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EX-32.2 - EXHIBIT 32.2 - EFT Holdings, Inc.v315623_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - EFT Holdings, Inc.v315623_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - EFT Holdings, Inc.v315623_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - EFT Holdings, Inc.v315623_ex31-2.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

(Mark One)

  x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended:      March 31, 2011

 

  ¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

 

EFT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Commission File No.  0-53730

 

Nevada 20-1211204

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

   

17800 Castleton St., Suite 300

City of Industry, CA

91748
(Address of Principal Executive Offices) (Zip Code)

 

Registrant's Telephone Number:  (626) 581-3335

 

Securities registered pursuant to Section 12(b) of the Act:   

 

None
(Title of Class)

 

Securities registered pursuant to Section 12 (g) of the Act:

 

Common Stock
(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes   x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¨ Yes  x No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes  x No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer   ¨ Accelerated filer x
         
Non-accelerated filer   ¨ Smaller reporting company ¨

 

 
 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes   x No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the price of $2.30 per share, which was the closing price of the common stock as reported on the OTC Bulletin Board under the symbol “EFTB” on September 30, 2010, was $58,841,372.

 

As of June 20, 2012, the registrant had 75,983,201 outstanding shares of common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE:

None 

 

2
 

 

Explanatory Note

 

On August 25, 2011, EFT Holdings, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (the “Initial Form 10-K”). This amendment to the Initial Form 10-K (the “Form 10-K/A”) amends disclosure related to the following areas.

 

Part II

Item 6. – Selected Financial Data.

Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 8. – Financial Statements and Supplemental Data.

Item 9A. – Controls and Procedures.

 

Part III

Item 12. – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. – Certain Relationships and Related Transactions, and Director Independence.

 

Part IV

Item 15. – Exhibits, Financial Statement Schedules.

 

No other changes have been made to the Initial Form 10-K. The filing of this Form 10-K/A shall not be deemed as an admission that the original filing, when made, included any untrue statement of material fact or omitted to state a material fact necessary to make a statement not misleading. This Form 10-K/A does not reflect events occurring after the filing of the Initial Form 10-K on March 31, 2011, and no attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the Initial Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with the Initial Form 10-K and the Company’s filings with the Securities and Exchange Commission (the “SEC”) subsequent to the filing of the Initial Form 10-K.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements made in this annual report on Form 10-K are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding our plans and objectives for future operations. Forward-looking statements are based on current expectations and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate.  In light of the significant uncertainties inherent in forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

3
 

 

EFT HOLDINGS, INC.

 

FORM 10-K/A

For the Fiscal Year Ended March 31, 2011

 

Number       Page
    PART II    
         
Item 6.   Selected Financial Data.    
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.    
Item 8.   Financial Statements and Supplementary Data.    
Item 9A.   Controls and Procedures.    
         
    PART III    
         
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.    
         
    PART IV    
         
Item 15.   Exhibits, Financial Statement Schedules.    

 

4
 

 

PART II

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The following selected historical consolidated financial data is qualified by reference to, and should be read in conjunction with the consolidated financial statements and the related notes, appearing elsewhere in this report, as well as Item 7 of this report.

 

   Years ended March 31, 
Statements of Operations  2011   2010   2009   2008   2007 
       (Restated)   (Restated)         
Net revenue  $13,013,480   $21,073,166   $18,515,208   $40,359,662   $19,844,776 
Operating expenses:                         
Total operating expenses   22,874,274    26,380,783    9,702,045    3,693,369    1,690,293 
Total other income (expense)   841,124    384,658    235,128    326,194    11,566 
Interest income   1,022,556    517,039    1,261,708    275,538    22,819 
Net income (loss)   (19,756,880)   (14,178,943)   810,763    20,795,695    10,063,293 
Net income (loss) attributable to Company  $(15,409,176)  $(8,386,643)  $2,541,795   $20,795,695   $10,063,293 
Net income (loss) per common share:                         
Basic and diluted  $(0.20)  $(0.11)  $0.04   $0.37   $0.17 
Weighted average common shares outstanding:                         
Basic and diluted   75,983,203    75,983,205    66,637,448    55,350,545    59,821,414 
                          

 

 

Balance Sheets  March 31, 
   2011   2010   2009   2008   2007 
       (Restated)   (Restated)         
Current assets  $47,047,371   $43,186,040   $47,026,462   $19,414,774   $2,722,521 
Total assets   56,492,067    65,739,747    79,930,632    57,427,420    2,826,369 
Current liabilities   21,988,783    11,242,672    15,684,199    55,687,992    3,195,557 
Contingent liabilities   2,703,409    2,904,957             
Total liabilities   24,692,192    14,147,629    15,684,199    55,687,992    3,195,557 
Working capital   25,058,588    31,943,368    31,342,263    (36,273,218)   (473,036)
Stockholders' equity (deficit)   31,799,875    51,592,118    64,246,433    1,739,428    (369,188)

 

Our net income (losses) for each fiscal quarter during the two years ended March 31, 2011 were:

 

   6/30/2010   9/30/2010   12/31/2010   3/31/2011 
                 
Net revenue  $3,765,872   $4,711,418   $4,241,906   $294,284 
Gross profit   2,413,898    1,737,639    1,561,779    (3,367,846)
Income tax (expense) benefit       (2,400)   (143,539)   76,739 
Net income (loss)   173,797    (4,875,804)   (3,400,260)   (11,654,613)
Non-controlling interest   474,453    2,792,696    876,257    204,298 
Net income (loss) attributable to Company   648,250    (2,083,108)   (2,524,003)   (11,450,315)
Net income (loss) per common share, basic and diluted   0.01    (0.03)   (0.03)   (0.15)

 

   6/30/2009   9/30/2009   12/31/2009   3/31/2010 
   (Restated)   (Restated)   (Restated)   (Restated) 
Net revenue  $5,046,677   $6,183,310   $4,507,110   $5,336,069 
Gross profit   2,990,559    3,662,664    2,199,553    2,968,911 
Income tax (expense) benefit   -    -    -    (4,505)
Net income (loss)   548,128    1,321,576    37,492    (16,086,139)
Non-controlling interest   574,173    546,195    485,564    4,186,368 
Net income (loss) attributable to Company   1,122,301    1,867,771    523,056    (11,899,771)
Net income (loss) per common share, basic and diluted   0.01    0.02    0.01    (0.15)

 

5
 

 

See Note 2 of the Notes to the Consolidated Financial Statements contained in Item 8 for a reconciliation of these amounts to previously reported amounts and Item 7 for information on items affecting comparability.

 

6
 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We believe that our Business to Customer business, which represents 98.8% of our total net revenues in the fiscal year ended March 31, 2011, is robust and that consumers have become more confident in ordering products, like ours, over the internet. However, the nutritional supplement and cosmetic e-business markets have and continue to become increasingly competitive and are rapidly evolving. Barriers to entry are minimal and current and new competitors can launch new websites at a relatively low cost. Many competitors in this area have greater financial, technical and marketing resources than we do. Continued advancement in technology and increasing access to that technology is paving the way for growth in direct marketing. We also face competition for consumers from retailers, duty-free retailers, specialty stores, department stores and specialty and general merchandise catalogs, many of which have greater financial and marketing resources than we have. Notwithstanding the foregoing, we believe that we are well-positioned within the Asian consumer market with our current plan of supplying American merchandise brands to consumers and that our exposure to both the Asian and American cultures gives us a competitive advantage. There can be no assurance that we will maintain our competitive edge or that we will continue to provide only American made merchandise.

 

Our products are sensitive to business and personal discretionary spending levels and tend to decline or grow more slowly during economic downturns, including downturns in any of our major markets.    The current worldwide recession is expected to adversely affect our sales and liquidity for the foreseeable future. Although we have mitigated decreases in sales by lowering our levels of inventory to preserve cash on hand, we do not know when the recession will subside and when consumer spending will increase from its current depressed levels. Even if consumer spending increases, we are not sure when consumer spending will increase for our products which will affect our liquidity.

 

The global economy is currently undergoing a period of unprecedented volatility, and the future economic environment may continue to be less favorable than that of recent years. This has led, and could further lead, to reduced consumer spending, and which may include spending on nutritional and beauty products and other discretionary items, such as our products. In addition, reduced consumer spending may force us and our competitors to lower prices. These conditions may adversely affect our revenues and profits.

 

In addition, we expect future operations to be affected by the Excalibur transportation business, Digital’s distribution of EFT Phones and our prospective water bottling operations.

 

Results of Operations

 

Material changes in our Statement of Operations for the periods presented are discussed below:

 

Year Ended March 31, 2011

 

    Increase (I) or    
Item   Decrease (D)   Reason
         
Sales revenue, net   D   Sales are recorded net of commissions we pay the Affiliates who are responsible for the sales, and the commission is paid to Affiliates upon receipt of sales orders which is even before revenue can be recognized.  In March 2011, $15 million of sales orders and payments were received. Out of the $15 million, only $3.5 million was recognized as revenue in accordance with our revenue recognition policy, but full commission expenses of $10 million related to these orders have been credited to the Affiliates’ accounts and were recorded as a reduction of revenue in this year, which resulted in a decrease in net revenue. Undelivered orders at year end, which is recorded as Unearned Revenue, will be recognized as revenue once they are delivered.   The increase in commissions of $6.0 million, while causing a $1.5 million reduction in our gross sales, decreased our net sales revenue by $7.5 million.
         
Shipping charges   D   Decrease in gross sales of $1.5 million, and we did not collect 10% of shipping fees for the $3.0 million of sales made through our reverse auction program since products sold under this program are shipped directly by the manufacturer of the product.

 

7
 

 

Cost of goods sold   I   The cost of phones, which were not sold during the year ended March 31, 2010 and have a much higher cost than personal care products, representing 21% of total cost of goods sold.

Shipping costs   I   Logistic service provider increased its freight charges during the year.

 

Gross Profit as a % of total revenue   D   Gross profit, as a % of total revenue, was 26% during fiscal 2011 compared with 56% during the year ended March 31, 2010.  The main reasons for the decrease in gross profit were a decrease in gross sales of $1.5 million, while there was a $6.0 million increase in commission expense incurred due to the significant increase in unearned revenue for the year and shipping costs.
         
Selling, general and administrative expenses   D   Lesser administrative expenses incurred by Excalibur due to layoff of some staff members after the ship was damaged and rendered inoperable on August 8, 2010.
         
