Interim Consolidated Financial Statements of
Tenth Power Technologies Corp.
Three-months and Nine-Months Ended October 31, 2010
(Unaudited)
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review
of the interim financial statements they must be accompanied by a notice indicating that the financial
statements have not been reviewed by an auditor.
The accompanying unaudited interim consolidated financial statements of Tenth Power Technologies
Corp. (the “Company”) have been prepared by and are the responsibility of the Company’s management.
The Company’s independent auditor has not performed a review of these interim consolidated financial
statements in accordance with the standards established by the Canadian Institute of Chartered
Accountants for a review of interim financial statements by an entity’s auditor for the three months and
nine months ended October 31, 2010.
TENTH POWER TECHNOLOGIES CORP.
Consolidated Balance Sheets
(unaudited)
October 31
2010
January 31
2010
ASSETS
CURRENT
Cash
Accounts and other receivables
Prepaid expenses
$
CAPITAL ASSETS (Note 6)
INTANGIBLE ASSETS (Note 7)
GOODWILL (Note 8)
$
104,722
398,049
17,700
$
66,540
371,262
26,442
520,471
464,244
81,402
57,969
327,475
400,103
556,195
1,485,543
556,195
1,478,512
$
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
Income taxes payable
Current portion of obligations under capital leases (Note 9)
Current loans payable (Note 10)
Current portion, long term obligation (Note 11)
Current portion of convertible debentures (Note 12)
Demand loans from shareholders & related parties
(Note 13)
$
932,855
26,406
49,843
156,326
429,327
$
1,195,804
80,441
39,317
9,375
159,939
62,715
175,383
1,770,140
222,403
1,769,994
33,841
-
9,170
136,286
826,007
720,954
88,426
108,087
TOTAL LIABILITIES
2,718,415
2,744,491
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share Capital (Note 14)
5,686,547
5,389,994
1,218,988
1,125,121
348,273
196,137
OBLIGATIONS UNDER CAPITAL LEASES (Note 9)
LONG TERM OBLIGATIONS (Note 11)
CONVERTIBLE DEBENTURES (Note 12)
FUTURE INCOME TAXES (Note 18)
Contributed Surplus (Note 15)
Equity Component of Debentures & Future Obligation (Notes 5 &
12)
Deficit
$
(8,486,680)
(7,977,232)
(1,232,872)
1,485,543
(1,265,980)
1,478,512
$
APPROVED BY THE BOARD
"G. Burry"
…………………….…….……. Director
"J. Whincup"
…………………….…….……. Director
TENTH POWER TECHNOLOGIES CORP.
Consolidated Statements of Income (Loss), Comprehensive Income (Loss) and Deficit
9 months ended October 31 (unaudited)
Three Months
3rd Quarter
2010
2009
Nine Months
Year-to-Date
2010
2009
SALES
COST OF SALES
1,028,985
640,988
1,003,601
690,595
3,009,551
1,931,658
1,270,373
728,214
GROSS MARGIN
387,997
313,006
1,077,893
542,159
EXPENSES
Sales and marketing
General and administration
Amortization
Interest
Interest accretion
226,689
231,169
31,412
40,027
21,010
216,384
237,345
40,530
23,630
12,495
751,946
596,193
94,946
93,103
70,814
465,831
476,201
55,572
66,970
35,640
550,307
530,384
1,607,002
1,100,214
(162,310)
(217,378)
(529,109)
(558,055)
(3,343)
(13,177)
(19,661)
(16,677)
(3,343)
(13,177)
(19,661)
(16,677)
LOSS FROM CONTINUING OPERATIONS
(158,967)
(204,201)
(509,448)
(541,378)
Gain on disposal of subsidiary (Note 16)
Income (loss) from discontinued operations (Note 16)
NET LOSS & COMPREHENSIVE LOSS
(158,967)
(204,201)
(509,448)
79,560
60,085
(401,733)
(8,327,714)
($8,486,680)
(7,415,121)
($7,619,322)
(7,977,232)
($8,486,680)
(7,217,589)
($7,619,322)
LOSS BEFORE INCOME TAXES
INCOME TAXES
Future - recovery (Note 18)
DEFICIT, BEGINNING OF PERIOD
DEFICIT, END OF PERIOD
NET LOSS, CONTINUING OPERATIONS PER SHARE
-$
(BASIC & DILUTED)
NET LOSS, (INCOME) DISCONTINUED OPERATIONS, PER
$
SHARE (BASIC & DILUTED)
NET LOSS PER SHARE (BASIC & DILUTED)
-$
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 19)
0.01
-$
0.02 -$
0.03
-$
0.05
0.01
$
-$
$
0.02 -$
0.03
$
-$
0.01
0.04
15,605,376
9,876,132
15,605,376
9,876,132
TENTH POWER TECHNOLOGIES CORP.
