Acquisition and Divestiture

12 Months Ended

Dec. 31, 2011

Acquisition And Divestiture

Acquisition and Divestiture

3.      Acquisition and Divestiture

Investment in Private Company—Triple 8

On November 17, 2010, the Company entered into a Share Exchange Agreement, which closed on December 30, 2010, to acquire 17,924 common shares, representing 44.9% of the issued and outstanding shares of Triple 8 Limited (“Triple 8”) from A.P. Holdings Limited (“APH”) (the “APH Agreement”).  In consideration for its purchase the Company issued 25,000,000 shares of common stock and a Note Payable (the “APH Note”) in the principal amount of $1,200,000, bearing interest at an annual rate of 6% and convertible into 6 million shares of common stock.  The APH Note was originally due on February 15, 2011.  Concurrently, certain shareholders agreed to surrender 70,000,000 shares of the Company’s common stock for cancellation to avoid diluting the ownership of the other existing shareholders.

Following the purchase of Triple 8 shares from APH, the Company entered into another Share Exchange Agreement to acquire 1,996 common shares, or 5% of the issued and outstanding common shares of Triple 8, from the H.A.M. Group Limited (“HAM”).  As a result, the Company’s ownership of Triple 8 increased to 49.9% of the issued and outstanding common shares.  As consideration for its purchase, the Company issued HAM 12,000 shares of Series A Preferred Stock and a 6% Convertible Debenture for $600,000, due June 30, 2011 (the “HAM Note”).  The Series A Preferred Stock has a stated value of $100 per share and is convertible into common stock at a conversion price of $0.30 per share, thus representing 4,000,000 shares of common stock of the Company.

The Company has defaulted on its note payable to APH and on its obligation under the HAM Note.  In order to avoid costly litigation and the potential detrimental impact of a judgment to the Company as a result of two defaults, the Company entered into an agreement to annul its purchases of Triple 8 stock.  As a part of the Annulment:

·   Triple 8 has agreed to pay the Company $2,001,000 (the “Triple Payments”) over time through November 2012.  If Triple 8 fails to make any of the payments for a period of 60 days, it must transfer the original number of its common shares (17,924) purchased back to the Company.  In addition, Triple 8 is not entitled to have any previous payments returned.

·   The Company issued a new $1,000,000 promissory note (the "CDOO Note") to an assignee of HAM and APH as consideration for the termination of the APH Note and the HAM Note, which were both in default.  The assignee has the ability to foreclose on all shares of Triple 8 held by the Company.  The CDOO note bears interest at an annual rate of ten percent (10%) and is due and payable in full on November 30, 2012.  In the event that Triple 8 fails to make the Triple Payments, then the amount payable under the CDOO Note is to be reduced by half of the amount of any missed payment.

·   APH and HAM have agreed to return all of their stock holdings to the Company for cancellation.

The Annulment closed on December 7, 2011, and the Company received its initial Triple Payment of $732,000 in cash at that time. Subsequently, the Company received Triple Payments of $73,214, $68,214 and $78,214 for the months of January, February and March 2012.

The Company initially accounted for its acquisition of Triple 8 using the acquisition method as prescribed by GAAP.  Under the acquisition method, the acquirer must recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their acquisition date fair values.  Although the Company acquired less than 50% of the ownership of Triple 8, the use of the acquisition method and the accounting treatment of Triple 8 was considered appropriate because the Company believed that it had acquired control of Triple 8.  The basis behind the determination that the Company acquired control of Triple 8 even though it owned a minority stake, was that an employee of the Company became the sole member of the Board of Triple 8’s operating subsidiary and continued to be in that role until June 2011.  In addition, the Company believed that Triple 8 was subject to consolidation under GAAP as a Variable Interest Entity.

However, in June 2011, Triple 8’s operating subsidiary’s management unilaterally removed the Company’s employee from its Board and asserted its control over business operations.  Since then, the Company has reevaluated its determinations that it had acquired control of Triple 8 and that Triple 8 was subject to consolidation as a Variable Interest Entity.  As a result, management has concluded that it never really had control and that the use of the acquisition method of accounting was not appropriate.  Upon reconsideration, management also has concluded that Triple 8 was not subject to consolidation as a Variable Interest Entity essentially because the Company had no equity investment at risk.  In coming to these conclusions, the Company considered the following:

1.   The fair value of the consideration paid in both of the Share Exchange Agreements is questionable.  The original consideration included the Company’s stock and notes payable.  Given that the fair value of the Company’s stock and the fair value of Triple 8 was difficult to determine and that the Company never made any cash payments for its obligations under the notes payable, there is a legitimate argument that no consideration was paid for the Triple 8 stock received under the Share Exchange Agreements.

a.   With respect to exchange value of the company’s stock, management takes into account that at the time of the Share Exchange Agreements the Company’s stock was not trading.  [Since then, the Company’s stock has been a thinly traded penny stock that has had a high level of price volatility with respect to what stock has been traded and has not been rated by any analysts.]

b.   With respect to value in use of the would-be acquiree, management takes into account that at the time of the Share Exchange Agreements Triple 8 was a newly formed entity in business for only 2 years.  Under the circumstances, any valuation of Triple 8 would be highly subjective.  A market or cost approach to valuing Triple 8 was not feasible and an income approach requires highly subjective estimates about future operations, profits, and cash flows.

c.   The Company’s failure to make debt payments and the continuing revisions indicate that the Company’s Notes Payable were of little value to Triple 8’s sellers.

2.   The unilateral removal of the Company’s employee from the Triple 8 Board and Triple 8’s operating subsidiary management assertion of its control over business operations indicates the Company’s inability to control Triple 8.