Impairment of investment   I   We used $5 million of our excess cash to invest in a convertible note receivable bearing 8% interest during the year.  On March 12, 2011, the note was converted into 10,593,220 shares of CTX Virtual Technologies, Inc. and an equal number of warrants to acquire one share of CTX common stock. The common stock of CTX is quoted on the Pink OTC market. Because of the lack of a sufficiently active market, we do not believe that quoted market prices for CTX’s common stock are a reliable indicator of fair value. Despite repeated inquiries and requests to CTX for current financial information that would allow us to assess the recoverability of our investment, we have not been able to obtain any information to enable us to assess the fair value of this investment. Accordingly, our management concluded that it would be prudent to conclude, in the absence of persuasive evidence to the contrary, that the investment should be considered impaired and therefore we have provided an impairment loss of $5 million during the period.
         
Impairment of goodwill   D   Excalibur suffered significant losses and only generated minimal income. The management hence decided to write off previously recorded purchase goodwill during 2010.
         
Impairment loss of equipment   D   Further impairment of transportation equipment was recognized as the net book value of the Excalibur transportation equipment exceeded its market value as a result of damage sustained by OceanLaLa on August 8, 2010.
         
Impairment loss of loan receivable   I   We determined during the period that the related party, to whom we made the loan, would not be able to repay the loan.
         
Interest income   I   Increase in investment in corporate notes and bonds.
         
Gain on disposal of held-to-maturity securities   I   We sold all our corporate notes in November 2010 as the issuers of some securities experienced significant deteriorations in their creditworthiness.
         
Foreign exchange loss   D   Changes in foreign exchange rates.
         
Other losses   I   Other losses represent loss resulting from a security breach in the Members area, in which an Affiliate was able to access the system in a manner that enabled them to alter the way the system’s automated transactions functioned and thus were able to create unauthorized, fraudulent transactions within the system.

 

8
 

 

         
Income tax expenses   I   Provision for tax liabilities due to subpart F income received in prior year.

Year Ended March 31, 2010

 

    Increase (I) or    
Item   Decrease (D)   Reason
         
Sales revenue, net   I   Sales are recorded net of the commissions we pay the Affiliates who are responsible for the sales.  We lowered the commission payout to our Affiliates by approximately 15% during the fiscal year ended March 31, 2010.  The reduction in commissions of $11 million, while causing a $7 million reduction in our gross sales, increased our net sales revenue by $4 million.
         
Shipping charges   D   We do not collect shipping fees for the sales made through our reverse auction program since products sold under this program are shipped directly by the manufacturer of the product.
         
Cost of goods sold   D   Gross sales decreased by $7 million, resulting in a corresponding decrease in cost of goods sold.
         
Shipping costs   D   Decrease in gross sales.
         
Operating cost – Excalibur   I   We did not acquire our interest in Excalibur until October 2008. As such, the operating cost for 2009 only represented less than six months of operating cost of Excalibur.
         
Gross Profit as a % of total revenue   I   Gross profit, as a % of total revenue, was 56% during fiscal 2010 compared with 55% during the year ended March 31, 2009.  The increase in our gross percentage was the result of increased sales revenue.  Sales revenue increased due primarily to a reduction in the amount of commissions we paid our Affiliates, and not as a result of increased product sales.  If sales revenue increased primarily as a result of product sales, there would have been a corresponding increase in cost of goods sold as well as shipping costs.
         
Interest income   D   Decline in interest rates.
         
Selling, general and administrative expenses   I   Increased due to the inclusion of the general and administrative expenses of Excalibur, as compared to the inclusion of less than six months of such expenses in 2009.
         
Impairment of goodwill   I   Excalibur suffered significant losses and only generated minimal income. The management hence decided to write off previously recorded purchase goodwill.
         

Impairment loss of equipment

 

  I   The net book value of OceanLaLa exceeded its market value after it was damaged.
         
Foreign exchange loss   I   Changes in foreign exchange rates.
         
Other income, net   D   Other income represents fees received for educational training classes conducted by the Company.  During the year ended March 31, 2010 group leaders conducted more of the classes and we did not receive any fees for the classes conducted by the group leaders.

 

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Capital Resources and Liquidity

 

The following table shows our sources and (uses) of our cash for the three years ended March 31, 2011.

 

   Year Ended March 31, 
   2011   2010   2009 
Net cash provided by (used in) operating activities  $4,547,136   $4,912,068   $(11,024,088)
Net cash (used in) investing activities   (7,180,044)   (13,904,536)   (18,158,923)
Net cash provided by (used in) financing activities   -    (193,992)   52,848,489 
Effect of exchange rate changes on cash   3,604    31,404    (241,533)
Net increase (decrease) in cash  $(2,629,304)  $(9,155,056)  $23,423,945 

 

The cash and cash equivalents and securities available for sale are our primary sources of liquidity. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at the present level for at least twelve months.

 

Operating Activities:

 

During the year ended March 31, 2011, we recorded a loss of $19,756,880, yet generated $4,547,136 from our operating activities.  The primary reason that we generated cash from our operating activities while suffering an operating loss was that impairment losses of approximately $7,000,000, associated with our investment in Excalibur, and impairment of $5,000,000 associated with our investment in CTX, were included in our operating loss. During this period, we also recorded approximately $11,300,000 of unearned revenue for cash that was received in the current period, but such revenue can only be recognized when goods are delivered to affiliates in future periods.

 

During the year ended March 31, 2010, we recorded a loss of $14,178,943, yet generated $4,912,068 from our operating activities.  The primary reason that we generated cash from our operating activities while suffering an operating loss was that losses of approximately $15,000,000, associated with our investment in Excalibur and depreciation of $2,300,000, which did not require the use of cash, were included in our operating loss.

 

During the year ended March 31, 2009, we had net income of $810,763, yet our operating activities used $11,024,088 in cash.  The primary reason that our operating activities used cash, despite having net income, was that during the year inventories and prepaid expenses increased, and we paid outstanding liabilities.  All of the foregoing required the use of cash but were not expensed in our statement of operations. During this period, we also recorded revenue which was previously recorded as unearned, with the result that a portion of our revenues were attributable to cash that was received in prior periods.

 

Investing activities:

 

Net cash used in investing activities for the year ended March 31, 2011 was $7,180,044, primarily attributable to our investment in CTX of $5,000,000, the purchase of $10,915,397 of available for sale securities and $470,297 of capital expenditure on construction in progress and leasehold improvements, partially offset by proceeds from corporate notes and securities available for sale of $8,705,650 and the redemption of corporate notes for $500,000.

 

Net cash used in investing activities for the year ended March 31, 2010 was $13,904,536, primarily attributable to the purchase of corporate notes for $4,800,184, the purchase of available for sale securities for $8,949,324 and capital expenditures of $1,353,248 on construction in progress and leasehold improvements, partially offset by $1,197,839 of loan repayments by related parties.

 

Net cash used in investing activities for the year ended March 31, 2009 was $18,158,923, primarily attributable to an equity investment in Excalibur of $15,985,269, loans to related parties of $1,897,000 and capital expenditures of $276,654 on equipment.

 

Financing activities:

 

We did not use or receive any cash from financing activities during the year ended March 31, 2011. Net cash used in financing activities for the year ended March 31, 2010 was $193,992, representing restricted cash frozen by the Taiwan Taipei district court as a result of a lawsuit filed against Excalibur for service fees and out-of-pocket expenses.

 

Net cash provided by financing activities for the year ended March 31, 2009 was $52,848,489, representing the proceeds from our private placement.

 

10
 

 

Material changes in our balance sheet items between March 31, 2011 and March 31, 2010 are discussed below:

 

    Increase (I) or    
Category   Decrease (D)   Reason
         
Cash and cash equivalents   D   We used some of our excess cash to invest in securities available for sale during the year ended March 31, 2011. We also reclassified $8,949,324 as securities available for sale that were reported as cash and cash equivalents at March 31, 2010.
         
Securities available for sale   I   We used some of our excess cash to invest in securities available for sale during the year ended March 31, 2011.
         
Inventories   D   Increase in product sales orders by year end.
         
Property and equipment   D   On August 8, 2010, OceanLaLa, the ship owned by Excalibur, was damaged when sailing in the Taiwan Strait. As a result of the damage, we estimated that the net book value of the ship exceeded its market value, and as a result, an impairment loss of $5.4 million has been provided.

 

Held-to-maturity securities   D   We sold all our corporate notes in November 2010 as the issuers of some securities experienced significant deteriorations in their creditworthiness.
         
Loans to related parties   D   We recorded an impairment loss of $1,567,000 during the period, as we determined that the related party to whom we made the loan would not be able to repay the loan.
         
Accounts payable   I   Marketing expenses accrued during the year have not been fully paid to the public relation company by year end.
         
Unearned revenue   I   Temporary delay in deliveries of product to Affiliates resulted in higher unearned revenues.
         
Non-controlling interest   D   This item represents the interests in Excalibur and Digital Development Partners, Inc. owned by others.

 

Between January and August 2008, we sold 14,890,040 Units to non-U.S. residents at a price of $3.80 per Unit.  The Units were sold pursuant to the exemption provided by Regulation S under the Securities Act of 1933.

 

Each Unit consisted of one share of our common stock and one warrant.  Each warrant allowed the holder to purchase one share of the Company’s common stock at a price of $3.80 per share at any time prior to November 30, 2010. On September 2, 2010, the Company extended the expiration date of the warrants to November 30, 2011. The Company has the right, but not the obligation, to redeem the outstanding warrants, on a pro rata basis, at a purchase price of $0.00001 per warrant within 30 days from the tenth consecutive trading day that the closing sales price, or the average of the closing bid and asked price, of the Company’s common stock trades on the OTC or any public securities market within the USA, for at least $11 per share.

 

We used $19,193,000 from the sale of the Units to purchase our 48.81% interest in Excalibur International Marine Corporation.

 

Yeuh-Chi Liu, a supplier of our spray bottles, borrowed $1,567,000 from us in July 2008.  The loan is non-interest bearing and is payable upon demand.  The loan was used by Yeuh-Chi Liu to acquire a 3.97% ownership of Excalibur International Marine Corporation and is secured by that interest. The Company provided a full allowance for impairment in the amount of $1,567,000 against the demand loan during the year. We have not yet enforced our interest in the collateral.

 

Since July 2008, we have made loans to Excalibur International Marine Corporation.  The loans were primarily used by Excalibur to acquire its ship, the OceanLaLa, and to fund operating costs.  As of March 31, 2011 we had the following outstanding loans to Excalibur. Because we consolidate Excalibur, these loans are not included in our consolidated financial statements.

