effect of Change in Tax Rates | 8,387 | 243 | 79,308 | |||||||
| Expiration of Non-Capital Losses and Other | (458 | ) | 4,620 | 36,406 | ||||||
| Income Tax Expense (Recovery) | - | - | - |
| b) |
Future Income Taxes |
|
The tax effects of significant temporary differences that give rise to future income tax assets as at December 31, 2010 and 2009 are: |
| Future Income Tax Assets: | ||||||
| Non-Capital Losses Carry-Forward | 374,174 | 337,526 | ||||
| Capital Losses Carry-Forward | 183 | 183 | ||||
| Property and Equipment and Other | 8,598 | 197 | ||||
| Share Issue Costs | 7,102 | 6,306 | ||||
| Valuation Allowance | (390,057 | ) | (344,212 | ) | ||
| Net Future Income Tax Assets | - | - |
18
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 12 – INCOME TAXES (Continued)
| b) |
Future Income Taxes (Continued) |
|
As at December 31, 2010, the Company has non-capital losses of approximately $2,771,600 which may be applied to reduce future taxable income in Canada. The non-capital losses expire as follows: |
| 2014 | 24,200 | ||
| 2015 | 86,300 | ||
| 2026 | 313,100 | ||
| 2027 | 515,300 | ||
| 2028 | 367,400 | ||
| 2029 | 1,157,900 | ||
| 2030 | 307,400 | ||
| 2,771,600 |
Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements and have been offset by a valuation allowance.
NOTE 13 – SUBSEQUENT EVENTS
| a) |
Private Placements |
|
On January 24, 2011, the Company completed a private placement of 1,300,001 shares at a price of US$0.15 per share, raising gross proceeds of $196,263 (US$195,000). The proceeds were received as of December 31, 2010 and were recorded as share subscription advance in equity. | |
|
On March 14, 2011, the Company completed a private placement of 403,333 shares at a price of US$0.15 per share, raising gross proceeds of $59,747 (US$60,500). | |
| b) |
Shares Surrendered and Returned to Treasury |
|
Subsequent to year-end, the Company entered into a Stock Surrender, Settlement and Voluntary Pooling Agreement with the vendors on March 4, 2011, who agreed to surrender 50% of the common shares received for the sale of Jaydoc and 50% of the common shares received upon the exercise of share rights (Note 4). | |
|
A total of 4,500,000 common shares were returned to the treasury of the Company as final settlement of deficiencies identified by the Company in certain representations arising out of the Jaydoc acquisition. The Company will record the book value of the shares surrendered in the amount of $97,336 as a recovery in the statement of operations upon settlement in 2011. | |
|
In connection to the settlement, the vendors agreed to hold in escrow the remaining 4,500,000 common shares received from the Jaydoc sale and the private placement. 12.5% of these shares will be released at a 90-day interval with the first release on May 30, 2011. |
19
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 14 – FINANCIAL INSTRUMENTS
The Company’s financial instruments are exposed to certain financial risks:
| a) |
Fair Values |
|
The carrying values of cash, bank indebtedness, subscription receivable, accounts payable and accrued liabilities, and amounts due to related parties approximate their fair value as at the balance sheet date. | |
| b) |
Liquidity Risk |
|
Liquidity risk refers to the risk that an entity will encounter difficulty meeting obligations associated with financial liabilities. The Company is dependent upon on the availability of credit from its suppliers and its ability to generate sufficient funds from equity and debt financing to meet current and future obligations. There can be no assurance that such financing will be available on terms acceptable to the Company. | |
| c) |
Credit Risk |
|
Credit risk is the risk of loss associated with a counter party’s inability to fulfill its payment obligations. Management considers that risks related to credit are not significant to the Company at this time. | |
| d) |
Interest Rate Risk |
|
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Management considers that risks related to interest are not significant to the Company at this time. Amounts owed from and to related parties are non-interest bearing. | |
| e) |
Foreign Exchange Risk |
|
The Company operates in Canada and Europe, and is publicly listed on the Over-The-Counter Bulletin Board in the United States. Some of its expenditures are payable in Euros and U.S. dollars, and its share subscription proceeds are receivable in U.S. dollars. The Company is therefore subject to currency exchange risk arising from the degree of volatility of changes in exchange rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk. As at December 31, 2010, the Company had the following financial instruments denominated in U.S. dollars: |
| US$ | |||
| Cash | 165,532 | ||
| Subscription Receivable | 20,000 | ||
| 185,532 |
NOTE 15 – CAPITAL MANAGEMENT
The Company’s objective for managing its capital structure is to safeguard the Company’s ability to continue as a going concern and to ensure it has the financial capacity, liquidity and flexibility to fund its on-going operations and capital expenditures including investment in resource properties it has or may acquire.