Consolidated Statements of Cash Flows
9 months ended October 31 (unaudited)
Three Months
3rd Quarter
2010
Nine Months
Year-to-Date
2010
2009
2009
NET (OUTFLOW) INFLOW OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Loss from continuing operations
Items not affecting cash
Gain on disposal of subsidiary
Amortization
Interest accretion
Future income taxes
$
Changes in non-cash working capital items
Accounts and other receivables
Prepaid expenses
Accounts payable and accrued liabilities
Income taxes
INVESTING
Purchase of capital assets
Deferred development costs
Acquisition of susidiary net of cash acquired
(158,967)
$
(204,201) $
(509,448)
$
(401,733)
31,412
21,010
(3,343)
(109,888)
40,530
12,495
(13,177)
(164,353)
94,946
70,814
(19,661)
(363,349)
(79,560)
55,572
35,640
(16,677)
(406,758)
36,843
7,185
(138,087)
(22,701)
(226,648)
229,308
18,315
(169,829)
(86,559)
(26,786)
8,742
146,895
(54,034)
(288,534)
243,475
8,100
(192,992)
(348,175)
-
(310)
(31,040)
(757)
(32,107)
(45,751)
(45,751)
(14,382)
(31,040)
(192,343)
(237,765)
400,000
(175,000)
13,910
(3,094)
235,816
687,500
10,860
(448,000)
(2,848)
(2,881)
244,631
550,000
(175,000)
28,714
(66,444)
35,197
372,467
687,500
50,000
26,953
88,020
9,725
(50,816)
811,382
9,168
125,965
38,182
225,442
-
-
-
(23,975)
FINANCING
Issuance of share capital, net of financing costs
Proceeds received from convertible debentures
Long term obligations
Accrued interest on convertible debentures
Shareholders advances
Obligations under capital leases
Long term debt - repayment
NET CASH (OUTFLOW) INFLOW FROM CONTINUING
OPERATIONS
Discontinued operations including cash
CASH POSITION, BEGINNING OF PERIOD
CASH POSITION, END OF PERIOD
Supplementary cash flow disclosure (Note 26)
$
95,553
104,722
$
130,611
256,576
$
66,540
104,722
$
55,109
256,576
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
1. Description of business
Tenth Power Technologies Corp. ("Tenth Corp." or the "Company") is a Canadian based technology and solutions company, and
provides security based systems focused on solutions that address all aspects of data and identity security within the digital community,
providing customers the technology required to both analyze and maintain all elements of data integrity in their businesses.
2. Continuation of business
While these consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern,
certain adverse conditions and events cast substantial doubt upon the validity of this assumption. The Company has incurred significant
losses over the past five fiscal years, including a year-to-date loss of $509,488 in the current period and has a working capital deficiency
of $907,683 as at October 31, 2010.
The Company’s ability to continue as a going concern will depend on management’s ability to successfully execute its business plan and
to raise capital through equity financing. Management continues to actively pursue new equity or debt financing as indicated by the
receipt of convertible debenture financing and shareholder advances (see Notes 12, 13 & 14).
If the going concern assumption were not appropriate for these consolidated financial statements, then adjustments would be necessary
in the carrying values of assets and liabilities, the reported net loss and the balance sheet classifications used. The financial statement
items most likely to be subject to adjustment would be goodwill, intangibles assets and capital assets.
3. Significant accounting policies
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles
(“GAAP"). The significant accounting policies are as follows:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Network Surveillance
Inc. (“NSI”), Secure IT Investigations and Consulting Inc. (“Secure IT”), Tenth Power Technologies Inc. ("Tenth Power"), 2126166
Ontario Inc. ("Holdco"); and WhiteHat Inc. ("WhiteHat"). All inter‑company balances and transactions have been eliminated on
consolidation.
Capital assets
Capital assets are recorded at cost. Amortization is being provided on the declining-balance basis at the following rates per annum:
Furniture, fixtures and office equipment
Computer equipment
Computer software
20%
30%
100%
Convertible securities
The Company has issued convertible securities which contain both a liability and an equity component, represented by a conversion
option. The Company has allocated the total proceeds received between the debt and equity components of the convertible securities
based on their discounted cash flows using an estimated cost of borrowing to represent an estimate of the rate at which the Company
could borrow similar debt without a conversion feature. The fair value of the equity component of the convertible securities was valued
as the proceeds less the fair value of the debt element.
Page 4 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
3. Significant accounting policies (continued)
Long-lived assets
The Company reviews the carrying value of its long-lived assets on an annual basis to determine if an impairment has occurred. If any
events or changes in circumstances indicate that the carrying amount of the long-lived asset is not recoverable and exceeds its fair value,
an impairment loss is recorded in the period in which the impairment occurs.
Goodwill and intangible assets
Goodwill is created when the Company acquires a business. It represents the excess, at the date of acquisition, of the cost of the
acquired business over the fair value of the net identifiable assets acquired.
Goodwill and intangible assets with indefinite useful lives are not amortized.
Goodwill is tested for impairment annually, on January 31, or more frequently if events or changes in circumstances indicate that the
asset might be impaired. When the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to the excess.
Intangible assets, that have an indefinite useful life, are also tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with
its fair value, and an impairment loss is recognized in the consolidated statement of loss for the excess, if any.
Intangible assets, such as acquired contracts that have a definite life, are capitalized and amortized over the life of the related contracts
and are further tested for impairment if events or circumstances indicate that the asset might be impaired.
Intangible assets, such as customer relationships, are amortized on the straight-line basis over their estimated lives of between 4 and 5
years.
Revenue recognition
The Company derives revenues from professional services and remote information technology infrastructure management services.
Revenues from these sales are recognized when evidence of an arrangement exists, when the service or product delivery has occurred,
when all significant contractual obligations have been satisfied, when the fee is fixed or determinable, and when collection is reasonably
assured.