 

11
 

 

Principal Amount     Interest Rate     Due Date
             
$ 1,564,717       0 %   Due on demand
$ 100,000       8 %   August 20, 2011
$ 250,000       8 %   September 1, 2011
$ 200,000       8 %   October 12, 2011
$ 1,100,000       8 %   November 13, 2011
$ 90,000       8 %   November 24, 2011
$ 2,500,000       8 %   November 25, 2011
$ 330,000       8 %   January 5, 2012
$ 100,000       8 %   January 7, 2012
$ 100,000       8 %   January 25, 2012
$ 120,000       8 %   February 1, 2012
$ 160,000       8 %   February 11, 2012
$ 140,000       8 %   March 10, 2012
$ 130,000       8 %   April 3, 2012
$ 512,000       8 %   April 30, 2012
$ 260,000       8 %   June 5, 2012
$ 150,000       8 %   June 28, 2012
$ 400,000       8 %   July 6, 2012
                 
$ 8,206,717              

 

 

From the proceeds from the sale of the Units, the Company bought $4.8 million of corporate bonds as investment securities during the year ended March 31, 2010. All corporate bonds were sold in November 2010.

 

The Company also lent $5,000,000 to CTX Virtual Technologies Inc., “CTX,” in July 2010. The loan to CTX was unsecured, bore interest at 8% per year and had a term of one year to July 26, 2011. At any time during the one-year term, the Company could, at its option, convert the loan into 8,474,576 units, with each unit consisting of one share of CTX’s common stock and one warrant (to be increased by 25% to 10,593,220 units if CTX common stock was not listed on either the American Stock Exchange, the OTC Bulletin Board or NASDAQ by February 28, 2011). On March 12, 2011, CTX elected to convert the full amount of $5,000,000 into 10,593,220 units and paid the Company in full all accrued and unpaid interest owing.

 

Since February 2010, the Company has started to buy securities available for sale to earn interest, and has invested $16 million in such securities at March 31, 2011.

 

The unused cash and cash equivalents of $26.8 million at March 31, 2011 will be used in the Company’s planned investment in a real estate project in Taiwan.

 

We have no unused lines of credit or other borrowing facilities and believe that our ongoing operations generate sufficient cash to meet their liquidity requirements.

 

Future Contractual Obligations

 

   Total   2012   2013   2014   2015   Thereafter 
                               
Lease payments  $690,500   $484,248   $206,252    -    -    - 

 

See Note 16 of the Notes to the Consolidated Financial Statements contained in Item 8 for our future contractual obligations under the employment agreements with certain of our executive officers and the consultancy agreement with a related party.

 

Other than as disclosed above and except for the payment obligation to purchase an office building located in Taipei Taiwan as disclosed in Item 2, we do not anticipate any capital requirements for the twelve months ending March 31, 2012.

 

Commitments for Capital Expenditures

 

Expect as otherwise disclosed herein, we do not have any commitments for any material capital expenditures. We do not have any commitments or arrangements from any person to provide us with any additional capital.

 

12
 

 

Except as disclosed in Item 1.A or this Item 7, we do not know of any trends or demands that affected, or are reasonably likely to affect, our capital resources or liquidity.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition.

 

Recent Events

 

Restatement of Financial Statements for the Prior Periods

 

We have restated our consolidated financial statements for prior periods to address two issues. See Note 2 of the Notes to the Consolidated Financial Statements contained in Item 8 for these issues and the effects of the restatement.

 

Significant Accounting Policies/Recent Accounting Pronouncements

 

See Note 3 to the Consolidated Financial Statements contained in Item 8 for a description of our significant accounting policies and recent accounting pronouncements which have, or potentially may have, a material impact on our financial statements.

 

Critical Accounting Policies and Estimates

 

Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, cash in time deposits, and certificates of deposit. We maintain our accounts in various banks.  Cash on deposit with several banks exceed the federally insured limit.

 

Inventories

 

Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory consists of nutritional, personal care, automotive additive, environmentally safe products, portable drinking containers and EFT-Phone.  We have two warehouses, one in City of Industry, CA and the other in Kowloon, HK. On a quarterly basis, we review inventory levels in each country for estimated obsolescence or unmarketable items, as compared with future demand requirements and the shelf life of the various products. Based on this review, we record inventory write-downs when costs exceed expected net realizable value. Historically, our estimates of the obsolete or unmarketable items have been insignificant.

 

Revenue/Unearned Revenue

 

Our revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, (“SAB 104”), ASC Topic 605, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and other applicable revenue recognition guidance and interpretations. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Transportation income is generated from transporting passengers and cargo and is recognized at the time when passengers and cargo are conveyed to the destination port. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.  Commissions paid to our Affiliates are considered to be a reduction of the selling prices of our products, and are recorded as a reduction of revenue.

 

Unearned Revenues consist of cash received in advance for goods to be delivered at a future date.  We record the payments received from customers as a liability until the products are delivered.  Sales are recorded when the products are delivered.

 

We have developed a reverse auction program, for the purpose of increasing revenues by attracting new members to join our Affiliate program. In a reverse auction the objective is to bid the price of a product down within a predetermined time frame unlike an ordinary auction (also known as a forward auction) where bidders bid the price up and the highest bidder wins the right to buy the product at the conclusion of bidding.  The reverse auction program was beta-tested and introduced to all Affiliates in June 2009. All the bidders acknowledge that they have read and understand the Terms and Conditions before they can participate in the program. The bidders must purchase bids in advance before entering the reverse auction program and these purchased bids are non-refundable.  Every bid has a fixed price of $1 and we only recognize revenue when a bidder places a bid on an auction product.  The reverse auction program generated $3,092,128 and $1,233,005, respectively, in sales revenue during the two years ended March 31, 2011.

 

13
 

 

Foreign Currency Translation

 

Our reporting currency is the U.S. dollar. Our operations in China, Hong Kong and Taiwan use their local currencies as their functional currency. The financial statements of our subsidiaries are translated into U.S. Dollars (USD) in accordance with ASC Topic 830, Foreign Currency Translation. According to ASC Topic 830, all assets and liabilities are translated at the year-end current exchange rate, stockholders equity items are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Reporting Comprehensive Income as a Component of Stockholders’ Equity. Foreign exchange transaction gains and losses are reflected in the income statement.

 

Income Taxes

 

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carry-forwards. Management must make assumptions, judgments and estimates to determine the current provision for income taxes and the deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Management’s judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, management’s interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or management’s interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our financial statements. Management’s assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations. Actual operating results and the underlying amount and category of income in future years could render management’s current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from the estimates, thus materially impacting our financial position and results of operations.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page(s)
   
Reports of Independent Registered Public Accounting Firm F-1
   
Reports of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting F-2
   
Consolidated Financial Statements  
   
Consolidated Balance Sheets F-4
   
Consolidated Statements of Operations F-5
   
Consolidated Statement of Changes in Stockholders’ Equity F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to Consolidated Financial Statements F-8

 

14
 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To The Board of Directors and Stockholders of

EFT Holdings, Inc.

City of Industry, California

 

We have audited the accompanying consolidated balance sheets of EFT Holdings, Inc. (the Company) and subsidiaries as of March 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EFT Holdings, Inc. and subsidiaries as of March 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EFT Holdings, Inc.’s internal controls over financial reporting as of March 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 17, 2011 expressed an adverse opinion thereon.

 

As described in Note 2, the Company determined it was necessary to restate the 2010 and 2009 consolidated financial statements.

  

/s/ Child, Van Wagoner and Bradshaw, PLLC

Salt Lake City, Utah

August 17, 2011, except Note 2, as to which the date is June 19, 2012

 

F-1
 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTOL OVER FINANCIAL REPORTING

 

To the Board of Directors and Stockholders of

EFT Holdings, Inc.

City of Industry, California

 

We have audited the EFT Holdings Inc. and subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). EFT Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of the internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statement for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.  We have identified the following material weaknesses of the company’s internal control over financial reporting. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2011 financial statements, and this report does not affect our report dated August 17, 2011 on those financial statements.

 

The items listed below are material weaknesses in the Company’s internal controls.  The final item consists of several significant deficiencies that have been aggregated to a material weakness that allowed the security breach that was not caught in a timely manner and resulted in a significant loss to the Company.

 

 

 

 · The Company initiated material investments without the proper approval of the Board of Directors.

 

F-2
 

 

· The Company has one individual, a consultant, with the ability and knowledge to create changes, and move them into the information system’s production environment.

 

· The Company has one individual, a consultant, with full control over the development, test and production of its information systems production environment.

 

· The Company’s information systems developer records changes in a manual log.  The Company’s information system does not have proper tools in place to track changes made in its system.

 

· Web-based application security controls are not adequate to prevent a breach in the Company’s information system.

 

· There is a lack of the information system resources needed to properly execute controls, including logical and physical access controls.

 

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, EFT Holdings, Inc. has not maintained effective internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EFT Holdings, Inc. as of March 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the three years in the period ended March 31, 2011 of EFT Holdings, Inc. and our report dated August 17, 2011 expressed an unqualified opinion thereon, which was not affected by the adverse opinion on internal control over financial reporting.

 

 

/s/ Child, Van Wagoner & Bradshaw, PLLC

Salt Lake City, Utah

August 17, 2011

 

F-3
 

 

EFT HOLDINGS, INC.

Consolidated Balance Sheets

 

   March 31, 2011   March 31, 2010 
       (Restated) 
ASSETS          
Current assets          
Cash and cash equivalents  $26,805,205   $29,434,509 
Securities available for sale   16,773,970    9,740,712 
Inventories   2,488,068    2,971,713 
Prepaid expenses   554,570    942,192 
Other receivables   425,558    96,914 
Total current assets   47,047,371    43,186,040 
           
Restricted cash   193,992    193,992 
Property and equipment, net   8,722,774    15,370,975 
Held-to-maturity securities   -    4,763,165 
Loans to related parties   -    1,567,000 
Security deposit   527,930    658,575 
Total assets  $56,492,067   $65,739,747 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $1,962,119   $1,424,459 
Commission payable   8,346,853    6,380,408 
Other liabilities   304,029    720,698 
Unearned revenues   11,327,787    2,673,680 
Due to related parties   47,995    43,427 
Total current liabilities   21,988,783    11,242,672 
           
Contingent liabilities   2,703,409    2,904,957 
Total liabilities   24,692,192    14,147,629 
           
Stockholders' equity          
EFT Holdings, Inc. stockholders' equity:          
Preferred stock, $.001 par value, 25,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, $0.00001 par value, 4,975,000,000 shares authorized, 75,983,201 shares issued and outstanding at March 31, 2011 and 75,983,205 shares issued and outstanding at March 31, 2010   760    760 
Additional paid in capital   52,854,891    52,854,891 
Retained deficit   (19,358,694)   (3,949,518)
Accumulated other comprehensive income (loss)   462,790    126,469 
Total EFT Holdings, Inc. stockholders' equity   33,959,747    49,032,602 
Non-controlling interests   (2,159,872)   2,559,516 
Total stockholders' equity   31,799,875    51,592,118 
           
Total liabilities and stockholders' equity  $56,492,067   $65,739,747 

 

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

 

F-4
 

 

EFT HOLDINGS, INC.

