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WORLDSTAR ENERGY, CORP. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition, changes in financial condition and results of operations for the year ended March 31, 2008 and 124-day period ended March 31, 2007 should be read in conjunction with our most recent audited consolidated financial statements for the year ended March 31, 2008 and 124-day period ended March 31, 2007, which are included in this annual report, and the related notes to the consolidated financial statements. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this annual report. Overview of Our Business We were incorporated on November 8, 1996 under the laws of the State of Nevada under the name "Flintrock Financial Services, Inc." Concurrent with the reverse merger with Tysa Corporation on March 1, 2000 we changed our name to "Auteo Media, Inc." effective March 14, 2000. On April 1, 2005 we changed our name to "WorldStar Energy, Corp." and amended our articles of incorporation to increase our authorized share capital to 100,000,000 shares of common stock. Our principal executive offices are located at Rm 803, 8/F, Jubilee Centre, No. 42 Gloucester Road, Wanchai, Hong Kong, China. 15 -------------------------------------------------------------------------------- We became a "shell" company as defined in Rule 12b-2 of the Exchange Act upon the sale of substantially all of our assets in July 2002. Acquisition of National Base Investment Limited On August 14, 2007, we completed the acquisition of all of the issued and outstanding shares of National Base, a company incorporated pursuant to the laws of the British Virgin Islands on November 28, 2006, from Jewel, also incorporated pursuant to the laws of the British Virgin Islands and the principal of which was our then President and Chief Executive Officer. The acquisition was completed in accordance with the Share Purchase Agreement dated February 12, 2007 among our Company, Jewel and National Base. At the time of the acquisition, National Base owned interests in 50 mineral exploration licenses in Mongolia. National Base owns 98% of BGI, a Hong Kong corporation, which in turn owns 52% of BGHK. The other 48% of BGHK shares are owned by a Hong Kong businessman as to 18% and a Mongolian businessman as to 30%. They currently remain minority shareholders in the Company. BGHK owns 100% of BGL, a Mongolian corporation. BGL owned the 50 mineral exploration licenses over properties in Mongolia. The Mongolian licenses covered an aggregate of some 817,000 hectares (8,200 square kilometers) of lands believed to be prospective for base and precious minerals. The properties contained no known reserves of any type of minerals. At the time of our acquisition of National Base, our plan was to organize the Mongolian licenses and prioritize exploration targets, as exploration work was required to further delineate and expand the known mineralization on the properties. As well, prospecting work and database reviews of other historical work were to be undertaken. We filed a Current Report on Form 8 K with the SEC on August 27, 2007 which provides, among other things, further information relating to the acquisition of National Base and the properties we had planned to explore, including risk factors relating to our business. We also filed a current report on December 20, 2007 disclosing that National Base, as the legal subsidiary, is treated as the acquiring company with the continuing operations. As National Base constitutes the operations of the Company, the Company has changed its fiscal year end to March 31, thereby adopting the same fiscal year end as National Base. In accordance with SEC guidance, as National Base constitutes the accounting acquirer, no transition report is required in connection with this change in year end. Forfeiture of Mineral Exploration Licenses As at March 31, 2008, we had not engaged in any exploration activities on the properties covered by the Mongolian licenses, as we had not yet completed our analysis of the existing database nor prioritized our exploration targets. Due in large part to the economic recession that commenced in the United States in December 2007, and the general worldwide economic downturn that followed, we were unable to raise sufficient financing to commence our planned exploration activities on the properties covered by the Mongolian licenses. As a result, effective June 30, 2009, our Company was forced to cease operations in Mongolia, and we were unable to maintain our interests in the Mineral Exploration License Certificates issued by the Minerals and Petroleum Authority of Mongolia. Accordingly, the exploration rights represented by the Mongolian licenses were forfeited, our Company wrote off the remaining book value of $7,317,739 as of March 31, 2008, and we once again became a "shell" company as defined in Rule 12b-2 of the Exchange Act. 16 -------------------------------------------------------------------------------- Our Plan of Operations Overview As reported in our current report on Form 8-K filed with the SEC on July 14, 2011, we have acquired an exclusive sublicense dated June 29, 2011 from Fire Block Technologies Inc. to use and apply, in Southeast Asia, including China, the patent-pending processes and solutions licensed by Fire Block Technologies Inc. from Fire Block International Inc., a private Canadian company, for the manufacture of engineered construction products