PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Unaudited Consolidated Balance Sheets

 

					December 31, 2007
		September 30, 2008			(As restated - Note 2)
ASSETS
Current:
Cash		$	16		$	1,040
Other current asset:
Prepaid expenses			-			-
Total current assets			16			1,040
Total assets		$	16		$	1,040
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current:
Accounts and accrued expenses payable, including $4,764,628 and $3,592,491 due to Company shareholders and directors, respectively		$	5,169,464		$	4,085,122
Estimated liability for legal judgment obtained by predecessor entity shareholder			1,053,385			1,053,385
Due to related parties			5,477,221			4,404,183
Notes payable, including accrued interest of $20,000 and $20,000 at September 30, 2008 and December 31, 2007, respectively			1,108,000			245,000
Total liabilities			12,808,070			9,787,690
Commitments and contingencies			-			-
STOCKHOLDERS’ (DEFICIT) EQUITY
Preferred stock, $0.00001 par value, 10 million shares authorized, no shares issued or outstanding at September 30, 2008 and December 31, 2007			-			-
Preferred stock Series A, $0.00001 par value, 2 million shares authorized, 355,000 and 280,000 shares to be issued at September 30, 2008 and December 31, 2007			355,000			280,000
Preferred stock Series C, $0.00001 par value, 2 million shares authorized, 25,000 and 0 shares to be issued at September 30, 2008 and December 31, 2007			25,000			-
Common stock, $0.00001 par value, 1 billion shares authorized, 650,993,240 and 649,743,240 issued and outstanding, respectively			6,509			6,497
Common stock to be issued, $0.00001 par value, 11,056,350 and 2,485,685 shares to be issued at September 30, 2008 and December 31, 2007, respectively			113			25
Additional paid-in capital			125,444,941			124,790,220
Accumulated deficit			(138,639,617	)		(134,863,392	)
Total stockholders’ (deficit) equity			(12,808,054	)		(9,786,650	)
Total liabilities and stockholders’ (deficit) equity		$	16		$	1,040

See accompanying notes to the consolidated financial statements.

 

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Unaudited Consolidated Statement of Operations (During the Development Stage)

 

		For the Three Months Ended September 30, 2008			For the Three Months Ended September 30, 2007			For the Nine Months Ended September 30, 2008			For the Nine Months Ended September 30, 2007			For the Period From Inception (November 15, 2005) to December 31, 2007 (As Restated - Note 2)			Accumulated During the Development Stage for the Period From Inception (November 15, 2005) to September 30, 2008
Revenue		$	-		$	-		$	-		$	-		$	-		$	-
Operating expenses:
Consulting fees and services, including $956,967, $858,508, $2,734,192, $2,473,835, $7,555,470 and $10,289,662 incurred to related parties, respectively			1,031,772			899,311			3,124,065			2,611,020			7,955,066			11,079,131
General and administrative			29,022			44,356			180,525			98,761			554,177			734,702
Directors' compensation			65,000			-			205,000			-			260,178			465,178
Delaware franchise taxes			105			14,413			315			43,239			185,001			185,316
Total operating expenses			1,125,899			958,080			3,509,905			2,753,020			8,954,422			12,464,327
Loss from operations during the
development stage			(1,125,899	)		(958,080	)		(3,509,905	)		(2,753,020	)		(8,954,422	)		(12,464,327	)
Other income (expense):
Gain on write off of liabilities associated with predecessor entity not to be paid			-			-			-			-			395,667			395,667
Loss on legal judgement obtained by predecessor entity shareholder															(1,053,385	)		(1,053,385	)
Loss on write off of marketing agreement			-			-			-			-			(125,000,000	)		(125,000,000	)
Loss on settlement of predecessor entity stockholder litigation			-			-			-			-			(2,000	)		(2,000	)
Expenses incurred as part of recapitalization transaction			-			-			-			-			(249,252	)		(249,252	)
Debt issue costs to be satisfied of $216,320 in Company Common Stock			-			-			(266,320	)		-			-			(266,320	)
-						-			(266,320	)		-			(125,908,970	)		(126,175,290	)
Net loss		$	(1,125,899	)	$	(958,080	)	$	(3,776,225	)	$	(2,753,020	)	$	(134,863,392	)	$	(138,639,617	)
Basic and diluted net loss per weighted-average shares common stock outstanding		$	(0.002	)	$	(0.001	)	$	(0.006	)	$	(0.004	)	$	(0.214	)	$	(0.220	)
Weighted-average number of shares of common stock outstanding			651,835,631			649,543,240			650,445,795			649,543,240			631,654,538			629,282,647

 

See accompanying notes to the consolidated financial statements.

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Unaudited Consolidated Statement of Changes in Stockholders' (Deficit) Equity (During the Development Stage)

			Series A Convertible Preferred Stock						Series C Convertible Preferred Stock						Common Stock						Common Stock
			Shares to be issued			Amount			Shares to be issued			Amount			Shares to be issued			Amount			Shares issued			Amount
Balance, November 14, 2005 pursuant to recapitalization transaction			--		$	--			--		$	--			--		$	--			25,543,240		$	255
Common stock conversion and settlement of senior note pursuant to recapitalization transaction			--			--			--			--			--			--			624,000,000			6,240
Net loss for the period from November 15, 2005 to December 31, 2005			--			--			--			--			--			--			--			--
Balance, December 31, 2005			-		$	-			-		$	-			-		$	-			649,543,240		$	6,495
Common stock to be issued for cash received by Company			--			--			--			--			985,000			10			--			--
Net loss for the year			--			--			--			--			--			--			--			--
Balance, December 31, 2006			-		$	-			-		$	-			985,000		$	10			649,543,240		$	6,495
Common stock to be issued for cash received by Company			--			--			--			--			500,000			5			--			--
Series A Convertible Preferred Stock to be issued for cash received by Company			280,000			280,000			-			-			--			--			--			--
Common stock issued in settlement of predecesor entity stockholder litigation			--			--			--			--			-			-			200,000			2
Common stock to be issued for directors' compensation			--			--			--			--			1,000,685			10			--			--
Net loss for the year (As Restated - See Note 2)			--			--			--			--			--			--			--			--
Balance, December 31, 2007 (As Restated - See Note 2)			280,000		$	280,000			-		$	-			2,485,685		$	25			649,743,240		$	6,497
Series A Convertible Preferred Stock to be issued for cash received by Company			75,000			75,000			--			--			--			--			--			--
Series C Convertible Preferred Stock to be issued for cash received by Company			--			--			25,000			25,000			--			--			--			--
Common stock to be issued for directors' compensation			--			--			--			--			750,000			9			--			--
Debt issue costs to be satisfied in Company Common Stock			--			--			--			--			3,704,000			38			--			--
Common stock to be issued for purchase of common stock			--			--			--			--			1,000,000			10			--			--
Common stock to be issued for consulting and marketing services			--			--			--			--			3,116,665			31			--			--
Common stock issued for consulting and marketing services			--			--			--			--			--			--			1,250,000			12
Net loss for the nine months ended September 30, 2008			--			--			--			--			--			--			--			--
Balance, September 30, 2008			355,000		$	355,000			25,000		$	25,000			11,056,350		$	113			650,993,240		$	6,509