Consolidated Statements of Operations

   Year Ended 
   March 31, 2011   March 31, 2010   March 31, 2009 
       (Restated)   (Restated) 
Sales revenues, net  $9,277,352   $16,776,314   $12,846,809 
Shipping charges   3,579,905    4,006,080    5,657,625 
Transportation income - Excalibur   156,223    290,772    10,774 
    13,013,480    21,073,166    18,515,208 
Cost of goods sold   6,161,273    4,869,900    5,780,447 
Shipping costs   1,873,867    1,224,231    2,204,502 
Operating costs - Excalibur   2,632,870    3,157,348    250,179 
    10,668,010    9,251,479    8,235,128 
Gross profit   2,345,470    11,821,687    10,280,080 
Operating expenses:               
Selling, general and administrative expenses   8,905,593    9,244,229    7,388,908 
Impairment of investment   5,000,000    -    - 
Impairment of goodwill   -    8,935,848    - 
Impairment of loan receivable   1,567,000    -    - 
Impairment of transportation equipment   5,400,000    6,141,261    - 
Royalty expenses   2,001,681    2,059,445    2,313,137 
Total operating expenses   22,874,274    26,380,783    9,702,045 
Net operating income (loss)   (20,528,804)   (14,559,096)   578,035 
                
Other income (expense)               
Interest income   1,022,556    517,039    1,261,708 
Gain on disposal of held-to-maturity securities   243,855    -    - 
Gain on disposal of available for sale securities   119,919    -    - 
Dividend income   41,119    13,437    - 
Foreign exchange gain (loss)   (3,675)   (248,645)   (1,661,245)
Other losses   (640,193)   -    - 
Other income (expense)   57,543    102,827    634,665 
Total other income (expense)   841,124    384,658    235,128 
                
Net income (loss)  before income taxes and non-controlling interest   (19,687,680)   (14,174,438)   813,163 
Income taxes expense   (69,200)   (4,505)   (2,400)
Net income (loss)   (19,756,880)   (14,178,943)   810,763 
Non-controlling interests   4,347,704    5,792,300    1,731,032 
Net income (loss) attributable to EFT Holdings Inc.  $(15,409,176)  $(8,386,643)  $2,541,795 
Net income per common share               
Basic and diluted  $(0.20)  $(0.11)  $0.04 
Weighted average common shares outstanding               
Basic and diluted   75,983,203    75,983,205    66,637,448 

 

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

 

F-5
 

 

EFT HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

 

                   Accumulated         
           Additional   Retained   Other       Total 
   Common Stock   Paid-In   Earnings   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Capital   (Deficits)   Income (Loss)   Interests   Equity 
                             
BALANCE, APRIL 1, 2008   61,022,414   $610   $6,552   $1,895,330   $(163,064)  $-   $1,739,428 
                                    
Shares issued to former shareholders   66,667    1    (1)   -    -    -    - 
Issuance of common stock to employee   4,084    -    16,731    -    -    -    16,731 
Issuance of common stock in private placement offering   14,890,040    149    43,919,414    -    -    -    43,919,563 
Issuance of warrants in private placement offering   -    -    8,912,195    -    -    -    8,912,195 
Acquisition of subsidiary with non-controlling interest   -    -    -    -    -    10,757,296    10,757,296 
Comprehensive income:                                   
Net income   -    -    -    2,541,795    -    (1,731,032)   810,763 
Foreign currency translation adjustment   -    -    -    -    (772,332)   (809,992)   (1,582,324)
Unrealized loss on securities available for sale   -    -    -    -    (327,219)   -    (327,219)
Total comprehensive income   -    -    -    -    -    -    (1,098,780)
                                    
BALANCE, MARCH 31, 2009 - restated   75,983,205   $760   $52,854,891   $4,437,125   $(1,262,615)  $8,216,272   $64,246,433 
                                    
Acquisition of subsidiary with non-controlling interest   -    -    -    -    -    381    381 
                                    
Comprehensive income:                                   
Net loss   -    -    -    (8,386,643)   -    (5,792,300)   (14,178,943)
Unrealized gain on securities available for sale   -    -    -    -    245,623    -    245,623 
Foreign currency translation adjustment   -    -    -    -    1,143,461    135,163    1,278,624 
Total comprehensive income   -    -    -    -    -    -    (12,654,696)
                                    
BALANCE, MARCH 31, 2010 - restated   75,983,205   $760   $52,854,891   $(3,949,518)  $126,469   $2,559,516   $51,592,118 
Retirement of common stock   (4)   -    -    -    -    -    - 
Comprehensive income:                                   
Net loss        -    -    (15,409,176)   -    (4,347,704)   (19,756,880)
Unrealized gain on securities available for sale   -    -    -    -    206,198    -    206,198 
Foreign currency translation adjustment   -    -    -    -    130,123    (371,684)   (241,561)
Total comprehensive income   -    -    -    -    -    -    (19,792,243)
                                    
BALANCE, MARCH 31, 2011   75,983,201   $760   $52,854,891   $(19,358,694)  $462,790   $(2,159,872)  $31,799,875 

 

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

 

F-6
 

 

EFT HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

    Year Ended  
    March 31, 2011     March 31, 2010     March 31, 2009  
          (Restated)     (Restated)  
Cash flows from operating activities:                  
Net income (loss)   $ (19,756,880 )   $ (14,178,943 )   $ 810,763  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                        
Depreciation and amortization     1,255,415       2,284,127       409,582  
Bond premium amortization     9,625       -       -  
Stock based compensation     -       -       16,731  
Gain from securities available for sale     (119,919 )     -       -  
Gain from held-to-maturity securities     (243,855 )     -       -  
Impairment of investment     5,000,000       -       -  
Impairment of goodwill     -       8,935,848       -  
Impairment of loan receivable     1,567,000       -       -  
Impairment of transportation equipment     5,400,000       6,141,261       -  
Changes in operating assets and liabilities:                        
Inventories     483,646       937,231       (1,289,511 )
Prepaid expenses and other receivables     228,801       2,407,919       (257,840 )
Accounts payable     520,964       (2,399,492 )     (1,258,563 )
Commission payable     1,966,445       402,439       (5,648,236 )
Other liabilities     (418,213 )     (300,787 )     (1,547,424 )
Unearned revenues     8,654,107       682,465       (1,954,590 )
Income tax payable     -       -       (305,000 )
Net cash provided by (used in) operating activities     4,547,136       4,912,068       (11,024,088 )
                         
Cash flows from investing activities:                        
Assets acquired in acquisition of Digital Development     -       381       -  
Investments     (5,000,000 )     -       (15,985,269 )
Additions to fixed assets     (470,297 )     (1,353,248 )     (276,654 )
Notes receivable - related party     -       1,197,839       (1,897,000 )
Advancement to related party     (33,000 )     -       -  
Refund by related party     33,000       -       -  
Purchase of corporate notes     -       (4,800,184 )     -  
Proceeds from redemption of corporate notes     500,000       -       -  
Proceeds from corporate notes     4,497,395       -       -  
Purchase of securities available for sale     (10,915,397 )     (8,949,324 )     -  
Proceeds from securities available for sale     4,208,255       -     -  
Net cash (used in) investing activities     (7,180,044 )     (13,904,536 )     (18,158,923 )
                         
Cash flows from financing activities:                        
Restricted cash     -       (193,992 )     -  
Proceeds from issuance of common stock and warrants     -       -       52,848,489  
Net cash provided by (used in) financing activities     -       (193,992 )     52,848,489  
Effect of exchange rate changes on cash     3,604       31,404       (241,533 )
Net increase (decrease) in cash     (2,629,304 )     (9,155,056 )     23,423,945  
Cash, beginning of period     29,434,509       38,589,565       15,165,620  
Cash, end of period   $ 26,805,205     $ 29,434,509     $ 38,589,565  
                         
Supplemental disclosures of cash flow information:                        
Income taxes paid in cash   $ 145,939     $ 4,505     $ 2,400  

 

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

 

F-7
 

 

EFT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - ORGANIZATION

 

EFT Holdings, Inc. (“EFT Holdings” or “the Company”), formerly EFT Biotech Holdings, Inc., HumWare Media Corporation, GRG, Inc., Ghiglieri Corporation, Karat Productions, Inc., was incorporated in the State of Nevada on March 19, 1992.

 

On November 18, 2007, the Company issued 53,300,000 shares of its common stock in connection with a share exchange with the stockholders of EFT BioTech, Inc. (“EFT BioTech”), a Nevada Corporation formed on September 18, 2007 (the “Transaction”), pursuant to which EFT BioTech became a wholly-owned subsidiary of the Company. The 53,300,000 common shares issued included 52,099,000 to pre-capitalization shareholders and 1,201,000 to four directors and officers of EFT BioTech, and represented approximately 87.34% of the Company’s common stock outstanding after the Transaction. Consequently, the stockholders of EFT BioTech owned a majority of the Company's common stock immediately following the Transaction. As EFT Holdings was a non-operating public shell corporation that acquired an operating company, this Transaction was treated as a capital transaction where the acquiring corporation issued stock for the net monetary assets of the shell corporation, accompanied by a recapitalization. The accounting is similar in form to a reverse acquisition, except that goodwill or other intangibles are not recorded. All references to EFT BioTech common stock have been restated to reflect the equivalent numbers of EFT Holdings common shares.

 

The Company, through its subsidiaries, uses the internet as its “storefront” and business platform to sell and distribute American brand products consisting of 27 different nutritional products, some of which are oral sprays, 21 different personal care products, an environmentally protective automotive product, an environmentally friendly house cleaner and a flip top portable drinking container.

 

We only sell our products through our website and only to “Affiliates.” Except as through our reverse auction program, to become an Affiliate, a customer must be recommended by another Affiliate, make a minimum purchase of $300, and pay $30 for shipping and handling fees.

 

On July 25, 2008, the Company loaned $1,567,000 to Yeuh-Chi Liu, a vendor to the Company. The proceeds of the loan were used by Yeuh-Chi Liu to acquire a 3.97% interest in Excalibur International Marine Corporation (“Excalibur”), which was pledged as collateral for the loan. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. On October 25, 2008, EFT Investment Co. Ltd (“EFT Investment”), a subsidiary of the Company, acquired 48.81% of Excalibur’s capital stock.  Due to this combined ownership and the substantial financial support EFT Investment has provided to Excalibur to fund its operations and other factors, EFT Investment is deemed to have a controlling interest in Excalibur as defined by Accounting Standards Codification (”ASC”) Topic 810, Consolidation, which required the Company to consolidate the financial statements of Excalibur.