from palm oil tree waste material with zero ignition and zero flame spread properties. Fire Block Technologies Inc. is a private Barbados company that controls the exclusive worldwide license outside of Canada for the sale, marketing and distribution of ZeroignitionTM Solution together with the sub-licensing rights for the patent-pending ZeroignitionTM New Materials Technology. ZeroignitionTM Solution is a proprietary formula, which when used in conjunction with the patent pending ZeroignitionTM New Materials Technology, is capable of creating a wide range of wood-based products with non-combustible characteristics ("ZeroignitionTM Products"). These new and unique revolutionary technologies and products, which demonstrate extreme flame resistance and highly efficient thermal protection, are non-toxic, pH neutral, environmentally friendly, non-corrosive and have withstood direct heat in excess of 18,000 degrees Fahrenheit without ignition or flame spread. Extensive testing to ASTM standards by INTERTEK Laboratories (Vancouver, Canada) and EMERCOM of Russia (Moscow) has resulted in achieving "Class A" fire ratings on wood fiber, cellulose, and textile products treated with ZeroignitionTM Solution. Siempelkamp GmbH & Co, ("Siempelkamp") (Krefeld, Germany), under contract with the owner of ZeroignitionTM technology and Fire Block Technologies, has successfully completed product testing on OSB (oriented strand board), MDF (medium density fiberboard), particle board and "ZeroignitionTM Wallboard" (a sheetrock replacement) manufactured using the ZeroignitionTM New Materials Technology, both for traditional wood fiber boards and EFB (or "empty fruit basket") waste material boards. Siempelkamp, a leader in lumber, cellulose fiber and wood products equipment manufacture and factory design, was established in 1883 and holds a 70% global market share in this industry, which represents 1,400 of the 2,000 OSB and MDF plants in the world. Our sublicense is for a 10 year term, and is renewable for successive periods of 10 years each. We have paid a CAD$150,000 acquisition fee to Fire Block Technologies by way of the issuance of 10,000,000 fully paid shares of our common stock to Fire Block Technologies Inc. We have also agreed to pay a continuing royalty to Fire Block Technologies Inc. of: (a) 1% of the net invoice price from sales of Zeroignition™ Products by our Company and any of our sublicensees; and (b) 3% of our Company's net invoice price from sales of any palm waste material that has been processed into pulp fibre ("ZiTM-Pulp") or chips ("ZiTM-Chips") and treated with ZeroignitionTM Solution for use as a raw material for the manufacture and production of engineered wood products. The 3% royalty relates to our Company's obligation under the sublicense agreement to manufacture ZiTM-Pulp and ZiTM-Chips for sale to our own future sublicensees, as well as to certain existing manufacturers of Zeroignition™ Products in the territory covered by the sublicense. In addition, we have agreed to purchase from Fire Block Technologies certain minimum quantities of ZeroignitionTM Solution during each year of the term of the sublicense agreement, as follows: year 1 - CAD$5,000,000; year 2 - CAD$25,000,000; year 3 - CAD$75,000,000; year 4 and each subsequent year - CAD$100,000,000. The sublicense agreement represents a key step in our reactivation; however, our strategic plan is still contingent on, among other things, the successful completion of all documents required under a letter of intent that we have signed with the owners of Palm Oil Plantations in Indonesia for the supply of palm oil tree waste material, as well as raising financing on acceptable terms to fund the construction of the required facilities to process palm oil tree waste material and manufacture our planned products, and to fund the start-up of operations. In addition, we will have to establish relationships with suppliers and distributors in South East Asia. Accordingly, we currently remain a "shell company" as defined in Exchange Act Rule 12b-2, as we have nominal assets and nominal operations. 17 -------------------------------------------------------------------------------- Liquidity and Financial Resources We had cash of $9,908 and a working capital deficiency of $5,155,462 at March 31, 2008. Our Company's continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to pay off existing debt and provide sufficient funds for general corporate purposes, all of which is uncertain. Our consolidated financial statements contain additional note disclosures to this effect, and the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Given the forfeiture of our exploration rights represented by the Mongolian licenses, and despite our acquisition of an exclusive sublicense to manufacture ZeroignitionTM Products from palm oil tree waste material for distribution in Southeast Asia, we currently have no operations and only nominal assets. Furthermore, we presently do not have sufficient financial resources to fund the construction of the required facilities to process palm oil tree waste material and manufacture our planned ZeroignitionTM Products, or to fund the start-up of operations. During the next 12 months we anticipate that we will be in the start-up phase and that we therefore will not generate any revenue. Accordingly, we anticipate that we will require additional financing during the next 12 months to meet our anticipated capital costs and