Acquisition and Divestiture/Restatements

3 Months Ended

Mar. 31, 2012

Acquisition And Divestiturerestatements

Acquisition and Divestiture/Restatements

3. Acquisition and Divestiture/Restatements

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 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 against the Company, as a result of two defaults, the Company entered into an agreement to annul its purchases of its ownership interest in Triple 8. 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 in the aggregate amount of $214,642 for the months of January, February and March 2012 per the terms of the agreement.

The Company initially accounted for its acquisition of Triple 8 using the acquisition method as prescribed by U.S. 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 were 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 U.S. 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:

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.

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.]

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 U.S. 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, U.S. 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.

Presented below are restatements of the statement of operations, and statement of cash flows for the three months ended March 31, 2011 to reflect the deconsolidation of Triple 8 and also a restatement for shares issued for services of $210,000 that had been previously been capitalized,.

	As Previously
	Reported			Net Change			As Restated

Revenue :
Income from foreign currency operations	$	3,178,233		$	(3,177,617	)	$	616
Consulting and services		14,232			(14,232	)		-
Total revenue		3,192,465			(3,191,849	)		616

Cost of goods sold		601,832			(601,832	)		-

General and administrative expenses		2,616,906			(2,148,802	)		468,105

Loss from operations		(26,273	)		(441,215	)		(467,489	)

Minority interest		238,960			(238,960	)		-

Other income (expense):
Interest expense, net of interest income		(139,404	)		129,060			(10,344	)
Total other income (expense)		(139,404	)		129,060			(10,344	)

Loss before income taxes		(404,637	)		(73,196	)		(477,833	)

Income tax expense		(23,126	)		23,126			-

Net loss	$	(427,763	)	$	(50,070	)	$	(477,833	)

Net loss per share:
Basic and diluted	$	(0.01	)	$	(0.00	)	$	(0.01	)

Weighted average number of common shares outstanding:
Basic and diluted		63,826,663			782,829			64,609,492

	As Previously
	Reported			Net Change			As Restated
Cash flows from operating activities:
Net loss	$	(427,763	)	$	(50,070	)	$	(477,833	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment		154,891			(154,193	)		698
Minority interest in subsidiary		238,960			(238,960	)		-
Common shares issued to consultants for services		212,000			-			212,000
Foreign currency adjustment		(71,876	)		71,876			-
Changes in assets and liabilities:
Accounts receivable and prepaid expenses		(491,420	)		491,420			-
Accrued interest on notes receivable		-			(21,403	)		(21,403	)
Accounts payable and accrued expenses		1,094,145			(1,160,110	)		(65,965	)
Accrued interest on note payable		31,750			-			31,750

Net cash provided by (used in) operating activities		740,686			(1,061,439	)		(320,753	)

Cash flows from investing activities:
Issuance of a short-term receivable		-			(150,000	)		(150,000	)
Purchase of fixed assets		(1,404,628	)		1,404,628			-

Net cash provided by (used in) investing activities		(1,404,628	)		1,254,628			(150,000	)

Cash flows from financing activities:
Issuance of common stock in private placement		28,345			-			28,345
Issuance of shares to reduce a note payable		71,736			(71,736	)		-

Net cash provided by (used in) financing activities		100,081			(71,736	)		28,345

Net (decrease) increase in cash and cash equivalents		(563,862	)		121,454			(442,408	)
Cash and cash equivalents, beginning of period		3,078,339			(2,618,190	)		460,149

Cash and cash equivalents, end of period	$	2,514,478		$	(2,496,737	)	$	17,741


NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued interest on notes payable	$	31,750		$	(31,750	)	$	-
Accrued interest on notes receivable	$	12,000		$	(12,000	)	$	-
Restricted common shares issued to ATL for certain draws
on a note to pay certain expenses	$	71,736		$	-		$	71,736
Issuance of shares for services	$	212,000		$	(212,000	)	$	-