 

See accompanying notes to the consolidated financial statements.

 

 

ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

Unaudited Consolidated Statement of Changes in Stockholders' (Deficit) Equity (During the Development Stage)

		Additional Paid-in Capital			Accumulated Deficit			Total
Balance, November 14, 2005 pursuant to recapitalization transaction		$	(2,674,761	)	$	--		$	(2,674,506	)
Common stock conversion and settlement of senior note pursuant to recapitalization transaction			125,907,967			--			125,914,207
Net loss for the period from November 15, 2005 to December 31, 2005			--			(1,272,258	)		(1,272,258	)
Balance, December 31, 2005		$	123,233,206		$	(1,272,258	)	$	121,967,443
Common stock to be issued for cash received by Company			984,990			--			985,000
Net loss for the year			--			(3,514,445	)		(3,514,445	)
Balance, December 31, 2006		$	124,218,196		$	(4,786,703	)	$	119,437,998
Common stock to be issued for cash received by Company			499,995			--			500,000
Series A Convertible Preferred Stock to be issued for cash received by Company			--			--			280,000
Common stock issued in settlement of predecesor entity stockholder litigation			11,998			--			12,000
Common stock to be issued for directors' compensation			60,031			--			60,041
Net loss for the year (As Restated - See Note 2)			--			(130,076,689	)		(130,076,689	)
Balance, December 31, 2007 (As Restated - See Note 2)		$	124,790,220		$	(134,863,392	)	$	(9,786,650	)
Series A Convertible Preferred Stock to be issued for cash received by Company			--			--			75,000
Series C Convertible Preferred Stock to be issued for cash received by Company			--			--			25,000
Common stock to be issued for directors' compensation			54,991			--			55,000
Debt issue costs to be satisfied in Company Common Stock			216,283			--			216,321
Common stock to be issued for purchase of common stock			49,990			--			50,000
Common stock to be issued for consulting and marketing services			245,968			--			245,999
Common stock issued for consulting and marketing services			87,489			--			87,501
Net loss for the nine months ended September 30, 2008			--			(3,776,225	)		(3,776,225	)
Balance, September 30, 2008		$	125,444,941		$	(138,639,617	)	$	(12,808,054	)

 

See accompanying notes to the consolidated financial statements.

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

 

Unaudited Consolidated Statement of Cash Flows (During the Development Stage)

 

		For the Nine Months Ended September 30, 2008			For the Nine Months Ended September 30, 2007			For the Period From Inception (November 15, 2005) to December 31, 2007 (As Restated - See Note 2)			Accumulated During the Development Stage for the Period From Inception (November 15, 2005) to September 30, 2008
Net loss		$	(3,776,225	)	$	(2,753,020	)	$	(134,863,392	)	$	(138,639,617	)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Net non-cash change in stockholders’ equity due to recapitalization transaction			-			-			1,264,217			1,264,217
Loss on write-off of marketing and distribution agreement			-			-			125,000,000			125,000,000
Debt issue costs to be satisfied in Company Common Stock			216,321			-			-			216,321
Debt issue costs to be satisfied in Company Common Stock			50,000			-			-			50,000
Common stock issued for consulting and marketing services			87,501			-			-			87,501
Common stock to be issued for consulting and marketing services			245,999						-			245,999
Increase in prepaid expenses			-			(1,861	)		-			-
Stock-based directors' compensation to be issued			55,000						60,041			115,041
Changes in operating asset and liabilities:
Increase in accounts and accrued expenses payable			1,334,342			940,840			2,848,562			4,182,904
Estimated liability for legal judgement obtained by predecessor entity shareholder			-			-			1,053,385			1,053,385
Net cash (used in) operating activities			(1,787,062	)		(1,814,041	)		(4,637,187	)		(6,424,249	)
Cash flows from investing activities:
Cash acquired as part of merger transaction			-			-			39,576			39,576
Advances to related party			(250,000	)		(244,575	)		(369,575	)		(619,575	)
Net cash (used in) investing activities			(250,000	)		(244,575	)		(329,999	)		(579,999	)
Cash flows from financing activities:
Proceeds of issuance of note payable			863,000			-			25,000			888,000
Proceeds of loans received from related parties			605,000			725,000			1,175,000			1,780,000
Repayment towards loan from related party			(88,000	)		(86,425	)		(86,425	)		(174,425	)
Net increase in due to related parties attributed to operating expenses paid on the Company’s behalf by the related party			556,038			970,041			2,027,653			2,583,691
Net increase in investments/capital contributed			100,000			450,000			1,776,998			1,876,998
Advances from senior advisor			-			-			50,000			50,000
Net cash provided by financing activities			2,036,038			2,058,616			4,968,226			7,004,264
Net change in cash			(1,024	)		-			1,040			16
Cash balance at beginning of period			1,040			-			-			-
Cash balance at end of period		$	16		$	-		$	1,040		$	16
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes		$	-		$	-		$	-		$	-
Interest expense		$	-		$	-		$	-		$	-
Non-cash investing and financing activities:
Non-cash purchase of marketing and distribution agreement		$	-		$	-		$	125,000,000		$	125,000,000
Settlement of senior note payable through issuance of convertible preferred stock		$	-		$	-		$	125,000,000		$	125,000,000
Non-cash acquisition of accrued expenses in recapitalization		$	-		$	-		$	421,041		$	421,041
Non-cash acquisition of notes payable in recapitalization		$	-		$	-		$	220,000		$	220,000

See accompanying notes to the consolidated financial statements.

