---

---

 

 

 

		September 30,			June 30,
		2006			2006
ASSETS		(Unaudited)			(Audited)
Current assets:
Cash and cash equivalents		$	12,742,408		$	14,431,407
Prepaid expenses and other current assets			117,384			808,425
Total current assets			12,859,792			15,239,832
Investment - Thorium Power, Inc.			1,350,000			1,350,000
Total assets		$	14,209,792			16,589,832
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable		$	281,912		$	463,354
Accrued liabilities			73,700			103,541
Due to related parties			91,168			128,675
Due to Thorium Power, Inc.			505,824			264,740
Warrant liability			3,080,024			3,678,278
Accrued payroll tax liability			-			635,000
Total Current Liabilities			4,032,628			5,273,588
Total Liabilities			4,032,628			5,273,588
Commitments (Note 7 )
Common Stock With Registration Rights:
Common Stock subject to continuing registration, $0.001 par value, 36,659,837 shares issued and outstanding at September 30, 2006 and June 30, 2006			12,041,373			12,041,373
STOCKHOLDERS’ DEFICIENCY
Preferred stock, $0.001 par value; 50,000,000 authorized shares; no shares issued and outstanding			-			-
Voting Common stock, $0.001 par value; 500,000,000 authorized shares; 121,185,622 shares issued and outstanding ( June 30, 2006 -118,101,637)			121,186			118,101
Additional paid-in capital			17,955,474			14,913,153
Deferred Stock Compensation			(306,000	)		(83,328	)
Common Stock and Warrants Reserved for Future Issuance			87,500			1,807,445
Accumulated Deficit			(19,735,905	)		(17,482,900	)
Accumulated Other Comprehensive Income			13,536			2,400
Total Stockholders’ Deficiency			(1,864,209	)		(725,129	)
Total Liabilities and Stockholders’ Deficiency		$	14,209,792		$	16,589,832

 

 

		Three Months Ended						Cumulative Period from (Inception) June 28, 1999 to
		September 30,						September 30
		2006			2005			2006
Revenue		$	-		$	-		$	184,162
Operating Expenses
Consulting			532,674			1,250,634			8,800,720
Forgiveness of debt			-			-			(169,818	)
General and administrative			770,577			44,391			3,485,070
Impairment loss - equipment			-			-			12,445
Impairment loss - Mineral property acquisition costs			-			-			720,544
Interest attributable to beneficial conversion feature for notes payable			-						580,057
Mineral property exploration expenses			17,012			-			411,528
Stock-based compensation			1,687,619			-			6,637,348
			3,007,882			1,295,025			20,477,894
Operating Loss			(3,007,882	)		(1,295,025	)		(20,293,732	)
Other Income and Expenses
Dividend income			2,007			-			10,143
Interest income			154,617			-			227,052
Legal Settlement			-			-			(146,445	)
Gain on fair value of warrant derivatives			598,254			-			459,034
Other income			-			-			8,043
Net Loss		$	(2,253,004	)	$	(1,295,025	)	$	(19,735,905	)
Net Loss Per Common Share, Basic and diluted		$	(.01	)	$	(0.01	)	$	-
Weighted Average Number Of Common Shares
Outstanding			155,946,235			86,998,483			-

 

 

 

 

 

		Common Stock						Additional Paid-in			Deferred			Common Stock and Warrants Reserved for Future			Accumulated			Accumulated Other Comprehensive
		Shares			Amount			Capital			Compensation			Issuance			Deficit			Income			Total
Issuance of shares to founders			3,465		$	3		$	18,947		$	-		$	-		$	-		$	-		$	18,950
Net loss for the period			-			-			-			-			-			(159,909	)		-			(159,909	)
Balance, June 30, 2000			3,465			3			18,947			-			-			(159,909	)		-			(140,959	)
Repurchase of common stock by consideration of forgiveness of loan payable to shareholder			(1,445	)		(1	)		16,098			-			-			-			-			16,097
Balance			2,020			2			35,045			-			-			(159,909	)		-			(124,862	)
Adjustment to number of shares issued and outstanding as a result of the reverse take-over transaction -
Custom Branded Networks, Inc.			(2,020	)		(2	)		2			-			-			-			-			-
Aquistar Ventures (USA) Inc.			15,463,008			15,463			(15,463	)		-			-			-			-			-
Balance			15,463,008			15,463			19,584			-			-			(159,909	)		-			(124,862	)
Shares allotted in connection with the acquisition of Custom Branded Networks, Inc.			25,000,000			25,000			(9,772	)		-			-			-			-			15,228
Less: Allotted and not yet issued			(8,090,476	)		(8,090	)		8,090			-			-			-			-			-
Common stock conversion rights			-			-			421,214			-			-			-			-			421,214
Net loss for the year			-			-			-			-			-			(723,239	)		-			(723,239	)
Balance, June 30, 2001			32,372,532		$	32,373		$	439,116		$	-		$	-		$	(883,148	)		-		$	(411,659	)