The Company manages its share capital as capital, which as at December 31, 2010 totalled $2,786,932 (2009 – $2,241,445). At this time the Company’s access to the debt market is limited and it relies on equity issuances and the support of shareholders to fund its investments in capital assets and development of solar power projects. The Company monitors capital to maintain a sufficient working capital position to fund annualized administrative expenses and capital investments.
20
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 15 – CAPITAL MANAGEMENT (Continued)
As at December 31, 2010 the Company had a working capital surplus of $74,875. The Company will issue shares and may from time to time adjust its capital spending to maintain or adjust the capital structure. There can be no assurance that the Company will be able to obtain debt or equity capital in the case of operating cash deficits.
The Company’s share capital is not subject to external restrictions. The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future. There were no changes in the Company’s approach to capital management during the year ended December 31, 2010.
NOTE 16 – DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada (“CDN GAAP”) which differ in certain respects from those principles that the Company would have followed had its consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and from practices prescribed by the United States Securities and Exchange Commission (“SEC”).
Significant measurement differences between CDN and US GAAP and their effect on the consolidated balance sheets, statements of operations and deficit, and cash flows are quantified below and described in the accompanying notes.
| 2010 | 2009 | ||||||||
| $ | $ | ||||||||
| Total Assets under CDN GAAP and US GAAP | 205,148 | 14,284 | |||||||
| Total Liabilities under CDN GAAP | 129,940 | 282,429 | |||||||
| Warrant Derivative Liability | (d) | 1,614,000 | 143,000 | ||||||
| Total Liabilities under US GAAP | 1,743,940 | 425,429 | |||||||
| Total Shareholders’ Equity (Deficiency) under CDN GAAP | 75,208 | (268,145 | ) | ||||||
| Reduction in Share Capital and Contributed Surplus by the | |||||||||
| Initial Value of Warrants and Share Rights | (d) | (605,345 | ) | (486,670 | ) | ||||
| Adjustments to Accumulated Deficit: | |||||||||
| Decrease in Write-Down of Intangible Asset | (c) | 25,646 | - | ||||||
| Acquisition-Related Costs Expensed | (c) | (25,646 | ) | - | |||||
| (Loss) Gain on the Change in Fair Value of Derivative Liability on Warrants and Share Rights | (d) | (1,008,655 | ) | 343,670 | |||||
| Total Shareholders’ Deficiency under US GAAP | (1,538,792 | ) | (411,145 | ) |
21
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 16 – DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
| 2010 | 2009 | 2008 | ||||||||||
| $ | $ | $ | ||||||||||
| Net Loss for the Year under CDN GAAP | (398,327 | ) | (480,025 | ) | (485,973 | ) | ||||||
| Decrease in Write-Down of Intangible Asset | (c) | 25,646 | - | - | ||||||||
| Acquisition-Related Costs Expensed | (c) | (25,646 | ) | - | - | |||||||
| (Loss) Gain on the Change in Fair Value of Derivative Liability on Warrants and Share Rights | (d) | (1,352,326 | ) | 274,184 | 69,486 | |||||||
| Net Loss for the Year under US GAAP | (1,750,653 | ) | (205,841 | ) | (416,487 | ) | ||||||
| Basic and Diluted Loss per Share under US GAAP | (0.09 | ) | (0.08 | ) | (0.23 | ) | ||||||
| Weighted Average Number of Common Shares Outstanding under CDN GAAP and US GAAP | 18,560,292 | 2,495,843 | 1,804,562 |
The effect of measurement differences between CDN GAAP and US GAAP on the consolidated statement of cash flows for the years ended December 31, 2010, 2009 and 2008 are summarized below:
| Cash Flows from Operating Activities under CDN GAAP | (267,621 | ) | (298,404 | ) | (291,336 | ) | ||||||
| Acquisition-Related Costs Expensed | (c) |
(25,646 | ) | - | - | |||||||
| Cash Flows from Operating Activities under US GAAP | (293,267 | ) | (298,404 | ) | (291,336 | ) | ||||||
| Cash Flows from Financing Activities under CDN GAAP and US GAAP | 475,490 | 287,638 | 315,085 | |||||||||
| Cash Flows from Investing Activities under CDN GAAP | (25,646 | ) | (783 | ) | (30,500 | ) | ||||||
| Acquisition-Related Costs Expensed | (c) |
25,646 | - | - | ||||||||
| Cash Flows from Investing Activities under US GAAP | - | (783 | ) | (30,500 | ) | |||||||
| Cash, Beginning of the Year, under CDN GAAP and US GAAP | (10,986 | ) | 563 | 7,314 | ||||||||
| Cash (Bank Indebtedness), End of the Year, under CDN GAAP and US GAAP | 171,237 | (10,986 | ) | 563 |
a) Income Taxes
Under Canadian GAAP, future income tax assets and liabilities are recorded at substantively enacted tax rates. Under US GAAP, deferred tax assets and liabilities are recorded only at enacted tax rates. Any deferred income tax assets would have been required to be reduced to $Nil by a valuation allowance, which is consistent with the accounting treatment under Canadian GAAP. Accordingly, accounting for income taxes under Canadian and US GAAP has resulted in no significant differences.