 

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

 

NOTE 1 - NATURE OF BUSINESS / ORGANIZATION

 

Business Description 

 

Arrow Resources Development, Inc. and Subsidiaries (“the Company”), was subject to a change of control transaction that was accounted for as a recapitalization of CNE Group, Inc. (“CNE”) in November 2005. Arrow Resources Development, Ltd., (“Arrow Ltd.”) the Company's wholly-owned subsidiary, was incorporated in Bermuda in May 2005. Arrow Ltd. provides marketing and distribution services for the development of natural resources.

 

In April of 2006, Arrow Ltd. entered into an agency agreement with Arrow Pacific Resources Group Limited (“APR”) that provides marketing and distribution services for timber resource products and currently has an exclusive marketing and sales agreement with APR to market lumber, com and related products from land leased by GMPLH which is operated by APR and it's subsidiaries, located in Indonesia. Under the agreement Arrow Ltd. will receive a commission of 10% of gross sales derived from lumber, com and related products. The consideration to be paid to APR will be in the form of a to-be-determined amount of the Company's common stock, subject to the approval of the Board of Directors.

 

As of December 31, 2005, the Company also had a wholly-owned subsidiary, Career Engine, Inc. (“Career Engine”) for which operations were discontinued prior to the recapitalization transaction. The net assets of Career Engine had no value as of December 31, 2005.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

Interim Financial Statements

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of September 30, 2008 and the results of its operations, changes in stockholders' (deficit) equity, and cash flows for the three and nine months periods ended September 30, 2008 and 2007, respectively, for the period from the commencement of the development stage (November 15, 2005) to September 30, 2008, and for the period from the commencement of the development stage (November 15, 2005) to December 31, 2007. Although management believes that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities Exchange Commission.

 

The results of operations for the three and nine months ended September 30, 2008 and for the period from the commencement of the development stage (November 15, 2005) to September 30, 2008, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008, and for the period from the commencement of the development stage (November 15, 2005) to December 31, 2008. The accompanying consolidated financial statements should be read in conjunction with the more detailed “restated” consolidated financial statements, and the related footnotes thereto, filed with the Company’s amended Annual Report on Form 10KSB/A for the year ended December 31, 2007 filed on June 26, 2008.

Going-Concern Status

These consolidated financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.

 

As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $1,125,899 and $3,776,225 for the three and nine months ended September 30, 2008, and a net loss during the development stage from inception in November 15, 2005 through September 30, 2008 of $138,639,617. The Company’s operations are in the development stage, and the Company has not generated any revenue since inception. The Company’s existence in the current period has been dependent upon advances from related parties and other individuals, and the sale of senior notes payable.

One of the principal reasons for the Company’s substantial doubt regarding its ability to continue as a going concern involves the fact that as of December 31, 2007, the Company’s principal asset, a marketing and distribution intangible asset in the amount of $125,000,000 was written off as impaired as discussed in Note 6 due to the fact that environment laws affecting timber harvesting have become more restrictive in Papua New Guinea.

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The condensed consolidated financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.

 

Principles of consolidation:

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Arrow Ltd. All significant inter-company balances and transactions have been eliminated.

Development Stage Company:

 

The accompanying financial statements have been prepared in accordance with the Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by Development-Stage Enterprises”. A development state enterprise is one in which planned and principal operations have not commenced or if its operations have commenced, there has been no significant revenue there from. Development-stage companies report cumulative costs from the enterprise’s inception.

Income taxes:

 

The Company follows SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance has been provided for the Company's net deferred tax asset, due to uncertainty of realization.

Effective January 1, 2007, the Company adopted Financial Accounting Standard Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS Statement No. 109 Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting interim period, disclosure and transition. There were no adjustments required upon adoption of FIN 48.

 

Fair value of financial instruments:

 

For financial statement purposes, financial instruments include cash, accounts and accrued expenses payable, and amounts due to Empire Advisory, LLC (“Empire”) (as discussed in Notes 6 and 7) for which the carrying amounts approximated fair value because of their short maturity.

 

Use of estimates:

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Loss per share:

 

The Company complies with the requirements of the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, “Earning per share” (“SFAS No. 128”). SFAS No. 128 specifies the compilation, presentation and disclosure requirements for earning per share for entities with publicly held common stock or potentially common stock. Net loss per common share, basic and diluted, is determined by dividing the net loss by the weighted average number of common shares outstanding.

Net loss per diluted common share does not include potential common shares derived from stock options and warrants because they are anti-dilutive for the period from November 15, 2005 to December 31, 2007 and for the period from November 15, 2005 to September 30, 2008. As of September 30, 2008, there are no dilutive equity instruments outstanding. However, the Company has 355,000 and 0 shares of Series A Convertible Preferred Stock and 25,000 and 0 shares of Series C Convertible Preferred Stock that are issuable as of September 30, 2008 and 2007, respectively.

 

Acquired intangibles:

 

Intangible assets were comprised of an exclusive sales and marketing agreement. In accordance with SFAS 142, “Goodwill and Other Intangible Assets” the Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:

 

1.

Significant underperformance relative to expected historical or projected future operating results;

 

2.

Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and

 

3.

Significant negative industry or economic trends.

When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

The sales and marketing agreement was to be amortized over 99 years, utilizing the straight-line method. Amortization expense had not been recorded since the acquisition occurred as the company had not yet made any sales.