 

 

		Common Stock						Additional Paid-in			Deferred			Common Stock and Warrants Reserved for Future			Accumulated			Accumulated Other Comprehensive
		Shares			Amount			Capital			Compensation			Issuance			Deficit			Income			Total
Balance, June 30, 2001			32,372,532		$	32,373		$	439,116		$	-		$	-		$	(883,148	)	$	-		$	(411,659	)
Additional shares issued in connection with the acquisition of Custom Branded Networks, Inc.			1,500,000			1,500			(1,500	)		-			-			-			-			-
Common stock conversion rights			-			-			109,748			-			-			-			-			109,748
Net loss for the year			-			-			-			-			-			(326,038	)		-			(326,038	)
Balance, June 30, 2002			33,872,532			33,873			547,364			-			-			(1,209,186	)		-			(627,949	)
Issue of common stock for deferred compensation expense			4,500,000			4,500			40,500			(45,000	)		-			-			-			-
Amortization of deferred compensation			-			-			-			22,500			-			-			-			22,500
Common stock conversion rights			-			-			45,116			-			-			-			-			45,116
Net loss for the year			-			-			-			-			-			(142,233	)		-			(142,233	)
Balance, June 30, 2003			38,372,532			38,373			632,980			(22,500	)		-			(1,351,419	)		-			(702,566	)
Amortization of deferred compensation			-			-			-			22,500			-			-			-			22,500
Common stock conversion rights			-			-			3,301			-			-			-			-			3,301
Net loss for the year			-			-			-			-			-			(95,430	)		-			(95,430	)
Balance, June 30, 2004			38,372,532			38,373			636,281			-			-			(1,446,849	)		-			(772,195	)
Issue of common stock for services			14,800,000			14,800			901,200			-			-			-			-			916,000
Issue of common stock for convertible notes			20,000,000			20,000			484,166			-			-			-			-			504,166
Issue of warrants for convertible notes			-			-			495,834			-			-			-			-			495,834
Issue of common stock for services			11,600,000			11,600			1,583,900			(598,000	)		-			-			-			997,500
Issue of common stock for services			1,300,000			1,300			226,700			-			-			-			-			228,000
Amortization of deferred compensation			-			-			-			98,033			-			-			-			98,033
Net loss for the year			-			-			-			-			-			(2,691,516	)		-			(2,691,516	)
Balance, June 30, 2005			86,072,532		$	86,073		$	4,328,081		$	(499,967	)	$	-		$	(4,138,365	)	$	-		$	(224,178	)

 

 