These considerations have led the Company to conclude that the purchase of Triple 8 involved no consideration.  Furthermore, the Share Exchange Agreement transactions do not meet the conditions necessary to qualify as a business combination achieved without the transfer of consideration under GAAP.

The Company has also considered the use of the equity method and the cost method of accounting in connection with the Share Exchange Agreement transactions for the purchase of Triple 8.  Generally, GAAP requires that investments in common stock or in entities over which the investor can exercise significant influence, but not control, be accounted for using the equity method.  Otherwise, an investment should be accounted for at cost.  In addition, the Company believes that its investment in Triple 8 should be accounted for at cost because it did not have significant influence over the period from the closing of the APH Agreement through to date of the annulment agreement.  While the Company did not have significant influence over Triple 8 during that period, the counterparties to the annulment agreement acknowledged the Company’s investment by entering into the annulment agreement.  Therefore, these financial statements have been restated to present the investment in Triple 8 on a cost basis, with cost being determined by the market value of the Company’s stock paid and the stated value of the note payable issued under the APH Agreement.  The gain on settlement of Triple 8 is accounted for as other income in the 2011 statement of operations.

A restated and reclassified consolidated balance sheet as of December 31, 2010 along with a restated and reclassified consolidated statement of cash flows for the year then ended are presented below. The Company had no change to its 2010 statement of operations since the Share Exchange Agreement effectively closed on December 30, 2010.

	As Previously Reported			Net Change			As Restated
ASSETS
Current assets :
Cash and cash equivalents	$	3,078,339		$	(2,618,190	)	$	460,149
Accounts receivable		-			20,000			20,000
Notes and short term receivables		473,146			(49,998	)		423,148
Prepaid expenses and other current assets		188,075			(184,839	)		3,236
Total current assets		3,739,560			(2,833,027	)		906,533
Property and equipment, net		1,442,222			(1,424,561	)		17,661
Goodwill		26,594,710			(26,594,710	)		-
Investment in Triple 8 Limited		-			8,700,000			8,700,000
Other assets		346,755			(76,516	)		270,239
Total assets	$	32,123,247		$	(22,228,814	)	$	9,894,433
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities :
Accounts payable and accrued expenses	$	3,416,480		$	(3,229,939	)	$	186,541
Notes payable and accrued interest, current portion		1,208,800			-			1,208,800
Total current liabilities		4,625,280			(3,229,939	)		1,395,341
Long-term liabilities:
Notes payable and accrued interest, net of current portion		654,658			(75,890	)		578,768
Other long-term liabilities		75,000			(75,000	)		-
Total liabilities		5,354,938			(3,380,829	)		1,974,109
Stockholders' equity:
Series A Preferred stock		-			-			-
Series B Preferred stock		-			-			-
Common stock		636			-			636
Non-controlling Interest		497,360			(497,360	)		-
Treasury stock at cost		-			-			-
Additional paid-in capital		26,760,664			(18,350,625	)		8,410,039
Accumulated deficit		(490,351	)		-			(490,351	)
Total stockholders' equity		26,768,309			(18,847,985	)		7,920,324
Total liabilities and stockholders' equity	$	32,123,247		$	(22,228,814	)	$	9,894,433

	As Previously Reported			Net Change			As Restated
Cash Flows From  Operating Activities:
Net loss	$	(439,654	)	$	-		$	(439,654	)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:					-
Loss on termination of lease		-			32,809			32,809
Loss on disposition of joint venture		-			35,512			35,512
Depreciation  of  property and equipment		105,458			(94,741	)		10,717
Amortization of intangible assets		-			35,120			35,120
Amortization of debt discount		-			24,110			24,110
Common stock issued to consultants for services rendered		-			1,200			1,200
Common stock issued to an executive		-			40,000			40,000
Other adjustments		(158,566	)		158,566			-
Changes in assets and liabilities:
Accounts receivable		(23,236	)		3,236			(20,000	)
Prepaid expenses and other current assets		-			(3,236	)		(3,236	)
Accrued interest on notes receivable		-			(23,148	)		(23,148	)
Accounts payable and accrued expenses		160,841			(700	)		160,141
Accrued interest on notes payable		-			38,329			38,329
Net cash used in operating activities		(355,157	)		247,057			(108,100	)
Cash flows from investing activities:
Purchase of fixed assets		(20,097	)		(358	)		(20,455	)
Cash received from investment in subsidiary		2,618,190			(2,618,190	)
Acquisition of private company		(27,000,000	)		27,000,000
Leasehold improvements		(40,732	)		-			(40,732	)
Net cash provided by (used in) investing activities		(24,442,639	)		24,381,452			(61,187	)
Cash flows from financing activities:
Issuance of common stock in private placement		441,200			278,800			720,000
Advance on issuance of common stock		520,000			(520,000	)		-
Issuance of note payable in connection wih acquisition		1,200,000			(1,200,000	)		-
Issuance of shares in connection with acquisition		25,800,000			(25,800,000	)		-
Issuance of notes payable to affiliate party		54,159			(4,159	)		50,000
Issuance of convertible notes to third-party		511,507			(511,507	)		-
Consideration returned for return of shares		(700	)		700			-
Investment in securied note		(411,047	)		411,047			-
Investment in debt discount		(100,000	)		100,000			-
Investment in project		(33,932	)		33,932			-
Investment in joint venture		-			(35,512	)		(35,512	)
Investment in licensing and websites		(105,359	)		-			(105,359	)
Net cash provided by financing activities		27,875,828			(27,246,699	)		629,129
Net (decrease) increase in cash and cash equivalents		3,078,032			(2,618,190	)		459,842
Cash and cash equivalents, beginning of year		307			-			307
Cash and cash equivalents, end of year	$	3,078,339		$	(2,618,190	)	$	460,149