 

The value of the agreement was assessed to be fully impaired by the Company and it recorded a loss on the write off of the Marketing and Distribution agreement of $125,000,000 at December 31, 2007 (See Note 6).

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Consideration of Other Comprehensive Income Items:

SFAS 130 - Reporting Comprehensive Income, requires companies to present comprehensive income (consisting primarily of net income plus other direct equity changes and credits) and its components as part of the basic financial statements. For the period from inception (November 15, 2005) to September 30, 2008, the Company’s consolidated financial statements do not contain any changes in equity that are required to be reported separately in comprehensive income.

Recent Accounting Pronouncements:

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. The adoption of FASB 163 is not expected to have a material impact on the Company’s financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.  

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of FASB 161 is not expected to have a material impact on the Company’s financial position.  

 

In December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”.  SFAS No.160 requires that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, in the amount of consolidated net income attributable to the parent and to the noncontrolling interest on the face of the consolidated statement of income, and that entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  SFAS No.160 is effective for fiscal years, beginning on or after December 15, 2008 and cannot be applied earlier. 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations,” (“FASB 141R”). This standard requires that entities recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. FASB 141R is effective for fiscal years beginning after December 15, 2008.

The Company does not anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on the Company's overall results of operations or financial position, unless the Company makes a business acquisition in which there is a non-controlling interest.

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In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in Staff Accounting Bulletin 107, Share Based Payment , (“SAB 107”), for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. SAB 110 became effective for the Company on January 1, 2008. The adoption of SAB 110 is not expected to have a material impact on the Company’s financial position.

 

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 - AGREEMENT AND PLAN OF MERGER BETWEEN ARROW RESOURCES DEVELOPMENT, LTD. AND CNE GROUP, INC.

 

In August 2005, the Company entered into an Agreement and Plan of Merger (“the Agreement”) with CNE Group, Inc. (“CNE”) under which, CNE was required to issue 10 million shares of Series AAA convertible preferred stock (“the Preferred Stock”) to the Company, representing 96% of all outstanding equity of CNE on a fully diluted basis for the Marketing and Distribution Agreement provided to the Company, Empire, as agent. Under the Agreement, the Company changed its name to Arrow Resources Development, Inc. and divested all operations not related to Arrow Ltd. The Preferred Stock contained certain liquidation preferences and each share of the Preferred Stock was convertible to 62.4 shares of common stock.

 

The transaction was consummated upon the issuance of the Preferred Stock on November 14, 2005, which was used to settle the senior secured note payable for $125,000,000 and $1,161,000 of cash advances from Empire. The Preferred Stock was subsequently converted to common stock on December 2, 2005, for a total of approximately 649 million shares of common stock outstanding. This was recorded as a change of control transaction that was accounted for as a recapitalization of CNE.

 

The operations of the Company's wholly-owned subsidiary, Career Engine, Inc. were discontinued prior to the recapitalization transaction. The net assets of Career Engine had no value as of December 31, 2005.

 

During the period from November 15, 2005 to December 31, 2005, the Company incurred $249,252 of expenses incurred as part of recapitalization transaction.

NOTE 4 - INCOME TAXES

 

In August 2005, the Company entered into an Agreement and Plan of Merger (“the Agreement”) with CNE Group, Inc. (“CNE”). Under the Agreement, the Company changed its name to Arrow Resources Development, Inc. and divested all operations not related to Arrow Ltd. The transaction was consummated upon the issuance of the Preferred Stock on November 14, 2005. (See Note 3 for a detailed description of the transaction.)

Consequently, as of November 14, 2005 the predecessor CNE entity had a net operating loss carryforward available to reduce future taxable income for federal and state income tax purposes of the successor entity of approximately zero, because those losses arose from the predecessor CNE exiting previous business lines that had generated operating losses.

For tax purposes, all expenses incurred by the re-named entity now known as Arrow Resources Development, Inc. after November 14, 2005 have been capitalized as start up costs in accordance with Internal Revenue Code Section (“IRC”) No. 195. Pursuant to IRC 195, the Company will be able to deduct these costs by amortizing them over a period of 15 years for tax purposes once the Company commences operations. Accordingly for tax purposes, except for Delaware franchise taxes, none of the Company's post November 14, 2005 losses are as yet reportable in Company income tax returns to be filed for the years ended December 31, 2005, 2006 or 2007.

 

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ARROW RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 - INCOME TAXES (Continued)

 

The significant components of the Company's deferred tax assets are as follows:

 

Net operating loss carryforward		$	63,007
Differences resulting from use of cash basis for tax purposes			-
Total deferred tax assets			63,007
Less valuation allowance			(63,007	)
Net deferred tax assets		$	—

 

The net operating losses expire as follows:

 

December 31, 2026		$	127,349
December 31, 2027			57,967
Net Operating Loss Carryover		$	185,316

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

 

We are a holding company whose only operating subsidiary as of September 30, 2008 is Arrow Ltd. The principal business of Arrow is to provide marketing, sales, distribution, corporate operations and corporate finance services for the commercial exploitation of natural resources around the world. Prior to November 2005, we used to be a telecommunications and recruiting company formally known as CNE Group, Inc. The company elected to shift its business focus to the worldwide commercial exploitation of natural resources.

ARROW RESOURCES DEVELOPMENT, LTD.

 

In August 2005, Arrow entered into an Agreement and Plan of Merger (“the Agreement”) with its wholly-owned subsidiary, Arrow Ltd., in which Arrow (formerly CNE) was required to issue 10 million shares of Series AAA convertible preferred stock (“the Preferred Stock”) to Arrow Ltd.'s designees, representing 96% of all outstanding equity of CNE on a fully diluted basis in exchange for the Marketing and Distribution Agreement provided to the Company by Arrow. Under the Agreement, the Company discontinued all former operations (CareerEngine, Inc., SRC and US Commlink.) and changed its name to Arrow Resources Development, Inc.