		Common Stock						Additional Paid-in			Deferred			Common Stock and Warrants Reserved for Future			Accumulated			Accumulated Other Comprehensive
		Shares			Amount			Capital			Compensation			Issuance			Deficit			Income			Total
Balance, June 30, 2005			86,072,532		$	86,073		$	4,328,081		$	(499,967	)	$	-		$	(4,138,365	)	$	-		$	(224,178	)
Issuance of common stock for services			17,610,776			17,611			3,679,269			-			-			-			-			3,696,880
Issuance of common stock for settlement of debt			249,999			250			29,681			-			-			-			-			29,931
Issuance of warrants for settlement of debt			-			-			7,569			-			-			-			-			7,569
Issuance of common stock for property acquisition			6,000,000			6,000			1,604,000			-			-			-			-			1,610,000
Stock based compensation - employment agreement			5,000,000			5,000			4,145,000			-			-			-			-			4,150,000
Private placement for issuance of common stock			44,828,167			44,827			13,494,852			-			-			-			-			13,539,679
Reallocation of proceeds from sales of common stock with registration rights			(36,659,837	)		(36,660	)		(12,004,713	)		-			-			-			-			(12,041,373	)
Warrants issued pursuant to private placement			-			-			348,185			-			-			-			-			348,185
Issuance of stock as compensation for warrants cancelled by shareholder			15,000,000			15,000			1,739,166			-			-			-			-			1,754,166
Amortization of deferred compensation			-			-			-			499,967			-			-			-			499,967
Deferred compensation			-			-			-			(83,328	)		-			-			-			(83,328	)
Repurchase of issued stock			(5,000,000	)		(5,000	)		(1,445,000	)		-			-			-			-			(1,450,000	)
Stock returned to treasury			(15,000,000	)		(15,000	)		(1,739,166	)		-			-			-			-			(1,754,166	)
Stock reserved for future issuance			-			-			-			-			1,690,700			-			-			1,690,700
Stock based compensation - stock reserved for future issuance			-			-			-			-			73,500			-			-			73,500
Warrants reserved for future issuance			-			-			-			-			43,245			-			-			43,245
Stock based compensation - options			-			-			726,229			-			-			-			-			726,229
Other comprehensive income			-			-			-			-			-			-			2,400			2,400
Net loss for the year			-			-			-			-			-			(13,344,535	)		-			(13,344,535	)
Balance, June 30, 2006			118,101,637		$	118,101		$	14,913,153		$	(83,328	)	$	1,807,445		$	(17,482,900	)	$	2,400		$	(725,129	)

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

1.  BASIS OF PRESENTATION

The unaudited financial information of Thorium Power Ltd. (formerly, Novastar Resources Ltd.) (the “Company”) and subsidiaries furnished herein has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflects all adjustments, which in the opinion of management are necessary to fairly state the Company’s interim financial position and the results of its operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, this report on Form 10-QSB should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Form 10-KSB for the fiscal year ended June 30, 2006. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s Form 10-KSB for the fiscal year ended June 30, 2006, has been omitted. The results of operations for the three-month period ended September 30, 2006 are not necessarily indicative of results for the entire fiscal year ending June 30, 2007.

2.  NATURE OF OPERATIONS

 

 

 

 

Operations to date for Thorium Power, Inc., had been devoted primarily to filing for patents, developing strategic relationships within the industry, securing political and financial support from the United States and Russian governments, continued development of the fuel designs and administrative functions. We, therefore, are now preparing our financial statements as a Development Stage Enterprise instead of an exploration stage company.

 

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a).	Consolidation

These financial statements include the accounts of the Company (a Nevada corporation) and its wholly-owned subsidiary, Custom Branded Networks, Inc. (a Delaware corporation) and TP Acquisition Corp. (a Delaware corporation). All significant intercompany transactions and balances have been eliminated.

b).	Use of Estimates

The preparation of 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 financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to valuation of stock grants and stock options, impairment charges for mineral acquisition costs and contingent liabilities. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant in future periods.

 

 

 

c).	Prior Periods Reclassifications

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.

d).	Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R (“FAS-123R”), Share-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123 (“FAS-123”), Accounting for Stock-Based Compensation. In addition to requiring supplemental disclosures, FAS-123R addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FAS-123R focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. The Statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (“APB-25”), Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair value based method. Accordingly, proforma disclosure is no longer an alternative.

Under FAS-123R, the Company is required to recognize compensation cost for the portion of outstanding awards previously accounted for under the provisions of APB-25 for which the requisite service had not been rendered as of the adoption date for this Statement. The Statement also requires companies to estimate forfeitures of stock compensation awards as of the grant date of the award.

FAS-123R permits public companies to adopt its requirements using one of the following two methods:

i)

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of FAS-123R for all share-based payments granted after the effective date and (b) based on the requirements of FAS-123 for all awards granted to employees prior to the effective date of FAS-123R that remain unvested on the effective date; or

ii)

A “modified retrospective” method, which includes the requirements of the modified prospective method described above but also permits entities to restate, based on the amounts previously recognized under FAS-123 for purposes of pro forma disclosures, either (a) all prior periods presented for which FAS-123 was effective or (b) prior interim periods of the year in which FAS-123R is adopted.

