Acquisition and Divestiture/Restatements

9 Months Ended

Sep. 30, 2012

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 September 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 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 $653,926 for the nine months ended September 30, 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 determination 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 concluded that it never really had control and that the use of the acquisition method of accounting was not appropriate. Upon reconsideration, management also 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 real 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 for the three and nine months ended September 30, 2011 and statements of cash flows for the nine months ended September 30, 2011 to reflect the deconsolidation of Triple 8, a restatement for shares issued for services of $360,000 that had been previously been capitalized and correction of the weighted average common shares outstanding.

FOREX INTERNATIONAL TRADING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011

	Three months ended September 30,2011									Nine months ended September 30,2011
	As Previously									As Previously
	Reported			Net Change			As Restated			Reported			Net Change			As Restated
Revenues:
Income from foreign currency operations	$	-		$	-		$	-		$	616		$	-		$	616
Consulting and services		-			-			-			10,000			-			10,000
		-			-			-			10,616			-			10,616
Cost of revenues		-			-			-			-			-			-
		-			-			-			10,616			-			10,616
General and administrative expenses		179,925			454			180,379			702,380			360,454			1,062,834
Loss from operations		(179,925	)		(454	)		(180,379	)		(691,764	)		(360,454	)		(1,052,218	)

Other income (expenses):
Interest expense, net of interest income		(26,216	)		-			(26,216	)		(72,034	)		-			(72,034	)
Impairment expense to goodwill from Variable Interests		(24,800,000	)		24,800,000			-			(24,800,000	)		24,800,000			-
Income from equity interest in Variable Interests		-			-			-			394,309			(394,309	)		-
Total other income (expenses)		(24,826,216	)		24,800,000			(26,216	)		(24,477,725	)		24,405,691			(72,034	)

(Loss) income before income taxes		(25,006,141	)		24,799,546			(206,595	)		(25,169,489	)		24,045,237			(1,124,252	)

Income tax expense		-			-			-			-			-			-

Net (loss) income	$	(25,006,141	)	$	24,799,546		$	(206,595	)	$	(25,169,489	)	$	24,045,237		$	(1,124,252	)

Net (loss) income per share:
Basic and diluted	$	(0.60	)	$	0.59		$	(0.01	)	$	(0.61	)	$	0.58		$	(0.03	)

Weighted average number of common
shares outstanding:
Basic and diluted		41,428,796			(6,844,412	)		34,584,384			41,428,796			3,217,772			44,646,568

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2011


	As Previously
	Reported			Net Change			As Restated
Cash flows from operating activities:
Net loss	$	(25,169,491	)	$	24,045,239		$	(1,124,252	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation of property and equipment		4,303			-			4,303
Amortization of intangible assets		39,682			(172	)		39,510
Amortization of debt discount		38,390			(1,515	)		36,875
Common shares issued to consultants for services		-			362,000			362,000
Income fron equity interest in Triple 8 Limited		(394,309	)		394,309			-
Impairment expense to goodwill from variable interest		24,800,000			(24,800,000	)		-
Change in accounting method for investment in variable interest -
reclassification of goodwill		3,531,487			(3,531,487	)		-
Foreign currency adjustment		1,533			(1,533	)		-
Changes in assets and liabilities:
Accrued interest on notes receivable		-			(32,138	)		(32,138	)
Accounts receivable and prepaid expenses		8,075			(14,839	)		(6,764	)
Other assets		(4,487,375	)		4,487,375			-
Secured note and debt discount		51,205			(51,205	)		-
Accounts payable and accrued expenses		(2,048,521	)		2,375,457			326,936
Other current liabilities		460,767			(460,767	)		-
Other liabilities		(75,000	)		75,000			-
Accrued interest on notes payable		98,818			(8,033	)		90,785

Net cash provided by (used in) operating activities		(3,140,436	)		2,837,691			(302,745	)

Cash flows from investing activities:
Investment in additional 5% of Triple 8 Limited		(1,800,000	)		1,800,000			-
Issuance of a short-term receivable		-			(150,000	)		(150,000	)

Net cash (used in) provided by investing activities		(1,800,000	)		3,600,000			(150,000	)

Cash flows from financing activities:
Issuance of common stock in private placement		28,345			-			28,345
Purchase of shares returned to treasury		(10,529	)		-			(10,529	)
Retirement of common shares to purchase Triple 8 Limited		(25,800,800	)		25,800,800			-
Issuance of Series A preferred shares to replace common shares		25,800,080			(25,800,080	)		-
Issuance of shares to reduce note		71,736			(71,736	)		-
Series A shares issued to fund acquisition of additional 5% of Triple 8 Limited		1,200,000			(1,200,000	)		-
Note payable issued to fund acquisition of additional 5% of Triple 8 Limited		600,000			(600,000	)		-

Net cash provided by (used in) financing activities		1,888,832			(1,871,016	)		17,816

Net increase (decrease) in cash and cash equivalents		(3,051,604	)		2,616,675			(434,929	)
Cash and cash equivalents, beginning of period		3,078,339			(2,618,190	)		460,149

Cash and cash equivalents, end of period	$	26,735		$	(1,515	)	$	25,220

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Restricted common shares issued to pay certain expenses	$	-		$	71,736		$	71,736
Note issued to fund acquisition of additional 5% interest in
Triple 8 Limited	$	-		$	600,000		$	600,000
Issuance of Preferred Shares Series A - Triple 8 limited	$	25,800,080		$	(25,800,080	)	$	-
Equity interest from Triple 8 limited, YTD	$	(25,800,000	)	$	25,800,000		$	-
Impairment expense from variable interest	$	394,309		$	(394,309	)	$	-
Issuance of Series A preferred shares to acquire an
additional 5% in Triple 8 Limited	$	1,200,000		$	-		$	1,200,000
Conversion of debt to common shares	$	-		$	200,000		$	200,000
Cancellation of common shares issued to Forex NYC	$	-		$	200,000		$	200,000
Accrued interest on notes payable	$	137,276		$	137,276		$	-
Accrued interest on notes receivable	$	32,142		$	32,142		$	-