On August 1, 2005, Arrow Ltd. entered into the Marketing Agreement with Arrow Pte. and its subsidiaries in consideration for Arrow issuing a non-interest bearing note (the “Note”) in the principal amount of $125,000,000 to Empire Advisory, LLC, (“Empire”), acting as agent, due on or before December 31, 2005. Empire is Arrow Pte.'s merchant banker. The Note permitted the Company, as Arrow's sole stockholder, to cause Arrow to repay the Note in cash or with 10,000,000 shares of the Company's non-voting Series AAA Preferred Stock. However, in December 2007, Arrow Pte. assessed that it would be unable to harvest the timber products in Papua, New Guinea due to the fact that the widely accepted international guidelines of the World Wildlife Federation had not been adopted by Papua, New Guinea.

This fact is adverse to the economic, social and environmental goals of Arrow Pte. because with the amount of land that the project was allotted combined with the agreed upon previous guidelines of the marketing and distribution agreement, yields would be significantly reduced. Given the significant change in the economics of the harvesting of the timber in Papua, New Guinea, Arrow Pte. has decided not to pursue any further operations in Papua, New Guinea given that the above restrictions cause a significant reduction in the volume of harvesting, which results in a disproportionate cost to yield ration at the Papua, New Guinea site which makes the project not economically feasible in the foreseeable future.

Based on the fact that Arrow Pte. is unable to fulfill their part of the agreement, the Company has reached the conclusion that the marketing and distribution agreement has no value. Therefore, the Company has fully impaired the value of the agreement and recorded a loss on write-off of the marketing and distribution agreement of $125,000,000 at December 31, 2007. (See Note 6.)

On April 4, 2006 Arrow Resource Development Ltd. (the Company's Bermuda subsidiary) entered into an agency agreement with APR in which the Company will provide financial consultancy services to APR for an annual fee, payable as collected, equal to 10% of APR's gross revenue payable commencing upon execution. This agreement provides for the company to collect all revenues from all operations, retain its 10% fee and disperse the remaining 90% to APR and its subsidiaries. The term of the agreement is effective upon execution, shall remain in effect for ninety-nine (99) years and shall not be terminated until the expiration of at least ten (10) years. As of September 30, 2008, the Company has not recovered any revenue from this agreement.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to our allowance for doubtful accounts, inventory reserves, and goodwill and purchased intangible asset valuations, and asset impairments. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our consolidated financial statements.

 

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ALLOWANCE FOR DOUBTFUL ACCOUNTS, REVENUE RECOGNITION

We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us, we record a specific allowance to reduce the net receivable to the amount we reasonably believe will be collected. For all other customers, we record allowances for doubtful accounts based on the length of time the receivables are past due, the prevailing business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions were to worsen, additional allowances may be required in the future.

We recognize product revenue when persuasive evidence of an arrangement exists, the sales price is fixed, the service is performed or products are shipped to customers, which is when title and risk of loss transfers to the customers, and collectibility is reasonably assured.

VALUATION OF GOODWILL, PURCHASED INTANGIBLE ASSETS AND LONG-LIVED ASSETS

The Company’s only intangible asset was comprised of a marketing and distribution agreement with Arrow Pte. In accordance with SFAS 142, “Goodwill and Other Intangible Assets” this intangible agreement is no longer amortized; instead the intangible is tested for impairment on an annual basis. The Company assesses the impairment of identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:

·

Significant inability to achieve expected projected future operating results;

·

Significant changes in the manner in which the work is able to be performed what increases costs;

·

Significant negative impact on the environment.

 

We perform goodwill impairment tests on an annual basis and on an interim basis if an event or circumstance indicates that it is more likely than not that impairment has occurred. We assess the impairment of other amortizable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance to historical or projected operating results, substantial changes in our business strategy and significant negative industry or economic trends. If such indicators are present, we evaluate the fair value of the goodwill. For other intangible assets and long-lived assets we determine whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their caring value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values.

Fair value of goodwill is determined by using a valuation model based on market capitalization. Fair value of other intangible assets and long-lived assets is determined by future cash flows, appraisals or other methods. If the long-lived asset determined to be impaired is to be held and used, we recognize an impairment charge to the extent the anticipated net cash flows attributable to the asset are less than the asset's carrying value. The fair value of the long-lived asset then becomes the asset's new carrying value, which we depreciate over the remaining estimated useful life of the asset.

 

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. The adoption of FASB 163 is not expected to have a material impact on the Company’s financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.

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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of FASB 161 is not expected to have a material impact on the Company’s financial position.

 

In December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”.  SFAS No.160 requires that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, in the amount of consolidated net income attributable to the parent and to the noncontrolling interest on the face of the consolidated statement of income, and that Entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  SFAS No.160 is effective for fiscal years, beginning on or after December 15, 2008 and cannot be applied earlier. 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations,” (“FASB 141R”). This standard requires that entities recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date for any business combination consummated after the effective date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. FASB 141R is effective for fiscal years beginning after December 15, 2008.

The Company does not anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on the Company's overall results of operations or financial position, unless the Company makes a business acquisition in which there is a noncontrolling interest.

In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in Staff Accounting Bulletin 107, Share Based Payment , (“SAB 107”), for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. SAB 110 became effective for the Company on January 1, 2008. The adoption of SAB 110 is not expected to have a material impact on the Company’s financial position.

 

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

In November 2005, we discontinued and disposed of our subsidiaries except for Arrow Ltd. in conjunction with the recapitalization of the Company. The Company had no revenue during this period as Arrow Ltd. is still in the development stage. For the three and nine months ended September 30, 2008, we incurred consulting fees of $1,031,772 and $3,124,065, of which, $956,967 and $2,734,192 was related to services provided by the Management Agreement with Empire under which Empire provides the services of Chief Executive Officer and administrative services to the Company and consulting services provided by Hans Karundeng and Rudolph Karundeng under Engagement and Consulting Agreements. For the three and nine months ended September 30, 2007, we incurred consulting fees of $899,311 and $2,611,020, of which, $858,508 and $2,473,835 was related to services provided by the Management Agreement with Empire under which Empire provides the services of Chief Executive Officer and administrative services to the Company and consulting services provided by Hans Karundeng and Rudolph Karundeng under Engagement and Consulting Agreements.