 

Historically, Taiwan Vessel Law provided for certain Taiwan shareholding requirements for companies owning ships registered in Taiwan.  For example, a limited liability company owning a ship registered in Taiwan (not operating international liners), like Excalibur, was required to have at least 2/3 of its capital stock owned by Taiwan citizens, violation of which was not subject to fines and/or other penalties.   The Vessel Law was amended in December 2010, and after the amendment, no more than 50% of the capital stock of limited liability companies owning ships registered in Taiwan, like Excalibur, can be owned by non-Taiwan citizens.  Therefore, the Company’s ownership in Excalibur is no longer required to be reduced to 33%, and the Company’s owning of 48.81% of the capital stock of Excalibur is in compliance with applicable law in Taiwan.

 

In February 2010 the Company assigned the worldwide distribution and servicing rights to a product known as the “EFT-Phone” to Digital Development Partners, a previously unrelated company, in exchange for 79,265,000 shares of Digital’s common stock.  The shares acquired represent approximately 92% of Digital’s outstanding common stock.

 

The EFT-Phone is a cell phone which uses the Microsoft operating system.  The EFT-Phone has an application that will allow the Company’s Affiliates to access all of their back office sites, including their commission accounts, through which the Affiliates will be able to deposit, withdraw and transfer money to another account or to another Affiliate at no cost.  The worldwide distribution and servicing rights to the EFT-Phone include the right to sell the EFT-Phone to the Company’s affiliates and others.  Digital also acquired the rights to distribute all EFT-Phone accessories. The EFT-Phone is manufactured by an unrelated third party.  Distribution of the EFT-Phone began in July, 2010.

 

Note 2 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS

 

The Company has restated its consolidated financial statements for prior periods, the effects of which are summarized below, to address two issues:

 

1. Excalibur:

 

F-8
 

 

As described in Note 9, the Company acquired a 48.81% interest in Excalibur on October 25, 2008. The Company initially loaned funds to Excalibur in July 2008 and subsequently has continued to provide Excalibur with loan capital to fund its operations.

 

The Company initially accounted for its investment in Excalibur under the equity method. As previously disclosed, as a result of damage to Excalibur’s primary asset and a change in Excalibur’s management on January 15, 2010, the Company became responsible for a majority of Excalibur’s gains and losses and, with effect from that date, the Company began to include Excalibur on a consolidated basis as a variable interest entity in the Company’s consolidated financial statements.

 

As previously disclosed, on July 25, 2008, the Company loaned $1,567,000 to Yeuh-Chi Liu, a vendor to the Company. The proceeds of the loan were used by Yeuh-Chi Liu to acquire a 3.97% interest in Excalibur, which was pledged as collateral for the loan. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. The current status of the loan is discussed in Note 8.

 

In initially considering whether its investment in Excalibur should be accounted for under the equity method or whether the investment in, and loans to, Excalibur resulted in the Company being the primary beneficiary of a variable interest entity, the Company did not consider the effect of the loan made to Yeuh-Chi Liu. In accordance with ASC 810-10-25-43, in determining whether the Company was the primary beneficiary of Excalibur, the interest in Excalibur held by Yeuh-Chi Liu as a result of the loan made to her by the Company should be treated in the same manner as the Company’s own interests.  As a result, the Company should have concluded that it effectively held control of Excalibur from the time it acquired its interest in Excalibur.

 

The Company has now restated its financial statements for periods prior to December 31, 2009 to consolidate Excalibur from the time it acquired its interest in Excalibur, rather than accounting for its investment in Excalibur under the equity method.

 

In reviewing the prior accounting for its interest in Excalibur, the Company also determined that certain errors were made in accounting for its interest in Excalibur and those errors have now been corrected.  These errors related to –

 

  1.1 For the three months ended December 31, 2008, Excalibur recorded a deferred tax benefit for its net operating loss.  Because the realization of the benefit of this net operating loss was not more likely than not, no benefit should have been recognized.

 

  1.2 The Company consolidates Excalibur based on quarterly data for the prior fiscal quarter. For the three months ended March 31, 2009 (Excalibur information for the fiscal quarter ended December 31, 2008) and June 30, 2009 (Excalibur information for the fiscal quarter ended March 31, 2009), the Company did not use the correct periods and partially duplicated Excalibur’s results of operations.

 

  1.3 During the three months ended December 31, 2008, Excalibur previously recorded a prepaid asset of approximately $14.8 million for deposits on two ships purportedly made by certain shareholders of Excalibur. Neither the deposits nor the ships are owned or controlled by Excalibur, and the existence of these deposits is the subject of litigation as described in Note 18. When Excalibur was consolidated beginning on January 15, 2010, this purported prepayment was treated as a stock subscription receivable and excluded from Excalibur’s assets to be consolidated.  However, an exchange loss previously recorded by Excalibur related to these deposits was not adjusted.

 

  1.4 The Company did not consistently adjust Excalibur’s financial statements to reflect the elimination of inter-company interest income and expense.

 

  1.5 Because of Excalibur’s continuing losses, the Company previously considered that the amount by which the carrying value of its investment in Excalibur exceeded the Company’s share of Excalibur’s net assets should be written off. The amount to be written off has been adjusted as a result of the above adjustments.

 

The effect of each of the above adjustments is summarized below.

 

   Year Ended   Three Months Ended   Year Ended 
   March 31, 2009   June 30, 2009   September 30, 2009   December 31, 2009   March 31, 2010   March 31, 2010 
                         
Net income (loss) attributable to EFT Holdings Inc                              
                               
Adjustments for -                              
Deferred tax benefit reversed  $(214,141)   -    -    -    -    - 
Duplication of reporting periods   269,355    490,920    -    -    (490,920)   - 
Exchange losses related to prepayment   437,322    -    -    -    -    - 
Omission of depreciation expenses   (176,029)   -    -    -    -    - 
Impairment of goodwill   -    1,080,969    -    -    (1,838,120)   (757,151)
Inter-company interest   98,391    -    -    -    333,554    333,554 
Exchange rate differences   (1,765)   (41,663)   (5,946)   1,577    (71,098)   (117,130)
    413,133    1,530,226    (5,946)   1,577    (2,066,584)   (540,727)
                               
Net income (loss) - as previously reported   2,128,662    (407,924)   1,873,715    521,479    (9,833,186)   (7,845,916)
                               
Net income (loss) – as restated  $2,541,795   $1,122,302   $1,867,769   $523,056   $(11,899,770)  $(8,386,643)

 

F-9
 

 

2. Digital Development Partners:

 

On February 18, 2010, the Company contributed its EFT Phone to Digital Development Partners, Inc., a previously unrelated company, in exchange for 79,265,000 common shares of Digital, representing 91.74% of Digital’s outstanding common stock.  This exchange was part of a re-organization undertaken by Digital in which the existing assets and proposed businesses of Digital were spun-off to Digital’s existing shareholders (excluding the Company) in exchange for the surrender by those shareholders of 20,095,000 shares of Digital’s then-outstanding common stock. In accounting for the transaction with Digital, the Company treated the transaction as a business combination, although as a result of the spin-off of its proposed business and related assets to its existing shareholders, Digital had no continuing business at the time its re-organization and the transaction with the Company were completed.

 

In accounting for the transaction with Digital in its consolidated financial statements for the three months and the year ended March 31, 2010, the Company incorrectly included $104,153 of expenses incurred by Digital during the three months ended March 31, 2010, which expenses were incurred prior to the transaction with the Company or related to the businesses spun-off to Digital’s prior shareholders.  After accounting for the non-controlling shareholders’ interest in such expenses and recording goodwill of $5,000 previously recorded by Digital, the Company recorded an offsetting net gain of $100,531 in its consolidated statement of operations for the three months ended March 31, 2010. The Company has now restated its consolidated financial statements for the three months and the year ended March 31, 2010 to eliminate the pre-transaction Digital expenses previously recorded and the non-controlling shareholders’ portion thereof, eliminate the pre-existing Digital goodwill recorded, and eliminate the offsetting net gain previously recognized related to the transaction. The net effect of these adjustments on the Company’s net loss for the year ended March 31, 2010 was not material.

 

 Effects of Restatement

 

 

The effects of the restatement of the Company’s prior period financial statements for the above matters are summarized below. In addition, as disclosed below, the Company has restated its prior period financial statements to provide segment information not previously provided and to include information on non-recurring fair value measurements.

 

F-10
 

  

Consolidated Balance Sheets

Comparison for the Year Ended March 31, 2010 and 2009

 

   March 31, 2010   March 31, 2009 
   As Previously
Reported
   As Restated   As Previously
Reported
   As Restated 
                 
Current assets                    
Cash and cash equivalents  $29,434,509   $29,434,509   $38,181,837   $38,589,565 
Securities available for sale   9,740,712    9,740,712    508,746    508,746 
Inventories   2,971,713    2,971,713    3,908,629    3,908,940 
Prepaid expenses   475,092    942,192    2,551,298    2,923,023 
Other receivables   96,914    96,914    33,504    1,096,188 
Short-term notes receivable – Excalibur   -    -    4,064,717    - 
Total current assets   42,718,940    43,186,040    49,248,731    47,026,462 
                     
Restricted cash   193,992    193,992    -    - 
Property and equipment, net   15,370,975    15,370,975    360,156    22,020,413 
Investments in bonds   4,763,165    4,763,165    -    - 
Equity method investment – Excalibur   -    -    17,129,314    - 
Loans to related parties   2,034,100    1,567,000    1,897,000    1,897,000 
Security deposit   658,575    658,575    31,121    50,909 
Goodwill   5,000    -    -    8,935,848 
    23,025,807    22,553,707    19,417,591    32,904,170 
                     
Total assets  $65,744,747   $65,739,747   $68,666,322   $79,930,632 
                     
Current liabilities:                    
Accounts payable   2,346,835    1,424,459    3,610,195    6,424,740 
Commission payable   6,380,408    6,380,408    5,977,969    5,977,969 
Other liabilities   720,698    720,698    697,583    1,247,851 
Unearned revenues   2,673,680    2,673,680    1,991,215    1,991,215 
Due to related parties   43,427    43,427    -    42,424 
Total current liabilities   12,165,048    11,242,672    12,276,962    15,684,199 
                     
Contingent liabilities   2,904,957    2,904,957    -    - 
                     
Total liabilities   15,070,005    14,147,629    12,276,962    15,684,199 
                     
Stockholders’ equity:                    
                     