The Company has reviewed its income tax positions in its tax filings, and based on its review, the Company does not believe that any income tax positions taken are subject to material uncertainty if reviewed by the Canada Revenue Agency or the Internal Revenue Service.
22
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 16 – DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
| b) |
Stock-Based Compensation | |
|
Under both Canadian and US GAAP, the Company uses the fair value measurement method for stock- based compensation. Accordingly, there is no significant difference in the consolidated financial statements prepared under Canadian and US GAAP. | ||
| c) |
Business Combination | |
|
The differences in Canadian and US GAAP with respect to business combination would result in a net decrease of $25,646 in the purchase cost of the acquisition of Jaydoc (Note 4) under US GAAP. As a result, the value of the intangible asset acquired and subsequently written down would be increased by the same amount under US GAAP in 2010. | ||
| (i) |
Measurement of Shares Issued | |
|
Under Canadian GAAP, the measurement date used for purposes of calculating the fair value of the common shares issued for a business combination is a reasonable period of time before and after the date of a written agreement. Under US GAAP, the measurement date is the date when control is obtained, on which the acquirer legally transfers consideration to the vendor and acquires the assets and assumes the liabilities of the acquiree. There was no material difference noted in the fair value of the common shares on these dates. | ||
| (ii) |
Business Combination – Acquisition-Related Costs | |
|
Under Canadian GAAP, direct expenses incurred with respect to a business combination are included in the cost of the purchase and therefore are included in the amounts assigned to the assets acquired and liabilities assumed. Under US GAAP, these acquisition-related costs are expensed as incurred. | ||
|
Accordingly, the purchase cost of the acquisition of Jaydoc would be reduced by the acquisition- related costs of $25,646 which would be expensed as incurred under US GAAP. | ||
| d) |
Warrant Derivative Liability | |
|
Under Canadian GAAP, the proceeds received on issuance of units, consisting of common shares and share purchase warrants, are not required to be allocated to the individual common share and warrant components when the instruments and its components are all determined to be equity instruments. | ||
|
Effective January 1, 2009, the Company adopted new accounting guidance under US GAAP which indicates that an equity-linked financial instrument would not be considered indexed to an entity’s own stock if the exercise price is denominated in a currency other than the company’s functional currency, and would be accounted for as derivative liabilities with changes in fair value recorded to the consolidated statement of operations. | ||
|
The functional currency of the Company is the Canadian dollar, while the exercise price of the Company’s warrants is denominated in US dollars. Accordingly, the Company’s warrants is now required to be treated as a derivative liability under US GAAP, with changes in fair value recorded to the consolidated statements of operations. The fair value of the warrants is determined using the Black-Scholes option- pricing model. | ||
23
| RAINCHIEF ENERGY INC. |
| Notes to the Consolidated Financial Statements |
| December 31, 2010 |
| (Expressed in Canadian Dollars) |
NOTE 16 – DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
| d) |
Warrant Derivative Liability (Continued) |
|
On January 1, 2009, the grant date fair value of warrants of $40,408 and $81,078 was reallocated from share capital and contributed surplus respectively under US GAAP, and a derivative liability was recorded in the amount of $52,000 being the fair value of the warrants on January 1, 2009, with a decrease in opening accumulated deficit of $69,486 for the gain on change in fair value of derivative liability. | |
|
During the year ended December 31, 2009, the Company issued warrants with an initial value of $365,184 determined on a relative fair value basis on the date of grant. An amount of $88,874 and $276,310 was reallocated from share capital and contributed surplus respectively to derivative liability under US GAAP. As at December 31, 2009, the derivative liability was adjusted to its fair value of $143,000 with a decrease of $274,184 in consolidated net loss for the gain on change in fair value of derivative liability. | |
|
During the year ended December 31, 2010, the Company issued warrants with an initial value of $113,360 determined on a relative fair value basis on the date of grant, which was reallocated from share capital to derivative liability under US GAAP. As at December 31, 2010, the derivative liability was adjusted to its fair value of $1,614,000 with an increase of $1,357,640 in consolidated net loss for the loss on change in fair value of derivative liability. In addition, the fair value of unexercised, expired share rights was $Nil as at December 31, 2010, and accordingly the Company reallocated the grant date fair value of these share rights of $5,314 from contributed surplus to gain on change in fair value of derivate liability resulting in a decrease in consolidated net loss. | |
| e) |
Consolidated Statements of Cash Flows |
|
The Company has included a subtotal in cash flows from operating activities. Under US GAAP, no such subtotal would be disclosed. |
24