start-up expenses, currently estimated at $4,500,000. However, there can be no assurance that we will be able to obtain such financing. We believe that debt financing will not be an alternative at this time as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. We cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our anticipated capital costs and start-up expenses. In the absence of such financing, we will not be able to execute upon our plan of operations. Cash and Working Capital The following table sets forth our cash and cash equivalents and working capital as of March 31, 2008 and 2007: As of As of March 31, March 31, 2008 2007 Cash and cash equivalents $ 9,908 $ 24,146 Working capital surplus (deficiency) $ (5,155,462 ) $ (7,324,589 ) 18 -------------------------------------------------------------------------------- Acquisition of National Base On August 14, 2007, the Company issued 30,000,000 shares pursuant to the Acquisition to acquire a 100% interest in National Base, together with an additional 2,000,000 shares issued in facilitation of this transaction. Private Placement The Company also completed a private placement financing of 22,000,000 at a price of US$0.25 per share for gross proceeds of US$5,500,000 on August 14, 2007. A financing fee of 2,200,000 shares was also paid. Debt settlement Upon closing of the Acquisition, 931,700 shares were issued for debt and other settlements. Results of Operations - Year Ended March 31, 2008 and 124-Day Period Ended March 31, 2007 The following table sets forth our consolidated loss from operations during the fiscal year ended March 31, 2008 and 124-day period ended March 31, 2007. Consolidated Gain (Loss) From Operations Year Ended 124-Day March 31, Period Ended 2008 March 31, 2007 Net sales $ - $ - General and administrative expenses 2,896,770 20,283 Write-off of mineral exploration rights 7,317,739 - Other items 2,796 812 Loss from operations $ 10,217,305 $ 21,090 Write-off of Mineral Exploration Rights Effective June 30, 2008, the Company ceased active mineral exploration operations in Mongolia and was not able to fund sufficient activities in order to maintain its interests in the Mineral Exploration License Certificates issued by the Minerals and Petroleum Authority of Mongolia. Accordingly, the exploration rights represented by those licenses were forfeited and the Company wrote off the remaining book value of $7,317,739 as of March 31, 2008. Amortization Our amortization and amortization expenses increased to $1,323,133 in 2008, as compared to $263 in 2007. The increase was primarily due to the amortization of mineral exploration rights of $1,318,475 in 2008 compared to $Nil in 2007. The remainder was due to the increase in accumulated amortization of property, plant and equipment in 2008 as compared to 2007. Property Exploration and Maintenance Property exploration and maintenance increased to $419,836 in 2008 as compared to $Nil in 2007. The increase was due to the Acquisition of National Base during the year ended March 31, 2008 which did not have any mining operations for its initial 124 days. 19 -------------------------------------------------------------------------------- General and Administrative Expenses Our general and administrative expenses increased to $1,153,801 during 2008 as compared to $20,020 in 2007. The increase in general and administrative expenses is primarily due to a full year in 2008 as compared to only 124 days in the 2007 period. In addition, during 2008, the following general and administrative expenses increased due to the Acquisition of National Base. Audit fees increased to $73,797 in 2008 compared to $20,000 in the 2007. New expenditure items such as building management fee (2008 - $8,912; 2007 - $Nil); filing fees (2008 - $4,838; 2007 - $Nil); business travels (2008 -$40,048; 2007 - $Nil); environmental protection fees (2008 - $6,625; 2007 - $Nil); legal and professional fees (2008 - $641,292; 2007 - $Nil); management fees (2008 - $40,000; 2007 - $Nil); office expenses (2008 - $56,408; 2007 - $Nil); rent (2008 - $28,849; 2007 - $Nil); Salaries (2008 - $38,136; 2007 - $Nil); and miscellaneous expenditures (2008 - $213,763; 2007 - $Nil) were included in the year ended March 31, 2008. Of these expenditures, $86,411 was incurred by WorldStar which was included in 2008 due to the Acquisition of National Base compared to $Nil in the 2007 period. Write-off of Mineral Exploration Rights Write-off of mineral exploration rights increased to $7,317,739 in 2008 as compared to $Nil in 2007. The increase was due to the forfeiture of mineral licenses subsequent to March 31, 2008. Finance Costs Finance costs are primarily attributable to the Acquisition of National Base. This increased from $812 in 2007 to $8,199 in 2008. Net Loss The following table reflects our net loss for the year ended March 31, 2008 and 124-day period ended March 31, 2007, after taking into account the amounts recognized as other income or expenses. 124-Day Period Ended Year Ended March 31, March 31, 2008 2007 Loss from operations $ (2,896,770 ) $ (20,283 ) Other expenses (7,320,535 ) (812 ) Provision for income taxes - - Net loss $ (10,217,305 ) $ (21,090 ) We recorded a net loss of $10,217,305 for the year ended March 31, 2008 as compared to a net loss of $21,090 for the 124-day period ended March 31, 2007. The increase in net loss between these periods is primarily related to: º An increase in write-off of mineral exploration rights in the amount of $7,317,739. º An increase in general and administrative expenses due to the inclusion of WorldStar in the consolidation process due to the Acquisition of National Base of $86,411. º An increase in general and administrative expenses in National Base due to increase in activities of $1,047,370. º An increase in amortization of mineral exploration rights of 1,323,133. º An increase in property exploration and maintenance expenses of $419,836. 