The Company generates revenue from selling security products and solutions and licensing the rights to security software products to endusers. Sales of product in which the Company acts as a principal are presented on a gross basis. As a principal, the Company obtains and
validates customer orders, purchases the product from the supplier at a negotiated price, arranges for shipment of the product, collects
payment from customers, ensures that the product reaches customers and processes returns. The products received from the Company's
suppliers are inspected and repackaged and shipped-on to customers using third-party carriers. Revenue is recorded when the product is
shipped to customers, freight on board shipping point, or with licensing security software products when customers acquire the right to
use or copy software under license, but in no case prior to the commencement of the term of the software license agreement or service
contract, when the price is fixed and determinable and collection is reasonably assured.
Income taxes
The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recognized based
on the expected future tax consequences of differences between the carrying amounts of balance sheet items and their corresponding tax
bases, using the enacted and substantively enacted income tax rates for the years in which the differences are expected to reverse. The
effect on future income tax assets and liabilities of a change in the tax rates is included in income in the period of substantive enactment.
The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized.
Page 5 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
3. Significant accounting policies (continued)
Loss per share
Basic loss per share is computed by dividing the loss available to common shareholders by the weighted average number of common
shares outstanding during the period. For the years presented, all stock options and warrants are anti-dilutive, therefore diluted loss per
share is equal to basic loss per share.
Stock-based compensation
The Company has a stock-based compensation plan, which is described in Note 15(b). The Company accounts for all stock-based
payments using the fair value method.
The Company grants stock options for a fixed number of shares to employees and consultants with an exercise price equal to the fair
value of the shares at the date of grant. The Company recognizes compensation expense over the vesting period when stock options are
issued. Any consideration paid on exercise of stock options is added to share capital, along with the corresponding amount of stock
compensation previously recognized in contributed surplus.
If stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the stock option
cancelled is charged to deficit. For non-vested stock options settled with a cash payment, the Company recognizes immediately the
amount of any remaining stock-based compensation not previously recognized.
Foreign currency translation
Assets and liabilities expressed in foreign currencies are translated into Canadian dollars at the rates prevailing at the balance sheet date
for monetary items and at exchange rates prevailing at the transaction date for non-monetary items. Revenues and expenses are
translated at exchange rates prevailing at the time of the related transactions. Exchange gains or losses arising on the translation are
included in earnings.
Financial instruments
Financial assets and liabilities are initially recognized at fair value and their subsequent measurement is dependent on their classification
as described below; their classification depends on the purpose, for which the financial instruments were required or issued, their
characteristics and the Company's designation of such instruments. Settlement date accounting is used.
The Company had made the following classifications:
i) Cash is classified as a financial asset held for trading and is measured at fair value;
ii) Accounts receivable and other receivables are classified as loans and receivables and are recorded at amortized cost using the
effective interest method;
iii) Accounts payable and accrued liabilities, capital leases, loans from shareholders, loans payable, and long term debt are classified as
other liabilities and measured at amortized cost using the effective interest method.
Transaction costs
Transaction costs relating to financial assets and liabilities are expensed as incurred.
Derivative instruments
Embedded derivatives
Derivatives embedded in other financial instruments or contracts are separated from their host contracts and accounted for as derivatives
when a) their economic characteristics and risks are not closely related to those of the host contract; b) the terms of the embedded
derivative are the same as those of a free standing derivative; and, c) the combined instrument or contract is not measured at fair value
with changes in fair value recognized in Other income. These embedded derivatives are measured at fair value with changes therein
recognized in Other income. The Company selected February 1, 2004 as the transition date for embedded derivatives, as such only
contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives.
Page 6 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
3. Significant accounting policies (continued)
Convertible debentures
The component parts of compound instruments issued by the Company are classified separately as financial liabilities and equity in
accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability and equity components
are measured separately, and to the extent necessary, are adjusted on a pro rata basis so that the sum of the component parts equals the
amount of the instrument as a whole. The liability component is subsequently recognized on an amortized cost basis using the effective
interest method until extinguished upon conversion or at the instrument's maturity date. The equity component is recognized and
included in equity, and is not subsequently re-measured.
Management estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant management estimates include allowance for
doubtful accounts, useful lives of capital and intangible assets, fair value of goodwill, stock-based compensation and convertible
debentures. Actual results could differ from those estimates.
The Company has adopted the following recommendations of the CICA.
The Company also adopted the changes made by CICA to Section 3862, Financial instruments – Disclosures whereby an entity shall
classify and disclose fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy shall have the following levels:
Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
Level 3 - valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable
inputs).
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to
the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
The required disclosures are included in note 22.
4. Changes in accounting policies and future accounting policies
Future accounting changes
Business combinations/consolidated financial statements/non-controlling interests
In January 2009, the CICA issued sections 1582 "Business Combinations", 1601 "Consolidated Financial Statements", and 1602, "NonControlling Interests" which superseded current sections 1581, "Business Combinations" and 1600 "Consolidated Financial Statements".
These new sections replace existing guidance on business combinations and consolidated financial statements to harmonize Canadian
accounting for business combinations with International Financial Reporting Standards ("IFRS"). These sections will be applied
prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after January 1, 2011, it is required to disclose that fact and apply each of the new sections concurrently. The
Corporation is currently evaluating the impact of the adoption of these changes on its consolidated financial statements.