EFT Holdings Inc. stockholders’ equity                    
Common stock   760    760    760    760 
Additional paid-in capital   52,854,891    52,854,891    52,854,891    52,854,891 
Retained earnings (deficit)   (3,821,924)   (3,949,518)   4,023,992    4,437,125 
Accumulated other comprehensive income (loss)   (469,326)   126,469    (490,283)   (1,262,615)
Total EFT Holdings Inc. stockholders’ equity   48,564,401    49,032,602    56,389,360    56,030,161 
                     
Non-controlling interests   2,110,341    2,559,516    -    8,216,272 
                     
Total stockholders’ equity   50,674,742    51,592,118    56,389,360    64,246,433 
                     
Total liabilities and stockholders’ equity  $65,744,747   $65,739,747   $68,666,322   $79,930,632 

 

F-11
 

 

Consolidated Statements of Operations

Comparison for the Year Ended March 31, 2010 and 2009

 

   Year Ended March 31, 2010   Year Ended March 31, 2009 
   As Previously
Reported
   As Restated   As Previously
Reported
   As Restated 
                 
Sales revenue, net  $16,776,314   $16,776,314   $12,846,809   $12,846,809 
Shipping charge   4,006,080    4,006,080    5,657,625    5,657,625 
Transportation income – Excalibur   -    290,772    -    10,774 
    20,782,394    21,073,166    18,504,434    18,515,208 
                     
Cost of goods sold   4,869,900    4,869,900    5,780,447    5,780,447 
Shipping cost   1,224,231    1,224,231    2,204,502    2,204,502 
Operating costs – Excalibur   -    3,157,348    -    250,179 
    6,094,131    9,251,479    7,984,949    8,235,128 
                     
Gross profit   14,688,263    11,821,687    10,519,485    10,280,080 
                     
Operating expenses:                    
Selling, general and administrative expenses   7,171,017    9,244,229    6,616,025    7,388,908 
Impairment of transportation equipment   -    6,141,261    -    - 
Impairment of goodwill   -    8,935,848    -    - 
Royalty expenses   2,059,445    2,059,445    2,313,137    2,313,137 
Total operating income (loss)   9,230,462    26,380,783    8,929,162    9,702,045 
                     
Net operating income (loss)   5,457,801    (14,559,096)   1,590,323    578,035 
                     
Other income (expense)                    
Interest income   546,471    517,039    1,246,433    1,261,708 
Investment income   13,437    13,437    -    - 
Loss from equity method investment   (5,744,421)   -    (2,063,686)   - 
Equity method investment write-off   (8,178,697)   -    -    - 
Foreign exchange gain (loss)   (133,437)   (248,645)   723,357    (1,661,245)
Other income (expense)   88,780    102,827    634,635    634,665 
Total other income (expense)   (13,407,867)   384,658    540,739    235,128 
                     
Net income (loss)  before income taxes and non-controlling interest   (7,950,066)   (14,174,438)   2,131,062    813,163 
Income taxes expense   (4,505)   (4,505)   (2,400)   (2,400)
Extraordinary gain   100,531    -    -    - 
Net income (loss)   (7,854,040)   (14,178,943)   2,128,662    810,763 
Non-controlling interest   8,124    5,792,300    -    1,731,032 
Net income (loss) attributable to EFT Holdings Inc.  $(7,845,916)  $(8,386,643)  $2,128,662   $2,541,795 
                     
Net income (loss) per common share:                    
Basic and diluted  $(0.10)  $(0.11)  $0.03   $0.04 
                     
Weighted average common shares outstanding   75,983,205    75,983,205    66,637,448    66,637,448 

 

F-12
 

 

Consolidated Statements of Operations

Three Months Ended June 30, September 30 and December 31, 2009

 

   Three Months Ended   Three Months Ended   Three Months Ended 
   June 30, 2009   September 30, 2009   December 31, 2009 
   As Previously
Reported
   As Restated   As Previously
Reported
   As Restated   As Previously
Reported
   As Restated 
                         
Sales revenue, net  $3,989,316   $3,989,316   $5,125,444   $5,125,444   $3,362,196   $3,362,196 
Shipping charge   1,054,080    1,054,080    995,490    995,490    965,520    965,520 
Transportation income – Excalibur   -    3,281    -    62,376    -    179,394 
    5,043,396    5,046,677    6,120,934    6,183,310    4,327,716    4,507,110 
                               
Cost of goods sold   960,448    960,448    1,365,484    1,365,483    1,048,913    1,048,913 
Shipping cost   301,900    301,900    286,468    286,468    334,879    334,879 
Operating costs – Excalibur   -    793,770    -    868,695    -    923,765 
    1,262,348    2,056,118    1,651,952    2,520,646    1,383,792    2,307,557 
                               
Gross profit   3,781,048    2,990,559    4,468,982    3,662,664    2,943,924    2,199,553 
                               
Selling, general and administrative expenses   2,306,319    2,524,505    2,253,548    2,501,530    2,398,664    2,601,802 
                               
Net operating income (loss)   1,474,729    466,054    2,215,434    1,161,134    545,260    (402,249)
                               
Other income (expense)                              
Interest income   164,932    165,054    134,462    134,663    426,577    426,601 
Investment loss – 48.81% Excalibur   (1,080,969)   -    -    -    -    - 
Loss from equity method investment   (996,734)   -    (514,854)   -    (464,566)   - 
Foreign exchange gain (loss)   886    (112,212)   (5,038)   (17,951)   751    (351)
Other income (expense)   29,232    29,232    43,711    43,730    13,457    13,491 
Total other income (expense)   (1,882,653)   82,074    (341,719)   160,442    (23,781)   439,741 
                               
Net income (loss)  before income taxes   (407,924)   548,128    1,873,715    1,321,576    521,479    37,492 
Income taxes expense   -    -    -    -    -    - 
                               
Net income (loss) before non-controlling interest   (407,924)   548,128    1,873,715    1,321,576    521,479    37,492 
Non-controlling interest   -    574,173    -    546,195    -    485,564 
Net income (loss) attributable to EFT Holdings Inc.  $(407,924)  $1,122,301   $1,873,715   $1,867,771   $521,479   $523,056 
                               
Net income (loss) per common share:                              
Basic and diluted  $(0.01)  $0.01   $0.02   $0.02   $0.01   $0.01 
                               
Weighted average common shares outstanding   75,983,205    75,983,205    75,983,205    75,983,205    75,983,205    75,983,205 

 

F-13
 

 

Consolidated Statements of Cash Flows

Comparison for the Year Ended March 31, 2010 and 2009

 

   Year Ended March 31, 2010   Year Ended March 31, 2009 
   As Previously Reported   As Restated   As Previously Reported   As Restated 
                 
Cash flows from operating activities:                    
Net income (loss)  $(7,854,040)  $(14,178,943)  $2,128,662   $810,763 
                     
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                    
Depreciation and amortization   77,110    2,284,127    51,514    409,852 
Loss on equity method investment   5,744,421    -    2,063,686    - 
Warranty liability   (9,079)   -    (33,924)   - 
Stock based compensation   11,467    -    16,731    16,731 
Impairment of goodwill   -    8,935,848    -    - 
Impairment of transportation equipment   -    6,141,261    -    - 
Equity method investment write-off   8,178,697    -    -    - 
Extraordinary gain from acquisition of business   (100,531)   -    -    - 
                     
Changes in operating assets and liabilities:                    
Inventories   936,916    937,231    (1,289,200)   (1,289,511)
Prepaid expenses and other receivable   1,478,331    2,407,919    (1,761,551)   (257,840)
Accounts payable   (2,520,479)   (2,399,492)   2,806,154    (1,258,563)
Commission payable   -    402,439    -    (5,648,236)
Other liabilities   406,742    (300,787)   (6,078,238)   (1,547,424)
Unearned revenues   682,465    682,465    (1,954,590)   (1,954,590)
Income tax payable   -    -    305,000    (305,000)
Net cash provided by (used in) operating activities   7,032,020    4,912,068    (3,745,756)   (11,023,818)
                     
Cash flows from investing activities:                    
Cash acquired in acquisition of Digital Development   96,561    381    -    - 
Cash acquired upon taking control of Excalibur   728,298         -      
Additions to fixed assets   (993,800)   (1,353,248)   (305,068)   (276,654)
Note receivables – related party   (1,660,382)   1,197,839    (5,961,717)   (1,897,000)
Purchase of corporate notes   (4,800,184)   (4,800,184)   -    - 
Purchase of securities available for sale   -    (8,949,324)   -    - 
Investments   -    -    (19,193,000)   (15,985,269)
Stock issuing costs   (3,992)        -      
Net cash (used in) investing activities   (6,633,499)   (13,904,536)   (25,459,785)   (18,158,923)
                     
Cash flows from financing activities:                    
Restricted cash   (193,992)   (193,992)   -    - 
Proceed from issuance of stock and warrants   -    -    52,831,758    52,848,489 
Net cash provided by (used in) financing activities   (193,992)   (193,992)   52,831,758    52,848,489 
Effect of exchange rate changes on cash   (2,533)   31,404    -    (241,533)
Net increase (decrease) in cash   201,996    (9,155,056)   23,626,217    23,424,215 
Cash, beginning of period   38,181,837    38,589,565    15,165,620    15,165,620 
Cash, end of period  $38,383,833   $29,434,509   $38,791,837   $38,589,835 
                     
Supplemental disclosures of cash flow information:                    
Income taxes paid in cash  $4,505   $4,505   $2,400   $2,400 
                     
Non-cash investing and financing activities:                    
Unrealized loss on securities available for sale  $245,623    -   $327,219    - 
Fixed assets sold with receivable   -    -   $33,504    - 
Release of cash from restriction   -    -   $37,845,432    - 

 

 

Selected Financial Data

 

   Years ended March 31, 
  2010   2010   2009   2009 
Statements of Operations    As Previously Reported   As Restated   As Previously Reported   As Restated 
Net revenue  $20,782,394   $21,073,166   $18,504,434   $18,515,208 
Operating expenses:                    
Total operating expenses   9,230,462    26,380,783    8,929,162    9,702,045 
Total other income (expense)   (13,407,867)   384,658    540,739    235,128 
Interest income   546,471    517,039    1,246,433    1,261,708 
Net income (loss)   (7,946,447)   (14,178,943)   2,128,662    810,763 
Net income (loss) attributable
to Company
  $(7,845,916)  $(8,386,643)  $2,128,662   $2,541,795 
Net income (loss) per common share:                    
Basic and diluted  $(0.10)  $(0.11)  $0.03   $0.04 
Weighted average common
shares outstanding:
                    