20 -------------------------------------------------------------------------------- Cash Flows from Operating Activities Our cash flows from operating activities during 2008 were $49,252. Our cash flows from operating activities for 2008 include net loss of $10,217,305, $1,323,133 in amortization, write-off of mineral exploration rights of $7,317,739, an increase in amount due from a minority stockholder of $188,984, a decrease in prepaid expenses of $77,772, and increase in other payables and accrued expenses of $20,298, an increase in amount due to related companies of $869,385, and an increase in amount due to a minority stockholder of $624,790. Our cash flows from operating activities during 2007 were ($393,080), primarily due to the net loss of $21,090, a decrease in amount due from a minority stockholder of $299,960 and an increase in other payables and accrued expenses of $73,100. Cash Flows From Investing Activities Our cash flows from investing activities during 2008 were $16,482 primarily due to $24,346 cash inflow on the Acquisition of National Base. This amount was offset by the purchase of equipment of $7,864. Our cash flows from investing activities during 2007 were ($3,290,166) primarily due to 3,714,286 cash advance to BGHK before the Acquisition on February 27, 2007. This was offset by a cash inflow from BGI and BGHK of $424,120. Cash Flows From Financing Activities Our cash flows from financing activities during 2008 were ($77,227) compared to $3,707,392 for 2007. During 2008, we received $15,873 in advances from related parties, $34,000 in proceeds from short-term loans. This was offset by $127,100 in repayment of short-term loans. During 2007, we received advances from the ultimate holding company of $3,540,000 and advances from a former stockholder of $74,286. As well, proceeds from short-term loans amounted to $93,100. Critical Accounting Policies And Estimates Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles ("US GAAP") applied on a consistent basis. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In the opinion of the management of the Company, the consolidated financial statements for the periods presented include all adjustments, including normal recurring adjustments, necessary to fairly present the results of such periods and the financial position as of the end of said periods. We regularly evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. 21 -------------------------------------------------------------------------------- Basis of Presentation The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Such adjustments could be material. The Company's continuation as a going concern is dependent upon the continued financial support of its creditors and its ability to obtain financing to repay its current obligations, fund working capital and overhead requirements, fund the development of the Company's mineral exploration rights and the Company's ability to achieve profitable operations. Management plans to obtain financing through future common share private placements. The Company's continued existence is dependent upon its ability to achieve its operating plan. There can be no assurance provide the Company will be able to raise sufficient debt or equity capital from sources described above, on satisfactory terms. If management is unsuccessful in obtaining financing or in achieving long-term profitable operations, the Company will be required to cease operations. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. Use of Estimates In preparing of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring management estimates relate to allowance for doubtful accounts, useful lives of property, plant and equipment and mineral exploration rights, asset retirement obligation estimates, accrued liabilities, and the determination of the valuation allowance for future income taxes. While management believes the estimates are reasonable, actual results could differ from those estimates and could impact future results of operations and cash flows. Foreign Currency Translation The functional currency of the Company is the United States dollar ("US dollar"). Amounts recorded in foreign currency are translated into US dollars as follows: i. Monetary assets and liabilities, at the rate of exchange in effect as at the balance sheet date; ii. Non-monetary assets and liabilities, at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and iii. Interest income and expenses (excluding amortization, which is translated at the same rate as the related asset), at the rate of exchange on the transaction date. Gains and losses arising from this translation of foreign currency are included in the consolidated statements of operations. Cash and Cash Equivalents Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less to be cash equivalents. As of March 31, 2008 most of the cash and cash equivalents were denominated in US dollars and were placed with banks in Mongolia, Hong Kong and Canada. 