Page 7 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
5. Acquisition of WhiteHat Inc.
Effective July 31, 2009, the Company acquired 100% of WhiteHat Inc. The purchase price consisted of: (i) cash $700,000; (ii)
400,000 freely tradable common shares of the Company; and, (iii) warrants, for two years maturing July 31. 2011, to purchase
60,000 common shares of the Company at $0.50 per common share. On closing, July 31, 2009, the Company paid $350,000 minus a
working capital adjustment of $45,450, issued 200,000 common shares of the Company and issued the 60,000 warrants to the
vendors. The balance of the purchase price cash and common shares are to be paid in two installments of $175,000 cash and
100,000 common shares 31 days following the anniversary dates July 31, 2010 and July 31, 2011 respectively.
Under CICA Handbook guidelines for determining the cost of the purchase the cost of the purchase to the acquirer should be
determined by the fair value of the consideration given.
The Company determined the fair value of the future cash consideration by discounting the stream of future mandatory payments at
the prevailing market rate for a similar instrument. In determining the appropriate interest rate the Company considers the
characteristics of its other debt instruments, including interest rates, terms, security and amount of the note or loan instruments;
based on this the Company believes the appropriate discount factor to be 21%.
The fair value of the share consideration of 200,000 common shares is based on their market price over a reasonable period before
and after the date the terms of the business combination are agreed to and announced. The future share consideration of 200,000
common shares to be issued on the anniversary dates is based on the current market price and fair valued to the closing date.
The fair value of the warrant component of the consideration was determined using the Black-Scholes option pricing model and the
following assumptions; share price of 7.5 cents; dividend yield of $NIL; expected volatility of 100%; an expected life of two years;
and, a risk-free rate of return of 1.224%.
The following table summarizes the estimated fair value of the net assets acquired at the date of acquisition:
Current assets (including cash $143,080)
Capital assets
Customer relationships (Note 8)
Goodwill (Note 9)
$
Total assets acquired
Less:
Current liabilities
Current tax liability
Future tax liability
Net assets acquired
Fair value of consideration paid:
Cash
Future cash payment obligations
Common shares (Note 15(a))
Future common share obligation
Warrants (Note 15(c))
Acquisition costs
Total purchase consideration
585,255
29,659
377,000
371,841
1,363,755
(527,202)
(95,179)
(99,905)
$
641,469
$
304,550
267,868
22,500
17,221
591
28,739
$
641,469
Page 8 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
6. Capital Assets
Cost
Furniture, fixtures and office equipment
Furniture, fixtures and office equipment
under capital leases
Computer equipment
Computer equipment under capital leases
Computer software
Software under capital lease
Furniture, fixtures and office equipment
Furniture, fixtures and office equipment
under capital leases
Computer equipment
Computer software
Software under capital lease
$
6,607
$
13,872
71,705
44,013
1,304
5,467
142,968
$
$
October-31-10
Accumulated
Amortization
$
1,726
$
2,428
47,834
4,401
1,076
4,100
61,566
Net Carrying
Value
$
4,881
$
11,444
23,871
39,612
228
1,366
81,402
Cost
6,607
January-31-10
Accumulated
Amortization
$
1,092
Net Carrying
Value
$
5,515
13,872
69,967
1,304
5,467
2,312
35,518
326
-
11,560
34,449
978
5,467
97,217
$
39,248
$
57,969
7. Intangible assets
Cost
Customer relationships
$
$
484,300
484,300
Cost
Customer relationships
$
$
484,300
484,300
October-31-10
Accumulated
Amortization
$
$
156,825
156,825
Net Book
Value
$
$
January-31-10
Accumulated
Amortization
$
$
84,197
84,197
327,475
327,475
Net Book
Value
$
$
400,103
400,103
Page 9 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
8. Goodwill
Balance, beginning of year
Less impairment
Acquisition goodwill (Note 5)
Oct 31, 2010
$
556,195
-
Jan 31, 2010
$
330,354
(146,000)
371,841
Balance, at end of year
$
$
556,195
556,195
At January 31, 2010, the Company reviewed the carrying value of goodwill on its balance sheet that arose from the acquisition of a
subsidiary in 2007 and recorded a $146,000 (2009 - $240,644) impairment loss.
9. Obligations under capital leases
The Company is in default with all its obligations under capital leases executed prior to fiscal 2009, and accordingly the total balance
owed is reported as a current liability. During fiscal 2009 the Company negotiated various settlement payments with the lessors that it
failed to comply with; no demand has been made by a lessor for immediate payment.
The Company acquired a new customer and financial reporting software system January 2010, which is leased over 36 months. The
buyout for $nil represents a bargain purchase option at the end of the lease. Accordingly, the lease is accounted in substance as a capital
lease and the cost of the system is recorded as an asset under capital lease obligation. The effective interest rate is approximately 22%.
The Company acquired various computer equipment, VOIP systems and servers, in the period ended July 31, 2010, which are leased
over periods ranging from 36 to 66 months. The buyouts for nominal amounts represent bargain purchase options at the end of the
respective leases. Accordingly, the leases are accounted in substance as capital leases and the cost of the computer systems are recorded
as assets under capital lease obligations. The effective interest rates range from approximately 10% to 20%.