The Company adopted FAS-123R on January 1, 2006, using the modified prospective method. The valuation of the stock issued to consultants for consulting services are valued as of the date of the agreements with the various consultants.

References to the issuances of restricted stock (see note 5) and other sections of this financial statement is stock issued to individuals whom are eligible to sell all or some of their shares of restricted common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act ("Rule 144"), subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company that has satisfied a two-year holding period.

e).

Warrants

Warrants issued in conjunction with equity financing transactions were accounted for under the Emerging Issues Task Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock

 

 

4.  INVESTMENT / DUE TO THORIUM POWER, INC.

 

5.  SHARE CAPITAL

a)	Common Stock

i)

On July 24, 2006 the Company issued 150,000 restricted shares of common stock to two executive officers pursuant to agreements that they signed with the Company. The value attributed to these shares was $73,500 ($0.47 and $0.51per share). This amount was expensed in the fiscal year ended June 30, 2006 and recorded under the caption “Common Stock and Warrants Reserved for Future Issuance,” and, accordingly, this stock issuance reduced the amount recorded in “Common Stock and Warrants Reserved for Future Issuance.”

ii)

On March 31, 2006, , the Company, Thorium Power and their respective officers were served, through their counsel, with a verified complaint by Raj Pamnani. Mr. Pamnani alleges that Novastar and Thorium Power and their respective officers breached an oral consulting agreement he alleges was entered into between Mr. Pamnani and the Company and demanded a combination of shares of unrestricted common stock of the Company and payment of monetary damages in the amount of $10 million plus an additional $5 million in punitive damages. The action was filed in the Supreme Court of the State of New York, County of New York, and the Company filed a Motion to Dismiss the complaint on May 23, 2006. On August 8, 2006, the parties entered into a Settlement Agreement under which Mr. Pamnani irrevocably and forever waived and released any and all claims against the Company, Thorium Power and the other defendants named in the complaint, through the date of execution of the Settlement Agreement, in return for the issuance of 215,000 shares of common stock of the Company, as well as warrants to purchase 107,500 shares of the Company's common stock at a price of $0.48 per share. On August 17, 2006, the Company issued these shares. The value attributed to these shares was $103,200 ($0.48 per share). This amount was expensed in the fiscal year ended June 30, 2006, and recorded under the caption “Common Stock and Warrants Reserved for Future Issuance” and, accordingly, this stock issuance reduced the amount recorded in “Common Stock and Warrants Reserved for Future Issuance.”

iii)	On September 12, 2006 the Company issued 1,500,000 shares of restricted stock to an executive pursuant to an employment agreement dated July 27, 2006. The value attributed to these shares was $750,000 ($0.50 per share) (see note 5d).

 

iv)

On September 12, 2006 the Company issued 3,000,000 shares of restricted stock with value of $1,500,000 ($0.50 per share) for payment of consulting services that were rendered to the Company for the year ended June 30, 2006. This amount was expensed in the fiscal year ended June 30, 2006 and recorded under the caption “Common Stock and Warrants Reserved for Future Issuance” and, accordingly, this stock issuance reduced the amount recorded in Common Stock and Warrants Reserved for Future Issuance.

v)

On September 14, 2006, the Company entered into an agreement with a consultant to provide investor relations and other services and issued 850,000 restricted common shares with value of $408,000 ($0.48 per share) for these services. The period of this agreement is from July 1, 2006 to July 1, 2007, and these shares vest in equal monthly installments over the one year period. As a result, deferred stock compensation was recorded as a contra equity account on the Balance Sheet and the balance at September 30, 2006 was $306,000.