REVENUES

 

There was no revenue for the three and nine months ended September 30, 2008 and September 30, 2007 as the Company is in development stage.

COST OF GOODS SOLD

 

There was no cost of goods sold for the three and nine months ended September 30, 2008 and September 30, 2007 as the Company is in development stage.

OTHER EXPENSES

Compensation, consulting and related costs increased to $1,031,772 and $3,124,065 for the three and nine months ended September 30, 2008 as compared to $899,311 and $2,611,020 for the three and nine months ended September 30, 2007, $7,955,066 for the period from inception (November 15, 2005) to December 31, 2007, and $11,079,131 for the accumulated during the development stage for the period from inception (November 15, 2005) to September 30, 2008. The increase was mostly due to consulting fees for services provided by the Management Agreement with Empire under which Empire provides the services of Chief Executive Officer and administrative services to the Company and consulting services provided by Hans Karundeng and Rudolph Karundeng under Engagement and Consulting Agreements.

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General and administrative expenses increased to $29,022 and $180,525 for the three and nine months ended September 30, 2008 as compared to $44,356 and $98.761 for the three and nine months ended September 30, 2007, $554,177 for the period from inception (November 15, 2005) to December 31, 2007, and $734,702 for the accumulated during the development stage for the period from inception (November 15, 2005) to September 30, 2008. This was primarily due to an increase in advertising and accounting expense.

Directors’ compensation increased to $65,000 and $205,000 for the three and nine months ended September 30, 2008, none for the three and nine months ended September 30, 2007, $260,178 for the year ended December 31, 2007 as compared to $465,178 accumulated during the development stage for the period from inception (November 15, 2005) to September 30, 2008. The increase was due to a December 3, 2007 resolution to compensate all members of the Board of Directors on an annualized basis of $50,000 in cash and 250,000 shares in the Company’s restricted common stock, effective January 1, 2007.

 

Delaware franchise taxes amount decreased to $105 and $315 for the three and nine months ended September 30, 2008 compared to $14,413 and $43,239 for the three and nine months ended September 30, 2007, $185,001 for the period from inception (November 15, 2005) to December 31, 2007 and $185,316 for the period from inception (November 15, 2005) to September 30, 2008. The Company is delinquent in its filing and payment of the Delaware Franchise Tax report and, accordingly, is not in good standing. At September 30, 2008, the Company has estimated unpaid Delaware franchise taxes for the years ended December 31, 2007, 2006 and 2005 in the amount of $57,650, $57,650 and $69,699, respectively. The Company did not file their tax returns on time due to an administrative oversight. The Company hopes to file the delinquent tax returns in the third quarter of 2008 and pay the amount owned in full during the fourth quarter of 2008.

Total operating expenses during the development stage increased to $1,125,899 and $3,509,905 for the three and nine months ended September 30, 2008 as compared to $958,080 and $2,753,020 for the three and nine months ended September 30, 2007, $8,954,422 for the period from inception (November 15, 2005) to December 31, 2007, and $12,464,327 accumulated during the development stage for the period from inception (November 15, 2005) to September 30, 2008.

On March 31, 2008, the Company received a $150,000 non-interest bearing advance from John Marozzi, which is due on demand. As payment for his services, the Company will repay the full amount of the note plus 1,000,000 shares of unregistered restricted common stock. The Company recorded $40,000 of debt issue costs related to the 1,000,000 shares of common stock that are now issuable John Marozzi as of March 31, 2008 (See Note 5). On May 5, 2008, John Marozzi received repayment of $50,000 from the Company leaving a balance of $100,000 unpaid principal as of September 30, 2008.

On April 8, 2008, the Company received a $50,000 non-interest bearing advance from Barry Weintraub, which was due on demand. In repayment, the Company repaid the full amount of the note on April 30, 2008 and is obligated to issue 2,000,000 shares of the Company’s unregistered restricted common stock to Barry Weintraub. The Company recorded $120,000 in debt issue costs related to the 2,000,000 shares of common stock that were issuable to Barry Weintraub as of September 30, 2008 (See Note 5).

On April 24, 2008, the Company received a $38,000 non-interest bearing advance from Christopher T. Joffe, which is due on demand. In repayment, the Company will repay the full amount of the note plus 304,000 shares of the Company’s unregistered restricted common stock. The Company recorded $24,320 in debt issue costs related to the 304,000 shares of common stock that are issuable to Christopher T. Joffe as of September 30, 2008 (See Note 5).

On April 24, 2008, the Company received another $38,000 non-interest bearing advance from James R. McConnaughy, which is due on demand. In repayment, the Company will repay the full amount of the note plus 304,000 shares of the Company’s unregistered restricted common stock. The Company recorded $24,320 in debt issue costs related to the 304,000 shares of common stock that are issuable to James R. McConnaughy as of September 30, 2008 (See Note 5).

On April 25, 2008, the Company received a $12,000 non-interest bearing advance from John E. McConnaughy, III, which is due on demand. In repayment, the Company will repay the full amount of the note plus 96,000 shares of unregistered restricted common stock. The Company recorded $7,680 in debt issue costs related to the 96,000 shares of common stock that are issuable to John E. McConnaughy, III as of September 30, 2008 (See Note 5).

On September 10, 2008, the Company received a $100,000 non-interest bearing advance from John Frugone, which is due on demand. In repayment, the Company will repay the full amount of the note in cash over two years from the date the note is executed. John Frugone is a relative of Peter Frugone, the Company’s CEO and also a Company Director.