Lease obligation payable
Less current portion
Oct 31, 2010
$
83,684
(49,843)
$
Long-term portion
$
$
33,841
Jan 31, 2010
48,487
(39,317)
9,170
Page 10 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
10. Current loans payable
Oct 31, 2010
Unsecured advance, non-interest bearing, no repayment terms
Jan 31, 2010
$
-
$
9,375
$
-
$
9,375
At January 31, 2010 the Company negotiated a settlement with the holder of the unsecured advance and settled the liability for 62,500
common shares at a price of $0.15 per common share for a total of $9,375. The gain on debt settlement was booked in the year ended
January 31, 2010. The common shares were issued February 1, 2010 (See note 15 (a) (ii)).
11. Long term debt & obligations
Oct 31, 2010
Obligations under the Purchase and Sale Agreement of the WhiteHat acquisition (Note 5). The
Company has future payment obligations to the vendors of WhiteHat to be paid in two
installments of $175,000 cash and 100,000 common shares 31 days following anniversary dates
July 31, 2010 and July 31, 2011 recorded at their fair value. The obligations have zero interest
and are unsecured. The present value of the two mandatory cash payments of $175,000 are based
on a discount factor of 21% per annum.
Accretion interest accrued through Oct 31, 2010 (January 31, 2010)
Less current portion
$
Jan 31, 2010
123,240
267,868
33,086
28,357
156,326
296,225
156,326
-
$
(159,939)
136,286
Page 11 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
12. Convertible debentures
Oct 31, 2010
Jan 31, 2010
(i) 12% Secured Convertible Debentures - On August 22, 2008 the Company closed a 12%
secured convertible debenture issue at a face value of $400,000. Effective January 31, 2010, the
12% debentures, which initially were to mature August 22, 2010, were extended by 12 months to
August 22, 2011, unless converted prior to maturity date at the sole option of the debenture
holders. The debentures bear interest at 12% per annum payable semi annually; August 22 and
February 22. The 12% debentures are convertible into debenture units at $0.35 per unit. Upon
conversion, each debenture unit comprises one common share and one warrant to purchase one
common share at a price of $0.65 per common share. The debentures are secured against the
assets of the Company, and are subordinated to other secured loans.
The 12% debentures are being accounted for in accordance with their substance and are
presented in the financial statements in their component parts measured at their respective fair
values. The debt component has been measured as the present value of the mandatory cash
payments of principal and interest due under the terms of the 12% debentures, including the
extension period of 12 months, discounted at a rate of interest of 18%, which approximates a
similar non-convertible secured financial instrument with comparable terms and risk. The
difference of $65,628, between the fair value and the face value of the 12% debentures is
allocated to equity.
Accrued interest and accretion interest
$
334,372
$
334,372
$
94,955
66,155
429,327
400,527
The fair value of the equity component was split between the conversion and warrant subcomponents determined using the Black-Scholes option pricing model and the following
assumptions: share prices ranging between 16.50 and 38.00 cents; dividend yield of $NIL;
expected volatility of 108%; an expected life of two years; and, a risk-free rate of return ranging
from 2.74 -3.41%. The corresponding assumptions for the extension period were: share price of
14.4 cents; dividend yield of $NIL; expected volatility of 234%; an expected life of one year;
and, a risk-free rate of 0.59%. The two equity components were determined to be as follows:
Conversion component
Warrant component
Equity component
$
$
56,512
9,116
65,628
Sub total - 12% Secured Convertible Debentures
Page 12 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
12. Convertible debentures (continued)
(ii) 9% Unsecured Convertible Debentures - As at February 11, 2009 the Company closed a
$415,000 private placement of a 9% unsecured convertible debenture. The effective date is
December 23, 2008 and the maturity date is December 23, 2011. The debentures bear interest at
9% per annum payable semi annually; in the event that the Company’s common shares trade at a
minimum of 50 cents for 30 consecutive days then the interest rate payable is reduced to 7%.
The term of the debentures is three years and the debenture holders are entitled to convert into
common shares of the Company at a conversion rate of 35 cents per common share. The
proceeds from the 9% debentures were immediately available for general working capital
purposes. Interest was accrued and payable from the debenture issue date of December 23, 2008.
The 9% debenture is being accounted for in accordance with its substance and is presented in the
financial statements in its component parts measured at their respective fair values. The debt
component has been measured as the present value of the mandatory cash payments of principal
and interest due under the terms of the 9% debentures discounted at a rate of interest of 21%,
which approximates a similar non-convertible unsecured financial instrument with comparable
terms and risk. The difference of $113,287 between the fair value and the face value of the 9%
debentures, is allocated to equity.
$
Accrued accretion interest and interest
Sub total - 9% Unsecured Convertible Debentures
301,713
301,713
112,968
414,681
81,429
383,142
(iii) 9% Unsecured Convertible Debentures - As at October 31, 2010 the Company closed a
$550,000 private placement of a 9% unsecured convertible debenture. The effective date is
October 31, 2010 and the maturity date is October 31, 2013. The debentures bear interest at 9%
per annum payable semi annually (January 31 and July 31). The term of the debentures is three
years and the debenture holders are entitled to convert into common shares of the Company at a
conversion rate of 20 cents per common share. The proceeds from the 9% debentures were
immediately available for general working capital purposes. Interest was accrued up to October
31, 2010 for holders who contributed their funds prior to the effective date.