22 -------------------------------------------------------------------------------- Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and amounts due from related parties. As of March 31, 2008, substantially all of the Company and related companies' cash and cash equivalents and related companies were held by major financial institutions located in Mongolia, Hong Kong, and Canada which management believes are of high credit quality. Property and Equipment Property, plant and equipment are stated at cost less accumulated amortization. Cost includes expenditures that are directly attributable to the acquisition of the asset and other costs directly attributable to bringing the asset to working condition for its intended use. The cost of self-constructed assets includes the cost of materials and direct labour. Amortization is provided on straight-line basis over their estimated useful lives. The principal amortization rates are as follows: Annual rate Furniture 10% Computer software 10% Computers 33.33% Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated amortization are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income. Mineral Exploration Rights Mineral exploration rights are stated at cost less accumulated amortization and are amortized on the straight-line basis over the tenure of the lease. Exploration and related costs and costs to maintain mineral rights and leases are expensed as incurred. Impairment of Long-Lived Assets Long-lived assets are tested for impairment in accordance with SFAS No. 144. The Company periodically evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. During the reporting period, the Company has not identified any indicators that would require testing for impairment. Asset Retirement Obligations ("ARO") The Company recognizes an estimate of the liability associated with an ARO in the consolidated financial statements at the time the liability is incurred. The estimated fair value of the ARO is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset. The capitalized amount will be depleted on a straight-line basis over the estimated life of the asset. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the year. The ARO can also increase or decrease due to changes in the estimates of timing of cash flows or changes in the original estimated undiscounted cost. Actual costs incurred upon settlement of the ARO are charged against the ARO to the extent of the liability recorded. 23 -------------------------------------------------------------------------------- Basic and Diluted Loss per Share Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share is calculated by dividing the net loss by the sum of the weighted average number of common shares outstanding and the dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon exercise of stock options and warrants calculated using the treasury stock method. Common equivalent shares are not included in the calculation of the weighted average number of shares outstanding for diluted loss per common shares when the effect would be anti-dilutive. Income Taxes The Company uses the asset and liability method of accounting for income taxes pursuant to SFAS No. 109 "Accounting for Income Taxes". Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry-forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Financial Instruments and Comprehensive Income All financial instruments are classified as one of the following: held-to-maturity, loans and receivables, held-for-trading, available-for-sale or other financial liabilities. Financial assets and liabilities held-for-trading are measured at fair value with gains and losses recognized in net income (loss). Financial assets held-to-maturity, loans and receivables, and other financial liabilities are measured at amortized cost using the effective interest method. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) and reported in shareholders' equity. Any financial instrument may be designated as held-for-trading upon initial recognition. Transaction costs that are directly attributable to the acquisition or issue of financial instruments that are classified as other than held-for-trading, which are expensed as incurred, are included in the initial carrying value of such instruments and amortized using the effective interest method. Comprehensive income or loss is defined as the change in equity from transactions and other events from sources other than the Company's stockholders. Other comprehensive income or loss refers to items recognized in comprehensive income or loss that are excluded from operations calculated in accordance with US GAAP. The Company has no items of other comprehensive income in any period presented. Therefore, net loss as presented in the Company's consolidated statements of operations equals comprehensive loss. Recently Adopted Accounting Pronouncements In December 2006, the FASB issued Staff Position No. EITF 00-19-2, "Accounting for Registration Payment Arrangement" ("SP EITF 00-19-2"). SP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, "Accounting for Contingencies" and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss". This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2006. The Company adopted SP EITF 00-19-2 effective April 1, 2007 and considers the adoption had no material impact on its consolidated financial statements. 