In December 2007, Arrow Pte. assessed that it would be unable to harvest the timber products in Papua, New Guinea due to the fact that the widely accepted international guidelines of the World Wildlife Federation had not been adopted by Papua, New Guinea. This fact is adverse to the economic, social and environmental goals of Arrow Pte. because with the amount of land that the project was allotted combined with the agreed upon previous guidelines of the marketing and distribution agreement, yields would be significantly reduced. Given the significant change in the economics of the harvesting of the timber in Papua, New Guinea, Arrow Pte. has decided not to pursue any further operations in Papua, New Guinea given that the above restrictions cause a significant reduction in the volume of harvesting, which results in a disproportionate cost to yield ration at the Papua, New Guinea site which makes the project not economically feasible in the foreseeable future. Based on the fact that Arrow Pte. is unable to fulfill their part of the agreement, the Company has reached the conclusion that the marketing and distribution agreement has no value. Therefore, the Company has fully impaired the value of the agreement and recorded a loss on write-off of the marketing and distribution agreement of $125,000,000 at December 31, 2007. (See Note 6.)

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The Company was a party to a lawsuit where the plaintiff alleged that he was entitled to $60,000 and 1,300,000 of common stock based upon CNE’s failure to compensate him for services related to identifying financing for CNE, based upon an agreement that was entered into between CNE and the plaintiff in April 2005. On November 28, 2007, the Company settled the lawsuit with the plaintiff. In full and final settlement of the claims asserted in the action, the Company has paid the plaintiff $10,000 in cash and issued the plaintiff 200,000 shares of the Company’s common stock having a fair value of $12,000, based on the public traded share price on December 21, 2007. The settlement resulted in a loss on debt conversion of $2,000 during the year ended December 31, 2007 because an estimated liability had been recognized prior to 2007.

In May 2006, the Company was advised that it was alleged to be in default of a settlement agreement entered into in January of 2005 by CNE, its predecessor company, related to the release of unrestricted, freely-tradable, non-legend shares of stock. In August 2006, the plaintiffs, alleging the default, obtained a judgment in the 17th Judicial Circuit Court Broward County, Florida for approximately $1,000,000. On November 13, 2007, legal counsel engaged by Management commenced an action on the Company’s behalf in the above Circuit Court seeking to vacate and set aside the 2006 judgment asserting claims under Rule 1.540(b) of the Florida Rules of Civil Procedure. Our counsel’s evaluation is that the Company has only a limited chance of having the 2006 judgment opened by the Court because Florida law provides very narrow grounds for opening a judgment once a year has passed from its entry. The Courts are generally reluctant to disturb final judgments and the Company’s grounds for opening the judgment depend on the Court’s adopting a somewhat novel argument regarding such matters. If, however, the Court does open the default judgment, the Company will then have the opportunity to defend the 2006 action and, in such event, our counsel believes that the Company has a reasonable chance of succeeding in defending that claim, at least in part, based on the documents he has reviewed. As of December 31, 2007, the Company has accrued $1,053,385 related to this matter.

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LIQUIDITY AND CAPITAL RESOURCES

In November 2005, we discontinued and disposed of our subsidiaries except for Arrow Ltd. in conjunction with the recapitalization of the Company. The Company was recapitalized by the conversion of $125,000,000 preferred convertible note related to the purchase of the Marketing Agreement. As part of the recapitalization plan, the Company settled all outstanding debt except for $220,000. As of September 30, 2008 and December 31, 2007 the Company had $16 and $1,040 of cash, respectively. We had losses of $1,125,899 and $3,776,225 for the three and nine months ended September 30, 2008, and do not currently generate any revenue. We had losses of $958,080 and $2,753,020 for the three and nine months ended September 30, 2007. In order for us to survive during the next twelve months we will need to secure approximately $350,000 of debt or equity financing. We expect to raise the additional financing in the future but there can be no guarantee that we will be successful.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

At September 30, 2008, we had no off-balance sheet arrangements.

OPERATING ACTIVITIES

We used $1,787,062 of cash in our operating activities during the nine months ended September 30, 2008. We had a net loss of $3,776,225. We had an increase in stock-based directors’ compensation to be issued of $55,000, accounts payable and accrued expenses payable of $1,334,342 mostly related to compensation and management fees, debt issue costs related to note payables of $216,321, common stock to be issued for consulting and marketing services of $87,501, common stock to be issued for cash received by the Company of $50,000, and common stock to be issued for consulting and marketing services of $245,999. In addition, we had a working capital deficiency of $11,746,821 at September 30, 2008. We did not have any material commitments for capital expenditures as of September 30, 2008.

INFLATION

 

We believe that inflation does not significantly impact our current operations.

RECENT TRANSACTIONS

 

On November 20, 2007, the Board of Directors approved a private placement offering (the "Offering") approximating $2,000,000 to accredited investors at $1.00 per share of Series A Convertible Preferred Stock. The Offering will consist of the Company's Series A Convertible Preferred Stock that will be convertible into our common stock. These securities are not required to be and will not be registered under the Securities Act of 1933. Shares issued under this placement will not be sold in the United States, absent registration or an applicable exemption from registration. As of September 30, 2008, the Company has received $355,000 from investors towards 355,000 Series A Convertible Preferred Stock shares issuable under subscription agreements covering the placement offering. Each Series A Convertible Preferred Stock is convertible into 20 shares of the Company’s Common Stock. The holders of the preferred stock have no voting rights except as may be required by Delaware law, no redemption rights, and no liquidation preferences over the Common Stock holders.

On December 3, 2007, the Board of Directors approved a plan to compensate all members of the Board of Directors at a rate of $50,000 per year and 250,000 shares of Company common stock effective January 1, 2007. This compensation plan applies to any board member that belonged to the Board as of and subsequent to January 1, 2007. Those board members that were only on the Board for part of the year will received pro-rata compensation based on length of service. As of September 30, 2008, none of the shares under this plan have been issued and the Company has accrued $350,137 of cash and recorded additional paid-in capital of $115,022 for stock compensation based on the fair value of 1,750,685 shares to be issued to the members of the Board.