The 9% debenture is being accounted for in accordance with its substance and is presented in the
financial statements in its component parts measured at their respective fair values. The debt
component has been measured as the present value of the mandatory cash payments of principal
and interest due under the terms of the 9% debentures discounted at a rate of interest of 21%,
which approximates a similar non-convertible unsecured financial instrument with comparable
terms and risk. The difference of $152,136 between the fair value and the face value of the 9%
debentures, is allocated to equity.
Accrued accretion interest and interest
Sub total - 9% Unsecured Convertible Debentures
Total convertible debentures
Less current portion, including accrued interest
$
397,864
-
13,463
411,327
-
1,255,334
429,327
826,007
$
783,669
62,715
720,954
As at October 31, 2010, unpaid interest owing to the secured and unsecured debenture holders was $17,951 and $58,389 repectively.
Page 13 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
13. Loans & advances
Loans & advances are unsecured and with 0% interest rates.
Oct 31, 2010
Demand loans payable to various shareholders, including a related party company controlled
by a shareholder and director.
$
$
175,383
175,383
Jan 31, 2010
$
$
222,403
222,403
14. Share capital
Effective August 18, 2009, the Company consolidated the common shares at a ratio of 5:1 (five old common shares for each one new
common share). Prior to the consolidation, the Company had 50,070,704 common shares outstanding, and upon completion of the
consolidation, the Company had approximately 10,014,140 common shares outstanding. References in these financial statements to
common share quantities, units, stock options, warrants, conversion prices and related matters are all post-consolidation.
Authorized: 2,000,000 voting, non-participating, special shares that are redeemable at their paid-up amount
Issued
Nil
Authorized: unlimited number of common shares
Issued
Oct 31, 2010
Share capital
Common shares (Note 15(a))
Warrants (Note 15(c))
Jan 31, 2010
$
5,448,106
591
$
5,057,686
332,308
$
5,448,697
$
5,389,994
(a) Common shares
Oct 31, 2010
Common shares issued
Balance, beginning of year
Common shares issued
WhiteHat purchase (Note 5)
Private placement (Note 15(a)(i))
Less financing costs
Debt equity settlement (Note 15(a)(ii))
Debt equity settlement (Note 15(a)(iii))
Total common shares
14,640,809
579,845
2,122,974
17,343,628
Jan 31, 2010
$
5,057,686
9,814,141
200,000
4,626,668
-
$
86,977
303,443
5,448,106
14,640,809
$
4,585,536
22,500
456,150
(6,500)
-
$
5,057,686
(i) On October 30, 2009, the Company completed a private placement of 4,626,668 units priced at $0.15 per unit. Each unit
consists of one common share and 1/2 of one common share purchase warrant. Each warrant is exercisable at $0.20 for 12
months. Of the gross proceeds from the units, $237,850 was attributed to the fair value of the warrants (Note 15(c)(i)) and
$456,150 was attributed to the fair value of the common shares.
(ii) Effective February 1, 2010, in connection with the settlement of debts, the Company issued 579,845 common shares at $0.15
per common share totalling $86,977 (see Note 17).
(iii) Effective July 31, 2010, in connection with the settlement of debts, the Company issued 2,022,957 common shares at $0.15 per
common share totalling $303,443.
Page 14 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
14. Share capital (continued)
(b)
Stock options
The Company has established a stock option plan. Under the plan, the Company will grant options to directors, officers,
employees and consultants of the Company. The maximum number of shares that may be reserved for issuance under the plan
at any time is 10% of the outstanding shares of the Company, subject to annual approval by shareholders at the Annual General
Meeting "AGM"; common shares issued during the year are not eligible for the 10% option pool until the subsequent AGM.
The options granted vest according to a twelve month schedule from the date of the grant at 25% every three months or as
determined by the Board of Directors. The current options expire three years after the date they are granted.
A summary of the stock options granted under the plan as of Oct 31, 2010 and January 31, 2010 and changes during the
periods then ended are as follows:
Weighted
Weighted
Average
Average
Oct 31, 2010
Price
Jan 31, 2010
Price
Options outstanding, beginning of period
Options granted
Options cancelled
Options expired
748,000
-
$
0.33
-
656,000
455,000
(8,000)
(355,000)
$
0.68
0.15
0.60
0.75
Options outstanding, end of period
748,000
$
0.33
748,000
$
0.33
Options exercisable, end of period
711,300
$
0.32
693,000
$
0.34
The following table summarizes information about stock options outstanding at October 31, 2010:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
Number
Outstanding at
Oct 31, 2010
Weighted
Average
Remaining Life
in Years
Weighted
Average
Exercise
Price
Number
Outstanding at
October 31, 2010
0.20 - 0.50
748,000
1.37
0.33
711,300
Weighted
Average
Exercise
Price
0.32
The Company has recognized $Nil in stock-based compensation expense to employees during the period ended July 31, 2010
(2009 - $Nil). The fair value of each option granted to employees and service providers has been estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions used: dividend yield of $NIL, expected volatility
of 241%, an expected life of three years, and a risk-free rate of return of 2.112%. This amount is charged to operations over the
vesting period for employees.