24 -------------------------------------------------------------------------------- Recently Issued Accounting Pronouncements Effective July 1, 2009, the FASB's Accounting Standards Codification ("ASC") became the single official source of authoritative, nongovernmental generally accepted accounting principles ("GAAP") in the U.S. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. The Codification is required to be applied to financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and did not impact the Company's consolidated financial statements. In December 2006, the FASB issued Staff Position No. EITF 00-19-2, "Accounting for Registration Payment Arrangement" ("SP EITF 00-19-2"). SP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, "Accounting for Contingencies" and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss". This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2006. The Company adopted SP EITF 00-19-2 effective April 1, 2007 and considers the adoption had no material impact on its consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for the Company's fiscal year on or after November 15, 2007. The Company adopted SFAS 159 effective April 1, 2008 and considers the adoption of SFAS 159 had no material impact on its consolidated financial statements. In December 2007, the FASB issued Accounting Standards Codification 805, "Business Combinations" ("ASC 805") (formerly SFAS No. 141(R)), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The amendments of ASC 805 are effective for financial statements issued for fiscal years beginning on or after December 15, 2008. Prior to the adoption of ASC 805, in process research and development costs were immediately expensed and acquisition costs were capitalized. Under ASC 805 all acquisition costs are expensed as incurred. The standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. In April 2009, the FASB updated ASC 805 to amend the provisions for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets liabilities arising from contingencies in business combinations. This update also eliminates the distinction between contractual and non-contractual contingencies. The Company adopted ASC 805 effective April 1, 2009 and considers the adoption had no material impact on the Company's consolidated financial statements. 25 -------------------------------------------------------------------------------- In December 2007, the FASB issued Accounting Standards Codification 810-10, "Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("ASC 810-10") (formerly SFAS No. 160). ASC 810-10 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective for the Company's fiscal year beginning on or after December 15, 2008. The Company adopted ASC 810-10 effective April 1, 2009 and considers the adoption had no material impact on its consolidated financial statements. In March 2008, the FASB issued Accounting Standards Codification 815, "Disclosures about Derivative Instruments and Hedging Activities" ("ASC 815"). ASC 815 changes the disclosure requirements for derivative instruments and hedging activities. The guidance will become effective for the Company's fiscal year beginning on or after November 15, 2008. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted ASC 815 effective April 1, 2009 and considers the adoption had no material impact on its consolidated financial statements. In April 2008, the FASB issued SFAS No. 142-3 ("SFAS 142-3") to amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) Business Combinations, and other US GAAP. SFAS 142-3 is not expected to have a material impact on the Company's consolidated financial statements. In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with US GAAP for non-governmental entities. SFAS 162 is not expected to have a material impact on the Company's consolidated financial statements, beyond its current disclosure. In June 2008, the FASB issued FASB SP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities" ("SP-EITF 03-6-1"). SP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the computation of earnings per share under the two-class method as described in SFAS No. 128, "Earnings per Share". SP EITF 03-6-1 is effective for financial statements issued for the Company's fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The Company adopted SP EITF 03-6-1 effective April 1, 2009 and considers SP EITF 03-6-1 had no material impact on the Company's consolidated financial statements. In April 2009, the FASB issued three FASB Staff Positions (FSP's) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP 157-4), clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP No. 115-2 and FSP No. 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments", (FSP 115-2 and FSP 124-2), establish a new model for measuring other-than-temporary impairments for debt securities, including criteria for when to recognize a write-down through earnings versus other comprehensive income. FSP No. 107-1 and APB 28-1, "Interim Disclosures About Fair Value of Financial Instruments", expand the fair value disclosures required for all financial instruments within the scope of SFAS, No. 107, "Disclosures about Fair Value of Financial Instruments" (FSP 107-1 and APB 28-1) to interim periods. 