 

 

 

 

5.  SHARE CAPITAL - CONTINUED

 

b).	Common Stock Issued With Registration Rights

On May 4, 2006, the Company completed a private placement with certain investors in which it sold an aggregate of 36,659,837 units, consisting of 36,659,837 shares of its restricted common stock and 18,329,919 common stock purchase warrants for $15,580,431. Each unit consists of one share of common stock and one-half of a non-transferable share purchase warrant. Each whole warrant entitles the holder of the warrant to acquire one additional share of common stock at a price of $0.65 per share and expires twelve months from the closing date of the subscription.

 

The EITF is currently reviewing the accounting for securities with liquidated damages clauses as stated in EITF 05-04, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19. There are currently several views as to how to account for this type of transaction and the EITF has not yet reached a consensus. In accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled in the Company's Own Stock, and EITF 05-04, because of the potential liquidated damages for failure to obtain and maintain an effective registration statement is substantial, the value of the common stock subject to such registration rights should be classified as temporary equity. Additionally, in accordance with EITF 00-19 and the terms of the above warrants, the fair value of the warrants should be recorded as a liability, with an offsetting reduction to shareholders’ equity. The warrant liability is initially measured at fair value using the Black Scholes option pricing model, and is then re-valued at each reporting date, with changes in the fair value reported as non-cash charges or credits to earnings.

The SEC concluded that under EITF 00-19, common stock and warrants subject to registration rights where significant liquidated damages could be required to be paid to the holder of the instrument in the event the issuer fails to maintain the effectiveness of a registration statement for a preset time period, the common stock subject to such liquidated damages does not meet the tests required for shareholders’ equity classification, and accordingly must be reflected between liabilities and shareholders’ equity in the balance sheet until the conditions are eliminated. In analyzing instruments under EITF 00-19, the likelihood or probability related to the failure to maintain an effective registration statement is not a factor.

Based on the above interpretation, as of June 30, 2006, the Company classified $12,041,373 for the value of common stock subject to registration rights as temporary equity instead of shareholders’ equity. In addition, the Company measured the initial fair value of the warrants on the closing date and at June 30, 2006 at $3,539,058 and classified the fair value of the warrants as warrant liability instead of shareholders’ equity.

An additional 733,196 warrants have been reserved for the subscribers, representing 4% of the warrants originally issued under the private placement. This additional grant represents a warrant penalty or the liquidated damages in accordance with the placement’s registration rights, as management had determined that the Company would require an additional time of two months past the specified date of effectiveness of September 1, 2006, in the Registration Rights agreement to complete the registration of the units. The total warrants were valued using the Black Scholes option pricing model using the following assumptions: weighted average expected life of one year, volatility of 153%, rate of quarterly dividends 0%, risk free interest rate of 4.30%.

At the end of each reporting period, the value of the warrants is re-measured based on the fair value of the underlying shares, and changes to the warrant liability and related “gain or loss in fair value of the warrants” is recorded as a non-cash charge or credit to earnings. The warrant liability will be reclassified to shareholders’ equity when the Company is no longer subject to all of its performance obligations under the registration rights agreement.

At September 30, 2006, the warrant liability was $3,080,024, due to changes in the fair value of the warrants. The fair value of the warrants was estimated using the Black Scholes option-pricing model, with the following assumptions for the period ended September 30, 2006: risk-free interest rate of 4.18% dividend yield of 0%, expected life of 1 year and volatility of 115% were used.

For the three month period ended September 30, 2006, the non-cash gain on fair value of warrants was $598,254. The gain on fair value of warrants is due principally to the decrease in the volatility factor used in the Black Scholes valuation of the warrants. The non-cash gain on fair value of warrants, recorded as gain on fair value of warrant derivatives, has no effect on the Company’s cash flows or liquidity.

 

 

 

c)	Stock Options

  The Company has in place a stock-based employee and director compensation plan. On July 17, 2006, the Company amended this stock plan. The Company has reserved 75,000,000 shares of common stock of its unissued share capital for the stock plan. Other limitations are as follows:

i)	No more than 37,500,000 options can be granted for the purchase of restricted common shares.

ii)	No more than 8,000,000 options can be granted to any one person.

iii)	No more than 5,000,000 options can be granted to any one person for the purchase of restricted common shares.