Page 15 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
14. Share capital (continued)
(c)
Warrants
A summary of warrants outstanding at October 31, 2010 is as follows:
Exercise Price
0.50
Exercise Date
Number
July 31, 2011 (Note 5)
60,000
60,000
Reference
Balance, January 31, 2009
Extension to April 2009 warrants
Fair value of warrants issued, purchase of
WhiteHat
Fair value of warrants issued in private
placement dated October 30, 2009
Ascribed value of expired warrants
Balance January 31, 2010
Ascribed value of expired warrants
Balance October 31, 2010
Amount
$
Number
3,098,375
625,000
(Note 15(c)(ii))
(Note 5)
Amount
424,318
93,867
60,000
(Note 15(c)(i))
2,313,334
(3,098,375)
2,998,334
(2,938,334)
60,000
591
591
591
$
237,850
(424,318)
332,308
(331,717)
591
(i) The fair value of each warrant in the October 30, 2009 private placement (Note 15 (a)(i)) has been estimated at the date of the
private placement using the Black-Scholes option pricing model with the following assumptions used: dividend yield of $NIL,
expected volatility of 315%, an expected life of one year, and a risk-free rate of return ranging from 0.469 to 0.641%.
(ii) In April 2009, the Company agreed to extend the expiry date of 625,000 warrants from April 30, 2009 to April 30, 2010. As a
result of this extension, the Company has transferred the value ascribed to the original warrants, $197,139 to contributed surplus
and has ascribed $93,867 to the extended warrants with an offsetting charge to contributed surplus. As of April 30, 2010, the
warrants expired and their carried value was tranferred to contributed surplus.
15. Contributed surplus
Contributed surplus resulted from the following:
Balance, beginning of year
Amounts resulting from stock-based compensation expense
Ascribed value of extended warrants
Ascribed value of expired warrants
Oct 31, 2010
$
$
1,125,121
331,717
1,456,838
Jan 31, 2010
$
$
728,951
65,720
(93,867)
424,317
1,125,121
16. Discontinued operations
On May 7, 2009, the Company through its wholly owned subsidiary Holdco executed an agreement to sell the 75% investment in
Admiral Secure Products to the 25% minority shareholders of the entity. Accordingly, the net income of the Admiral subsidiary for the
period ended July 31, 2009, was reported in discontinued operations.
Page 16 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
17. Related party transactions
All related party transactions are recorded at the exchange amount, which is the amount of consideration established and agreed to by
both parties. (See Note 14(i) - loan payable to a company controlled by a current director and shareholder.)
Current directors directly or indirectly own secured and unsecured debedentures (note 13) in the amounts of $100,000 and $400,000
respectively.
18. Income taxes
The Company and its wholly-owned subsidiaries have aggregate net operating losses, which are available to reduce taxable income in
future years. These losses expire as follows:
2011
2015
2026
2027
2028
2029
2030
2031
$
$
$
288,000
250,000
1,112,000
1,253,000
1,021,000
745,000
585,000
301,000
5,555,000
The following table reconciles income taxes calculated by applying the Canadian statutory income tax rates with income tax
expense in the financial statements:
Three Months
Nine Months
3rd Quarter
Year-to-Date
2010
2009
2010
2009
Loss before income taxes
Canadian statutory income taxes rates
Income taxes (recovery) based on statutory
income tax rates
Permanent differences
Unrecorded future income tax benefit of
losses incurred during the year
Income taxes (recovery)
$
(162,310)
33.5%
$
(217,378)
33.0%
$
(529,109)
33.5%
$
(558,055)
33.0%
$
(54,374)
7,038
$
(71,735)
4,123
$
(177,251)
23,723
$
(184,158)
11,761
$
43,993
(3,343)
$
54,434
(13,177)
$
46,620
(19,661)
$
155,720
(16,677)
The tax effect of significant items is as follows:
Oct 31, 2010
Future income tax assets
Tax value of capital assets in excess of carrying value
Financing costs not deducted for accounting purposes
Non-capital losses
$
Valuation allowance
Future income tax liabilities
Carrying value of intangibles in excess of tax value
$
82,520
79,550
1,388,750
1,550,820
(1,550,820)
88,426
88,426
Jan 31, 2010
$
$
82,520
79,550
1,313,976
1,476,046
(1,476,046)
108,087
108,087
The current tax liability represents the balance of taxes payable component of the net assets acquired on the WhiteHat acquisition (Note
5).
Page 17 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
19. Earnings per share
The following instruments have been excluded from the diluted earnings per share as these instruments are anti-dilutive.
9 Months
31-Oct-10
31-Oct-09
Stock options
748,000
301,000
Warrants
60,000
5,458,713
20. Financial instruments
In management's opinion, the carrying values of accounts and other receivables and accounts payable and accrued liabilities approximate
fair value due to the short-term nature of these instruments. The carrying value of loans payable, long-term debt and convertible
debentures approximates fair value as the interest rates on these instruments are similar to rates estimated to be currently available for
instruments of similar terms and maturities.
Credit risk
The Company is subject to risk of non-payment of accounts and other receivables. The Company has credit evaluation and monitoring
processes intended to mitigate this risk. The Company's maximum credit risk exposure is approximately $434,892.
The aging of accounts and other receivables at Oct 31, 2010 was as follows:
1 to 30 days
31 to 60 days
61 to 90 days
90+ days
$
$
277,819
103,831
6,768
9,631
398,049
Three customers represent $253,916 (64%) of total accounts and other receivables, however, they do not present any credit risk due to
their high credit rating and timely payment history with the Company.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company manages its liquidity
risk by forecasting cash flows from operations and anticipated investing and financing activities, and maintaining credit facilities to
ensure it has sufficient funds available to meet current and foreseeable financial requirements. (See also Note 2. Continuation of
Business.)