Basic and diluted   75,983,205    75,983,205    66,637,448    66,637,448 

 

  March 31, 
   2010   2010   2009   2009 
Balance Sheets    As Previously Reported   As Restated   As Previously Reported   As Restated 
Current assets  $42,622,026   $43,186,040   $49,215,227   $19,414,774 
Total assets   65,744,747    65,739,747    68,666,322    57,427,420 
Current liabilities   12,165,048    11,242,672    12,276,962    55,687,992 
Contingent liabilities   2,904,957    2,904,957    --    -- 
Total liabilities   15,070,005    14,147,629    12,276,962    55,687,992 
Working capital   30,456,978    31,943,368    36,938,265    (36,273,218)
Stockholders' equity (deficit)   50,674,742    51,592,118    56,389,360    1,739,428 

 

Our net income (loss) for each fiscal quarter during the year ended March 31, 2010 were:

 

   As Previously Reported 
   6/30/2009   9/30/2009   12/31/2009   3/31/2010 
Net revenue  $5,043,396   $6,120,934   $4,327,716   $5,290,348 
Gross profit   3,781,048    4,468,982    2,943,924    3,494,309 
Net income (loss) from
continuing operations
   (407,924)   1,873,715    521,479    (9,836,805)
Income tax (expense) benefit                  (4,505)
Net income (loss)   (407,924)   1,873,715    521,479    (9,941,310)
Non-controlling interest                  8,124 
Net income (loss) attributable to Company   (407,924)   1,873,715    521,479    (9,833,186)
Net income (loss) per common share, basic and diluted   (0.01)   0.02    0.01    (0.13)

 

F-14
 

 

   As Restated 
   6/30/2009   9/30/2009   12/31/2009   3/31/2010 
Net revenue  $5,046,677   $6,183,310   $4,507,110   $5,336,069 
Gross profit   2,990,559    3,662,664    2,199,553    2,968,911 
Net income (loss) from
continuing operations
                  (4,505)
Income tax (expense) benefit   548,128    1,321,576    37,492    (16,086,139)
Net income (loss)                    
Non-controlling interest   574,173    546,195    485,564    4,186,368 
Net income (loss) attributable to Company   1,122,301    1,867,771    523,056    (11,899,771)
Net income (loss) per common share, basic and diluted   0.01    0.02    0.01    (0.15)

 

Segment Information

 

The Company’s business is classified by management into two reportable business segments: transportation and online. The online business reportable segment is an aggregation of the Company’s online operating segments, which are organized to sell the Company’s products to affiliates through its websites. The online business reportable segment derives revenue from the sales of nutritional products, personal care products and EFT-phones. The transportation business reportable segment derives revenue from transport passengers and cargo between Taiwan and Mainland China through the Taiwan Strait.

 

Although substantially all of the Company’s revenue is generated from Mainland China, the Company is organizationally structured along business segments. The accounting policies of each of the Company’s operating segments are the same as those described in Note 3, “Summary of Significant Accounting Policies.”

 

The following tables provide business segment information as of and for the year ended March 31, 2010 and 2009.

 

    Year ended March 31, 2010  
    Online
business 
    Transportation business     Total  
Sales revenues, net  20,782,394   290,772   21,073,166 
Cost of goods sold   6,094,131    3,157,348    9,251,479 
Gross profit   14,688,263    (2,866,576)   11,821,687 
Operating expenses:               
    Selling, general and administrative expenses   7,066,562    2,177,667    9,244,229 
    Impairment of goodwill   -    8,935,848    8,935,848 
    Impairment loss of transportation equipment   -    6,141,261    6,141,261 
    Royalty expenses   2,059,445    -    2,059,445 
    Total operating expenses             26,380,783 
Net operating income (loss)   5,562,256    (20,121,352)   (14,559,096)
Other income             384,658 
Loss before income tax             (14,174,438)
                
Total long-lived assets   1,276,846    14,094,129    15,370,975 
                
Additions to long-lived assets   993,800    359,448    1,353,248 

 

    Year ended March 31, 2009 
    Online
business
    Transportation business    Total 
Sales revenues, net  18,504,434   10,774   18,515,208 
Cost of goods sold   7,984,949    250,179    8,235,128 
Gross profit   10,519,485    (239,405)   10,280,080 
Operating expenses:               
    Selling, general and administrative expenses   4,308,881    772,883    5,081,764 
    Marketing expenses   2,307,144    -    2,307,144 
    Royalty expenses   2,313,137    -    2,313,137 
    Total operating expenses             9,702,045 
Net operating income (loss)   1,590,323    (1,012,288)   578,035 
Other income             235,128 
Loss before income tax             813,163 
                
Total long-lived assets   360,156    21,660,257    22,020,413 
                
Additions to long-lived assets   276,654    -    276,654 
                

 

F-15
 

 

   Three months ended December 31, 2010 
   Online
business
   Transportation business   Total 
Sales revenues, net  4,160,577   81,329   4,241,906 
Cost of goods sold   (2,228,801)   (451,326)   (2,680,127)
Gross profit   1,931,776    (369,997)   1,561,779 
Operating expenses:               
    Selling, general and administrative expenses   1,511,693    321,417    1,833,110 
    Marketing expenses   299,374    -    299,374 
      Impairment loss of loan receivable   -    1,567,000    1,567,000 
      Impairment loss of  transportation equipment   -    1,164,091    1,164,091 
    Royalty expenses   502,566    -    502,566 
    Total operating expenses             5,366,141 
Net operating income (loss)   (381,857)   (3,422,505)   (3,804,362)
Other income             547,641 
Loss before income tax             (3,256,721)
                
Total long-lived assets   1,497,187    8,162,804    9,659,991 
                
Additions to long-lived assets   125,489    1,408    126,897 
                
                
    Three months ended September 30, 2010 
    Online
business
    Transportation business    Total 
Sales revenues, net  4,653,634   57,784   4,711,418 
Cost of goods sold   1,843,022    1,130,757    2,973,779 
Gross profit   2,810,612    (1,072,973)   1,737,639 
Operating expenses:               
    Selling, general and administrative expenses   1,727,811    222,787    1,950,598 
    Marketing expenses   277,858    -    277,858 
      Impairment loss of  transportation equipment   -    4,200,000    4,200,000 
    Royalty expenses   512,747    -    512,747 
    Total operating expenses             6,941,203 
Net operating income (loss)   292,196    (5,495,760)   (5,203,564)
Other income             330,160 
Loss before income tax             (4,873,404)
                
Total long-lived assets   1,421,438    8,940,515    10,361,953 
                
Additions to long-lived assets   31,707    -    31,707 

  

F-16
 

 

   Three months ended June 30, 2010 
   Online
business
   Transportation business   Total 
Sales revenues, net   4,649,402    -    4,649,402 
Cost of goods sold   1,543,612    691,892    2,235,504 
Gross profit   3,105,790    (691,892)   2,413,898 
Operating expenses:               
    Selling, general and administrative expenses   1,509,815    272,328    1,782,143 
    Marketing expenses   275,901    -    275,901 
    Royalty expenses   506,938    -    506,938 
    Total operating expenses             2,564,982 
Net operating loss   813,136    (964,220)   (151,084)
Other income             324,881 
Income before income tax             173,797 
                
Total long-lived assets   1,401,052    13,788,997    15,190,049 
                
Additions to long-lived assets   147,698    -    147,698 

 

 

Fair Value Measurements

 

As discussed in Note 9, the Company’s investment in the transportation equipment of Excalibur has been valued at fair value, on a non-recurring basis, using Level 3 – unobservable inputs, to reflect management’s estimate that the net book value of the transportation equipment owned by Excalibur exceeded its market value. Accordingly, on a non-recurring basis, using Level 3 – unobservable inputs, the Company recorded an impairment loss of $6.1 million during the year ended March 31, 2010. As of March 31, 2010, the Company also recorded an impairment loss of $8.9 million to write off the goodwill associated with the Company’s investment in Excalibur.

 

As part of the Company's periodic review of the value of its transportation assets, the Company recorded an impairment loss of $1.2 million and $4.2 million during the periods ended December 31 and September 30, 2010, respectively, to reflect management’s estimate that the net book value of the transportation equipment owned by Excalibur exceeded its market value.

 

   As previously reported 
   Level 1             
   Quoted Prices   Level 2   Level 3     
   in Active Markets   Significant Other   Significant     
   for Identical Assets   Observable Inputs   Unobservable Inputs   Total 
Securities available
for sale
     $   $-   $ 
-          December 31, 2010  $12,106,817    -    -    12,106,817 
-          September 30, 2010   11,233,654    -    -    11,233,654 
-          June 30, 2010   1,235,591    -    -    1,235,591 
-          March 31, 2010   9,740,712    -    -    9,740,712 

 

   As previously reported 
   Level 1             
   Quoted Prices   Level 2   Level 3     
   in Active Markets   Significant Other   Significant     
   for Identical Assets   Observable Inputs   Unobservable Inputs   Total 
Securities available
for sale
     $   $-   $12,106,8 
-          December 31, 2010  $12,106,817    -    -    17 
-          September 30, 2010   11,233,654    -    -    11,233,654 
-          June 30, 2010   1,235,591    -    -    1,235,591 
-          March 31, 2010   9,740,712    -    -    9,740,712 
                     
Transportation equipment of Excalibur                     
-          December 31, 2010              11,611,785    11,611,785 
-          September 30, 2010              13,333,122    13,333,122 
-          June 30, 2010              12,832,569    12,832,569 
-          March 31, 2010              17,270,427    17,270,427 

 

F-17
 

  

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Reclassification

 

Certain amounts have been reclassified to conform with the current period presentation. Specifically, certain amounts previously classified as cash and cash equivalents at March 31, 2010 have been reclassified as securities available for sale.  The amounts reclassified did not have an effect on the Company’s results of operations or stockholder’s equity.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

 

Foreign Currency

 

The Company’s reporting currency is the U.S. dollar. The Company’s operations in Hong Kong, Taiwan and China use their local currencies as their functional currency. The financial statements of the subsidiaries are translated into U.S. Dollars (USD) in accordance with ASC Topic 830, Foreign Currency Translation. According to ASC 830, all assets and liabilities are translated at the year-end current exchange rate, stockholders’ equity items are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Reporting Comprehensive Income as a Component of Stockholders’ Equity. Foreign exchange transaction gains and losses are reflected in the statement of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed in the footnotes to the financial statements.

 

F-18
 

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less. The Company maintains its accounts in banks and financial institutions in amounts that, at times, may exceed the federally insured limit. Management believes the Company is not exposed to any significant credit risk on those accounts.