On January 1, 2006, the Company adopted FAS-123R. In March 2005, the SEC staff expressed their views with respect to FAS-123R in Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”). SAB 107 provides guidance on valuing options. The impact of adopting FAS-123R for the three months ended September 30, 2006 was to record a non-cash compensation expense of $726,229. Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations, as permitted by FAS-123. In accordance with APB 25, no compensation cost was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company adopted FAS-123R using the modified-prospective-transition method. Under that transition method, compensation cost recognized in future interim and annual reporting periods includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS-123, and b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS-123R.

The adoption of FAS-123R had no effect on cash flow from operations or cash flow from financing activities for the three months ended September 30, 2006. FAS-123R requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) to be classified as financing cash flows. Prior to the adoptions of FAS-123R, excess tax benefits would have been classified as operating cash inflows. The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to stock-based compensation costs as a result of the full valuation allowance on our net operating loss carryforwards.

The Company recognizes share-based compensation expense for all service-based awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.

For awards with service conditions and graded vesting that were granted prior to the adoption of FAS-123R, the Company estimates the requisite service period and the number of shares expected to vest and recognize compensation expense for each tranche on a straight-line basis over the estimated requisite service period. The Company will continue to recognize compensation expense over the applicable vesting periods for awards granted prior to adoption of FAS-123R, but for all awards granted after December 31, 2005, compensation expense will be recognized over the requisite service period of the award or over a period ending with an employee’s eligible retirement date, if earlier. Adjustments to compensation expense as a result of revising the estimated requisite service period are recognized prospectively.

Total stock options outstanding at September 30, 2006 were 20,075,000 of which 2,714,239 of these options were vested. There were no stock options outstanding prior to January 1, 2006.

Stock option transactions to the employees, directors, advisory board members and consultants are summarized as follows:

Stock Options Outstanding at July 1, 2006	10,425,000
Granted	9,850,000
Exercised	-
Expired	-
Forfeited	(200,000)
Outstanding at September 30, 2006	20,075,000
Options exercisable at September 30, 2006	2,714,239

 

 

 

The above table includes options issued as of September 30, 2006 as follows:

(i)A total of 2,150,000 non-qualified 10 year options have been issued to advisory board members at exercise prices of $0.51 to $0.64 per share and a weighted average exercise price and fair value per share of $0.63 and $0.63 respectively;

(ii)A total of 4,500,000 non-qualified 5 year options have been issued to advisory board members at an exercise price of $0.445 per share and a weighted average and fair value per share of $0.445; and

(iii)A total of 13,425,000 non-qualified 10 year options have been issued to directors and officers of the Company, at exercise prices of $0.47 to $0.80 per share and a weighted average exercise price and fair value per share of $0.66 and $0.66, respectively. From this total, 7,200,000 options were issued to one officer who is also a director, on February 14, 2006, with a remaining contractual life of 9.0 years. All other options issued have a remaining contractual life ranging from 4.75 years to 9.9 years.

The following table provides certain information with respect to the above-referenced stock options that are outstanding and exercisable at September 30, 2006:

Exercise Prices	Stock Options Outstanding and Exercisable	Weighted Average Remaining Contractual Life - Years
$0.48	41,667	9.9
$0.49	503,127	9.9
$0.50	13,889	9.9
$0.51	55,556	9.75
$0.80	2,100,000	9.0
Total	2,714,239

Assumptions used in the option-pricing model are as follows:

	September 30, 2006
Average risk-free interest rate	4.18% - 4.45%
Average expected life	5 years
Expected volatility	269% - 275%
Expected dividends	0%

During the three month ended September 30, 2006, $937,619 was recorded as stock-based compensation expense (non-deductible for tax purposes) in the statement of operations as the result of all the stock option grants that occurred after January 1, 2006.

 

 

d)	Stock-Based Compensation

On July 27, 2006, the Company, pursuant to an employment agreement, granted an executive officer restricted stock options, resulting in stock based compensation expense of $750,000 (see note 5(a)(iii)). This executive officer was also granted 2,250,000 non-qualified ten year stock option that will vest over a period of 43 months; with 234,375 options vesting immediately and 46,875 options vesting each month thereafter.

 

 

 

e)

Warrants

During the three-month period ended September 30, 2006, there were no warrants issued or exercised to purchase stock. There were 23,272,279 warrants outstanding as of September 30, 2006.