Total
Trade & taxes
payable
Loans &
capital leases
Operating
lease
Convertible
debentures
Less than 1 yr
1 to 2 years
$
2,022,528
1,278,021
$
959,261
-
$
400,226
33,841
$
165,540
124,155
$
497,500
1,120,025
Face value
$
3,300,549
$
959,261
$
434,067
$
289,695
$
1,617,525
Foreign currency exchange risk
The Company undertakes sales and purchase transactions in foreign currencies, and therefore is subject to gains and losses due to
fluctuations in the foreign currencies. The Company does not purchase derivative instruments to mitigate this risk.
Page 18 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
20. Financial instruments (continued)
Interest rate risk
The Company has several fixed rate borrowings. The Company does not purchase derivative instruments to mitigate this risk.
Fair value
The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments.
(i) The carrying amounts of cash, accounts and other receivables, accounts payable and accrued liabilities, loans from shareholders,
obligations under capital lease and loans payable approximate fair value because of the short-term maturity of these financial
instruments.
(ii) The carrying amounts of long-term debt has been measured as the present value of the mandatory cash payments of principal and
interest due under the terms of the debt instruments, discounted at a rate of interest ranging between 18% and 21%, where actual
interest rate of such debt instrument is less than said discount rate, which approximates comparable financial instruments with
similar terms and risk.
(iii) Cash has been valued using a level 1 fair value hierarchy.
21. Commitments and guarantees
The Company has future commitments for a rental property and leases for equipment, computers and software. The following are the
future minimum annual payments:
2011
2012
2013
2014
2015
Thereafter
$
$
44,194
173,952
91,017
9,450
9,359
5,459
333,431
From time to time, the Company has provided indemnities under agreements. Under the terms of the agreements the Company has
agreed to indemnify the counterparties for liabilities arising during the term of the agreements. The maximum amount of any potential
future payment cannot be reasonably estimated.
The nature of the indemnification agreements prevent the Company from making a reasonable estimate of the maximum exposure due
to the difficulties in assessing the amount of liability which stems from unpredictability of future events and the unlimited coverage
offered to counterparties. Historically, the Company has not made any payments under such or similar indemnification agreements, and
therefore no amount has been accrued in the consolidated balance sheet with respect to the agreements.
Page 19 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
22. Segmented information
The Company identifies and manages its continuing operations in two business segments: (i) for managed network support and
consulting services that is primarily conducted through its subsidiary Tenth Power; and, (ii) professional security services through
its WhiteHat subsidiary. All operations are conducted from Canada. Tenth Power bills its United States based customer in
Canadian dollars; WhiteHat bills its US customers in US dollars, and all other customers are Canadian. The parent Company, Tenth
Corp, reported nominal sales in the two periods ended October 31, 2010 and 2009; it charges its subsidiary for shared costs and
management fees.
(a)
Sales revenues
(i) Domestic
Services, network support & consulting
Professional security services
Other
(ii) Foreign - billed USA
Services, network support & consulting
Professional security services
Total sales revenues
(b)
Three Months
3rd Quarter
2010
2009
$
111,131
945,490
-
$
Nine Months
Year-to-Date
2010
19,650
942,251
2,975
(41,830)
14,194
$
38,725
-
$
1,028,985
$
$
112,891
313,924
-
$
1,003,601
152,399
2,652,580
2,588
2009
$
74,270
127,713
114,485
942,251
6,162
207,475
-
$
3,009,551
$
$
152,399
764,216
2,588
$
1,270,373
Gross profits
(i) Domestic
Services, network support & consulting
Professional security services
Other
(ii) Foreign - billed USA
Services, network support & consulting
Professional security services
Total gross profits
(568,743)
216,904
108
(41,830)
3,012
$
387,997
38,725
$
(313,006)
74,270
84,421
(969,833)
216,904
3,295
207,475
-
$
1,077,893
$
(542,159)
$
157,525
$
168,750
(c) The Company's has the following concentration and reliance on certain customers:
(i) Tenth Power - network support & consulting
to customer A
$
(ii) WhiteHat - professional security services
to customer A
to customer B
to customer C
to customer D
to customer E
Total, major customer revenues
- percentage of total revenues
108,475
$
-
353,705
242,311
253,064
$
957,555
93%
74,300
$
74,300
7%
627,350
420,806
265,964
253,064
147,670
$
1,872,379
62%
$
168,750
13%
Page 20 of 21
TENTH POWER TECHNOLOGIES CORP.
Notes to the Consolidated Financial Statements
October 31, 2010
unaudited
23. Contingency
The Company has been named as a defendant in a lawsuit, dated from January 2007, for wrongful dismissal and defamation by the
former President of the Company. The Company believes that the case has no merit, has filed a defense and counterclaim and will
continue to defend itself accordingly. No amount has been recorded in these financial statements.
24. Supplementary cash flow disclosure
Interest paid
Taxes paid
Issuance of shares in settlement of debts
$
$
$
Three Months
3rd Quarter
2010
2009
(20,016)
$
(16,859)
(22,701)
$
303,444
$
-
Nine Months
Year-to-Date
$
$
$
2010
(38,916)
(54,034)
390,420
$
$
$
2009
(39,848)
-
25. Comparative numbers
Comparative numbers have been reclassified to conform to the current period presentation.
Page 21 of 21