On May 15, 2008, the Board of Directors approved a private placement offering (the "Offering") approximating $2,000,000 to accredited investors at $1.00 per share of Series C Convertible Preferred Stock. The Offering will consist of the Company's Series C Convertible Preferred Stock that will be convertible into our common stock. These securities are not required to be and will not be registered under the Securities Act of 1933. Shares issued under this placement will not be sold in the United States, absent registration or an applicable exemption from registration. As of September 30, 2008, the Company received $25,000 from investors towards the fulfillment of the financing agreement.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We conduct no hedging activity. We have no derivative contracts.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures 

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The Company’s Chief Executive Officer and acting Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending September 30, 2008 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and acting Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. As a result of the ineffectiveness of our controls, a description of a litigation in which the Company is a party was not accurately described in the Company’s Form 10K filed on April 15, 2008. In addition, the Company’s financial statements did not reflect a reserve relating to a judgment against the Company in this litigation. The Company is currently in the process of evaluating its options to fix the deficiency in internal controls.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, under the supervision of the Company’s Chief Executive Officer and acting Chief Financial Officer, conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2008 under the criteria set forth in the in Internal Control—Integrated Framework.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.   Management has determined that material weaknesses exist due to a lack of segregation of duties, resulting from the Company's limited resources.

 

This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Quarterly Report on Form 10-Q.

 

Changes in Internal Control Over Financial Reporting

 

Item 1.

Legal Proceedings

 

The Company was a party to a lawsuit where the plaintiff alleged that he was entitled to $60,000 and 1,300,000 of common stock based upon CNE’s failure to compensate him for services related to identifying financing for CNE, based upon an agreement that was entered into between CNE and the plaintiff in April 2005. On November 28, 2007, the Company settled the lawsuit with the plaintiff. In full and final settlement of the claims asserted in the action, the Company has paid the plaintiff $10,000 in cash and issued the plaintiff 200,000 shares of the Company’s common stock having a fair value of $12,000, based on the public traded share price on December 21, 2007. The settlement resulted in a loss on debt conversion of $2,000 during the year ended December 31, 2007 because an estimated liability had been recognized prior to 2007.

In May 2006, the Company was advised that it was alleged to be in default of a settlement agreement entered into in January of 2005 by CNE, its predecessor company, related to the release of unrestricted, freely-tradable, non-legend shares of stock. In August 2006, the plaintiffs, alleging the default, obtained a judgment in the 17th Judicial Circuit Court Broward County, Florida for approximately $1,000,000. On November 13, 2007, legal counsel engaged by Management commenced an action on the Company’s behalf in the above Circuit Court seeking to vacate and set aside the 2006 judgment asserting claims under Rule 1.540(b) of the Florida Rules of Civil Procedure. Our counsel’s evaluation is that the Company has only a limited chance of having the 2006 judgment opened by the Court because Florida law provides very narrow grounds for opening a judgment once a year has passed from its entry. The Courts are generally reluctant to disturb final judgments and the Company’s grounds for opening the judgment depend on the Court’s adopting a somewhat novel argument regarding such matters. If, however, the Court does open the default judgment, the Company will then have the opportunity to defend the 2006 action and, in such event, our counsel believes that the Company has a reasonable chance of succeeding in defending that claim, at least in part, based on the documents he has reviewed. As of December 31, 2007, the Company has accrued $1,053,385 related to this matter.

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Item 1A.

Risk Factors

Item 1A. “Risk Factors” of our Annual Report on Form 10-KSB for the year ended December 31, 2007 includes a detailed discussion of our risk factors. There have been no significant changes to our risk factors as set forth in our 2007 Form 10-KSB.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

On November 20, 2007, the Board of Directors approved a private placement offering (the "Offering") approximating $2,000,000 to accredited investors at $1.00 per share of Series A Convertible Preferred Stock. The Offering will consist of the Company's Series A Convertible Preferred Stock that will be convertible into our common stock. These securities are not required to be and will not be registered under the Securities Act of 1933. Shares issued under this placement will not be sold in the United States, absent registration or an applicable exemption from registration. As of September 30, 2008, the Company has received $355,000 from investors towards the fulfillment of this financing agreement. The holders of the preferred stock have no voting rights except as may be required by Delaware law, no redemption rights, and no liquidation preferences over the Common Stock holders.

On December 3, 2007, the Board of Directors approved a plan to compensate all members of the Board of Directors at a rate of $50,000 per year and 250,000 shares of Company common stock effective January 1, 2007. This compensation plan applies to any board member that belonged to the Board as of and subsequent to January 1, 2007. Those board members that were only on the Board for part of the year will received pro-rata compensation based on length of service. As of September 30, 2008, none of the shares under this plan have been issued and the Company has accrued $350,137 of cash and recorded additional paid-in capital of $115,022 for stock compensation based on the fair value of 1,750,685 shares to be issued to the members of the Board.

On May 15, 2008, the Board of Directors approved a private placement offering (the "Offering") approximating $2,000,000 to accredited investors at $1.00 per share of Series C Convertible Preferred Stock. The Offering will consist of the Company's Series C Convertible Preferred Stock that will be convertible into our common stock. These securities are not required to be and will not be registered under the Securities Act of 1933. Shares issued under this placement will not be sold in the United States, absent registration or an applicable exemption from registration. As of September 30, 2008, the Company received $25,000 from investors towards the fulfillment of the financing agreement.

Item 5.

Other Information

 

None

 

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Item 6.

Exhibits

31.1  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

31.2  Rule 13a-14(a)/15d-14(a) Certification of the Principal Accounting Officer

 

32.1  Certification Pursuant to 18 U.S.C. §1350 of Chief Executive Officer

 

32.2  Certification Pursuant to 18 U.S.C. §1350 of the Principal Accounting Officer

 

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SIGNATURES

 

In accordance with Section 13(a) or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ARROW RESOURCES DEVELOPMENT, INC.
Dated: November 17, 2008	By:	/S/  PETER J. FRUGONE
		Peter J. Frugone President and Chief Executive Officer

 

Dated: November 17, 2008	By:	/S/  PETER J. FRUGONE
		Peter J. Frugone Principal Accounting Officer

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