At September 30, 2006 the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows:

The investors in the November 23, 2005, March 30, 2006 and May 4, 2006 private placements received detachable warrants for the purchase of 2,104,999, 1,687,499 and 19,063,114 (including the 733,196 penalty warrants - see note 5(b)), shares of common stock, respectively, which were valued at $127,467, $281,117 and $3,678,278, respectively. For purposes of estimating the intrinsic fair value of each warrant as of dates of the private placements, the Company utilized the Black Scholes option-pricing model. The Company estimated the fair value of the warrants assuming no expected dividends and the following weighted-average assumptions:

f)	Common Stock and Warrants reserved for Future Issuance

Common stock and warrants reserved for future issuance consists of:

The Company signed an employment agreement with its Chief Executive Officer on February 14, 2006, and issued 5 million shares to the CEO in compensation in accordance with the agreement. The Board of Directors on September 18, 2006 had unanimously voted to redeem 2 million shares of this stock grant, at a price of $0.31 per share (after applying a 50% discount off the closing market stock price on the date of issuance), from the CEO, in order to pay the payroll taxes due on this stock issuance. A stock valuation was done after the stock grant and the stock price was recently determined by an independent third party valuation company, for payroll tax reporting purposes, to be $0.31 per share on the date of issuance. The Company also signed an employment agreement with another officer (see note 5 (a) (iii)) pursuant to which the Company is to redeem 600,628 shares of the stock grant, at a price of $0.25 per share (after applying a 50% discount off the closing market stock price on the date of issuance), and redeemed 30,000 shares from another former officer, in order to pay the payroll taxes due on these stock issuances. The Company, on September 28, 2006, paid $814,481 for the payroll tax withholdings and payroll tax expense due on these stock issuances.

As a result, at September 30, 2006, the total common shares that were redeemed and held by the Company in order for the Company to fulfill its payroll obligations were 2,631,015 shares. These shares will be retired to treasury.

The Company has employment agreements with its executive officers, the terms of which expire at various times. Such agreements provide for minimum salary levels, as well as incentive bonuses that are payable if specified management goals are attained. Under each of the agreements, in the event the officer’s employment is terminated (other than voluntarily by the offier or by the Company for cause or upon the death of the officer), the Company, if all provisions of the employment agreements are met, is committed to pay certain benefits, including specified monthly severance.

On October 6, 2006, Thorium Power, Ltd. (formerly Novastar Resources Ltd.) (“Thorium Ltd.”), a Nevada corporation, TP Acquisition Corp. (“Acquisition”), a wholly-owned subsidiary of Thorium Ltd., and Thorium Power, Inc. (“Thorium Inc.”) consummated a business combination pursuant to which Acquisition merged with and into Thorium Inc., with Thorium Inc. being the surviving entity and, as a result, becoming a wholly-owned subsidiary of Thorium Ltd. (the “Merger”).

The Merger was consummated pursuant to the terms of an Agreement and Plan of Merger among the parties that was entered into on February 14, 2006 and then amended on June 12, 2006 and August 8, 2006 (the “Merger Agreement”).

In accordance with the terms of the Merger Agreement, the following occurred with respect to the outstanding common shares, stock options and warrants of Thorium Inc. at the closing of the Merger:

i)

all of the shares of common stock of Thorium Inc. were cancelled and each registered owner of outstanding shares Thorium Inc. common stock automatically became the registered owner of 25.6278 shares of common stock of Thorium Ltd for each share of Thorium Inc. common stock that they previously owned. Each holder of non-compensatory options or warrants of Thorium Inc. that had an exercise price of $5.00 or $1.00, received from Thorium Ltd 12.315 shares and 22.965 shares of Thorium Ltd. respectively, for each option or warrant owned. There were 135,637,854 shares issued to the Thorium Inc. stockholders in the aggregate.

ii)

all of other outstanding warrants and options of Thorium Inc. were assumed by Thorium Ltd. and became exercisable for Thorium Ltd. common stock instead of Thorium Inc. common stock in an amount and at an exercise price that is consistent with the exchange ratio described above for the conversion of Thorium Inc. common stock. There were 2,743,662 stock warrants and 21,122,434 stock options assumed by Thorium Ltd. as of the date of the merger.