26 -------------------------------------------------------------------------------- All of these FSP's are effective for interim and annual periods ending after June 15, 2009, our quarter ended June 30, 2009. The adoption of these FSP's will not have a material impact on our consolidated results of operations and financial condition. However, adoption of FSP 107-1 and APB 28-1 during the quarter ended June 30, 2009 resulted in increased disclosures in our consolidated financial statements. In April 2009, the FASB issued Accounting Standards Codification 825-10, "Financial Instruments" (formerly SFAS 107-1 and Accounting Principles Board Opinion No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments") ("ASC 825-10"). This statement amends SFAS 107, "Disclosures about Fair Values of Financial Instruments", to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The statement also amends APB 28, "Interim Financial Reporting", to require those disclosures in all interim financial statements. This statement is effective for interim periods ending after June 15, 2009. The Company adopted The Company adopted ASC 825-10 effective April 1, 2010 and considers the adoption had no material impact on the Company's consolidated financial statements. In May 2009, the FASB issued Accounting Standards Codification 855-10, "Subsequent Events" (formerly SFAS No. 165, "Subsequent Events") ("ASC 855-10"). This statement is consistent with existing auditing standards in defining subsequent events as events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued, but it also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The new guidance defines two types of subsequent events: "recognized subsequent events" and "non-recognized subsequent events". Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date and must be reflected in the company's financial statements. Non-recognized subsequent events provide evidence about conditions that arose after the balance sheet date and are not reflected in the financial statements of a company. Certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. The new guidance was effective on a prospective basis for interim or annual periods ending after June 15, 2009. The Company adopted ASC 855-10 effective April 1, 2010 and considers the adoption had no material impact on the Company's consolidated financial statements. In June 2009, the FASB issued ASU No. 2009-01, "FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" ("ASU 2009-01") This update provides amendment to ASC 105-10 (formerly SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles"). ASU 2009-01 establishes the "FASB Accounting Standards Codification" ("Codification"), which officially launched July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change US GAAP. All other accounting literature excluded from the Codification will be considered non-authoritative. ASU 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASU 2009-01 effective April 1, 2010 and considers the adoption had no material impact on the Company's consolidated financial statements. In August 2009, the FASB issued ASU No. 2009-05, "Measuring Liabilities at Fair Value" ("ASU 2009-05"). This update provides amendments to ASC Topic 820, "Fair Value Measurements and Disclosure", for the fair value measurement of liabilities when a quoted price in an active market is not available. ASU 2009-05 is effective for reporting periods beginning after August 28, 2009. The Company adopted ASU 2009-05 effective April 1, 2010 and considers the adoption had no material impact on the Company's consolidated financial statements. 27 -------------------------------------------------------------------------------- In September 2009, the FASB issued ASU No. 2009-12, "Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" ("ASU 2009-12"). ASU permits, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of this ASU on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity's measurement date. The ASU also requires disclosures by major category of investment about the attributes of investments within the scope of the Update. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company adopted ASU 2009-12 effective periods ending on December 31, 2009 and considers the adoption had no material impact on the Company's consolidated financial statements. In January 2010, the FASB issued ASU No. 2010-06 ("ASU 2010-06") applicable to ASC Topic 820-10, Fair Value Measurements and Disclosures. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels and the reasons for the transfers and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010. As this guidance provides only disclosure requirements, the adoption of this standard by the Company effective April 1, 2011 will not impact the Company's consolidated financial statements. In February 2010, the FASB issued ASU No. 2010-09, "Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements" ("ASU 2010-09"), which amends ASC Topic 855 to address certain implementation issues related to an entity's requirement to perform and disclose subsequent events procedures. The amendments in ASU 2010-09 remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. The new guidance did not have an impact on the Company's consolidated financial statements. In April 2010, the FASB issued ASU 2010-13, "Compensation-Stock Compensation (ASC Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades" ("ASU 2010-13"). ASU 2010-13 provides amendments to ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of this ASU effective April 1, 2011 to have a material impact on the Company's consolidated financial statements. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. 28 -------------------------------------------------------------------------------- |