As a result of the merger, there were 293,768,313 common shares outstanding on October 6, 2006. Assuming the merger had occurred on July 1, 2006, Thorium Ltd’s net sales, net loss, basic and diluted earning per share would have been $ - , $2,569,161 and $.00, respectively.

The following Pro Forma balance sheet gives effect to the above events as if they had occurred on September 30, 2006:

On October 6, 2006, the Board of Directors of the Thorium Power, Ltd. increased the size of the board to five members and appointed Jack D. Ladd and Daniel B. Magraw, Jr., as a members of the Board of Directors of the Company, effective October 23, 2006. Pursuant to terms of the Independent Director’s Contracts, dated October 23, 2006, between Mr. Ladd and the Company and Mr. Magraw and the Company Mr. Ladd and Mr. Magraw will each receive a fee of $20,000 per year in cash, as well as such number of restricted shares, issued quarterly, equal to $5,000 each quarter, to be paid to each Director for the respective quarter based on the average closing price of the Company’s common stock, as quoted on the trading market on which the Company’s securities are traded, over the thirty day period prior to the first day of the applicable quarter. Additionally, the Director Contracts grant to Messrs. Ladd and Magraw for each year of service on the Board of Directors non-qualified options to purchase up to 500,000 shares of the common stock of the Company (the “Director Options”), which shall vest with respect to 13,889 shares on November 23, 2006 and the remaining 486,111 shares will subsequently vest in equal monthly installments of 13,889 shares on each one month anniversary of the grant until all shares underlying the Director Options have vested.

Effective on October 17, 2006, Cornelius J. Milmoe resigned from the Board of Directors of the Company. Mr. Milmoe was not a member of any committee of the Board of Directors at the time of his resignation. Additionally, on October 17, 2006, Mr. Milmoe was removed from the position of Chief Operating Officer of the Company. The Company has retained an outside firm to aid in the search for Mr. Milmoe’s replacement. The Company, in accordance with its employment agreement with Mr. Milmoe, if the provisions of the employment agreement are met, is required to pay him certain amounts as severance in accordance with the terms of the agreement.

·	Fuel fabrication: The relatively high melting point of thorium oxide will require fuel pellet manufacturing techniques that are different from those currently used for uranium pellets.

·	Fuel fabrication: Our metallic seed fuel rod designs are greater than 3 meters long compared to conventional Russian metallic icebreaker fuel rods that we understand are approximately 1 meter long. The longer rods will require new equipment and experience making longer extrusions.

·	Fuel design: Our “seed-and-blanket” fuel assembly design has a detachable central part which is not in conventional fuel designs.

·	Fuel design: Some of our fuel designs include plutonium-zirconium fuel rods which will operate in a soluble boron environment. Current reactor operating experience is with uranium-zirconium fuel in a boron-free environment.

·	Fuel use: Our fuel is expected to be capable of producing more gigawatt days per ton of fuel than is allowed by current reactor licenses, so to gain full economic benefits, reactor operators will have to get regulatory approval.

·	Fuel use: Our fuels are expected to produce energy economically for up to 9 years in the reactor core. Current fuel demonstrates the cladding can remain corrosion-free for up to 5 years. Testing is needed to prove corrosion resistance for the longer residence time.

·

Fuel reprocessing: The IAEA has identified a number of ways that reprocessing spent thorium fuel will require technologies different from existing uranium fuel reprocessing. Management’s current marketing plans do not assume or depend on the ability to reprocess and recycle spent fuel. Management expects spent thorium fuel will go into long term storage. This is current U.S. Government policy.

·	use of thorium and uranium oxide mix instead of only uranium oxide,

·	higher uranium enrichment level,

·	seed-and blanket fuel assembly design integrating thorium and uranium,

·	high burn-up levels of uranium,

·	use of metallic seed rods,

·	longer residence time of the blanket in the reactor, and

·	the ability of some of our fuels to dispose of reactor-grade plutonium and/or weapons-grade plutonium through the use of a new fuel design and in reactors that have never used plutonium-bearing fresh fuels.