 

Securities Available for Sale

 

The Company’s investments in corporate notes are classified as available-for-sale and are reported at fair value (based on quoted prices and market prices) using the specific identification method. Unrealized gains and losses, net of taxes, are reported as a component of stockholders’ equity. Realized gains and losses on investments are included in investment and other income, net when realized. Any impairment loss to reduce an investment’s carrying amount to its fair market value is recognized as an expense when a decline in the fair market value of an individual security below its cost or carrying value is determined to be other than temporary.

 

Inventories

 

Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory consists of nutritional, personal care, automotive additive, environmentally safe products, portable drinking containers and EFT-Phone. The Company has two warehouses, one in City of Industry, CA and the other in Kowloon, Hong Kong. On a quarterly basis, the Company’s management reviews inventory levels in each country for estimated obsolescence or unmarketable items, as compared with future demand requirements and the shelf life of the various products. Based on this review, the Company records inventory write-downs when costs exceed expected net realizable value. Historically, the Company’s estimates of obsolete or unmarketable items have been insignificant.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

 

Machinery and equipment 3-8 years
Computers and office equipment 3-5 years
Automobiles 5 years
Leasehold improvements 5 years
Transportation equipment 12 years

 

For the three years ended March 31, 2011, depreciation expenses were $1,255,415, $2,284,127 and $409,582 respectively.

 

Long-Lived Assets

 

The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC Topic 360. ASC Topic 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset’s carrying amount. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. The Company has recorded an impairment loss of $5.4 million on the transportation equipment of Excalibur for the year ended March 31, 2011 because the net book value of the equipment has exceeded its market value.

 

Fair Value of Financial Instruments

 

ASC Topic 825 requires the Company to disclose the estimated fair values of financial instruments. The carrying amounts reported in the Company’s consolidated balance sheets for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value due to the short-term maturity of these instruments.

 

Fair Value Measurements

 

F-19
 

 

ASC Topic 820 defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC Topic 820 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various other accounting pronouncements. The adoption of ASC Topic 820 did not have a material effect on the Company’s financial condition or operating results.

 

Refer to Note 4, “Fair Value Measurements” for additional information on ASC Topic 820.

 

Stock-Based Compensation

 

ASC Topic 718 requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees.

 

Stock Issued to Officers or Employees

 

During the three years ended March 31, 2011, the Company did not issue any stock options or warrants to its officers or employees nor were there any outstanding warrants or options held by officers or employees as of March 31, 2011.

 

Stock Issued for Services

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from persons other than employees in accordance with ASC Topic 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of performance commitment or completion of performance by the provider of goods or service as defined by ASC Topic 505.

 

Revenue / Unearned Revenue

 

The Company’s revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, (“SAB 104”), ASC Topic 605, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and other applicable revenue recognition guidance and interpretations. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Transportation income is generated from transporting passengers and cargo and is recognized when passengers and cargo are conveyed to the destination port. Payments received before all relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.  Commissions paid to the Company’s Affiliates are considered to be a reduction of the selling prices of its products, and are recorded as a reduction of revenue. The Company policy is to pay out commission to Affiliates upon receipt of sales orders even before revenue can be recognized.

 

Unearned Revenues consist of cash received in advance for goods to be delivered at a future date. The Company records the payments received from Affiliates as a liability until the products are delivered. Sales are recorded when the products are delivered.

 

In 2009, the Company developed a “reverse auction” program as a means of attracting younger members who typically would not otherwise become an Affiliate. The reverse auction is unlike an ordinary auction, also known as a forward auction, where bidders bid the price up and the highest bidder wins that product at the conclusion of bidding. In a reverse auction the objective is to bid the price of a product down.

 

Cars, laptop computers, cameras, television sets and many other products are offered through the reverse auction program at starting bid prices which are typically set at 25% of the manufacturer’s suggested retail price.

 

To participate in the reverse auction, one must initially purchase 300 bids at a price of $1.00 per bid. The purchase of the 300 bids automatically qualifies the purchaser as an Affiliate, and no purchase of the Company’s products is required. All bids are non-refundable once purchased.

 

Once the reverse auction for a particular product begins, participants can, through a designated website, enter a bid for the product. Each $1.00 bid lowers the price of the product by $0.01. At the conclusion of the auction, the person who entered the last bid is entitled to buy the product at the price reduced by the auction process. The Company only recognizes revenue for the price a bidder pays to purchase relevant bids when the bidder places such bids on an auction product.

 

F-20
 

 

For the two years ended March 31, 2011, the reverse auction program generated revenues of $3,092,128 and $1,233,005 respectively.

 

Warranty

 

The Company generally does not provide customers with right of return, but does provide a warranty, entitling the purchaser to a replacement of defective products within six months from the date of sale.  Historically, warranty costs have not been material. Factors that affect the Company’s warranty liability include the number of products currently under warranty, historical and anticipated rates of warranty claims on those products, and cost per claim to satisfy the warranty obligation. Other factors are less significant due to the fact that the warranty period is only six months and replacement products are already in stock or available at a pre-determined price. The anticipated rate of warranty claims is the primary factor impacting the estimated warranty obligation. Warranty claims are relatively predictable based on historical experience. Warranty reserves are included in other liabilities and the provision for warranty accruals is included in cost of goods sold in the Consolidated Statements of Operations. Management reviews the adequacy of warranty reserves each reporting period based on historical experience. The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty. If actual results differ from the estimates, the Company revises its estimated warranty liability.

 

As of March 31, 2011, the Company’s estimated warranty expense was as follows:

 

Products sold for 
0-2 months 2% of cost
3-4 months 1.5% of cost
5-6 months 1% of cost

 

Shipping Costs

 

The Company’s shipping costs are included in cost of sales for all periods presented.

 

Marketing Expenses

 

On January 1, 2009, EFT International Limited, a wholly-owned subsidiary of EFT Holdings, Inc., entered into a contract with ZR Public Relation Consultant Ltd. (the Consultant), which provides public relations consulting services in Asia.  In consideration of the services rendered by the Consultant, EFT International Limited pays 5% of total commission payout for each fiscal year.  For the three years ended March 31, 2011, consultant expense for EFT International Limited was $1,524,866, $ 1,279,307 and $1,771,944 respectively.

 

Income Taxes

 

The Company follows ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

 

 

Earnings per Share

Basic net income per share is computed on the basis of the weighted average number of common shares outstanding during the period.

 

Diluted net income per share is computed on the basis of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income per share are excluded from the calculation.

 

Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

F-21
 

 

The following table shows the weighted-average number of potentially dilutive shares excluded (since they were anti-dilutive) from the diluted net income per share calculation for the three years ended March 31, 2011:

 

   Year Ended March 31, 
   2011   2010   2009 
             
Weighted average warrants outstanding   14,890,040    14,890,040    14,890,040 
Total   14,890,040    14,890,040    14,890,040 
                
Historical Numerator:               
Net income (loss) attributable to EFT Holdings, Inc  $(15,409,176)  $(8,386,643)  $2,541,795 
                
Denominator:               
Weighted-average shares used for basic and diluted net income per share   75,983,203    75,983,205    66,637,448 
Basic and diluted net income (loss) per share  $(0.20)  $(0.11)  $0.04 

 

Comprehensive income

 

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented is comprised of net income, unrealized loss on marketable securities classified as available-for-sale, and foreign currency translation adjustments.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions, but several of its bank accounts exceed the federally insured limit. The Company’s accounts receivable are constantly at a marginal to zero dollar ($0) level and its revenues are derived from orders placed by consumers located anywhere in the world over the Company’s designated internet portal. The Company maintains a zero dollar ($0) allowance for doubtful accounts and authorizes credits based upon its customers’ historical credit history. The Company routinely assesses the credits authorized to its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

Segment Reporting

 

ASC Topic 280, “Disclosure about Segments of an Enterprise and Related Information” requires use of the management approach model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

The Company’s business is classified by management into two reportable business segments: transportation and online. These reportable segments are two distinct businesses, each with a different customer base, marketing strategy and management structure. The online business reportable segment is an aggregation of the Company’s online operating segments, which are organized to sell the Company’s products to affiliates through its websites. The online business reportable segment derives revenue from the sales of nutritional products, personal care products and EFT-phones. The transportation business reportable segment derives revenue from transport passengers and cargo between Taiwan and Mainland China through the Taiwan Strait. Substantially all of the Company’s revenue is generated from Mainland China.

 

Recent accounting pronouncements

 

The following Accounting Standards Codification Updates have recently been issued, or will become effective, after the end of the period covered by these financial statements:

 

Pronouncement   Issued   Title
         
ASU No. 2010-26   October  2010   Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force)
         
ASU No. 2010-27   December  2010   Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers (a consensus of the FASB Emerging Issues Task Force)
         
ASU No. 2010-28   December  2010   Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)
         
ASU No. 2010-29   December  2010   Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)
         
ASU No. 2011-01   January  2011   Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
         
ASU No. 2011-02   April  2011   Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring
         
ASU No. 2011-03   April  2011   Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements
         
ASU No. 2011-04   May  2011   Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)
         
ASU No. 2011-05   June  2011   Comprehensive Income (Topic 220): Presentation of Comprehensive Income

 

F-22
 

 

To the extent appropriate, the guidance in the above Accounting Standards Codification Updates is already reflected in our consolidated financial statements and management does not anticipate that these accounting pronouncements will have any material effect on our consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, an amendment to ASC Topic 220, “Comprehensive Income”, which provides the entity has the option to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.   This topic will be effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 for public entities, early adoption is permitted but the Company does not believe that the adoption of the amendments to ASC 220 will have a material effect on its financial statements.

 

In May 2011, the FASB issued ASU 2011-04, an amendment to ASC Topic 820 “Fair Value Measurement”, which the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify FASB’s intent about the application of existing fair value measurement requirement, including (1) specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities; (2) requirements specific to measuring the fair value of instrument classified in a reporting entity’s shareholders equity, such as equity interest issued as consideration in a business combination; and (3) clarifying that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.

 

Other amendments change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements, including (1) permitting an exception to the requirements in Topic 820 for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to those risks; (2) clarifying that the application of premiums and discount in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value; and (3) requiring additional disclosures about fair value measurements. This topic will be effective for periods beginning after December 15, 2011, early adoption is not permitted. The Company does not believe that the adoption of the amendments to ASC 820 will have a material effect on its financial statements.

 

F-23
 

 

In December 2010, the FASB issued ASU 2010-29, an amendment to ASC Topic 805, “Business Combinations”, which provides clarification that if a public entity presents comparative financial statements, it should disclose revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This topic will be effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company does not believe that the adoption of the amendments to ASC 805 will have a material effect on its financial statements.

 

In December 2010, the FASB issued ASU 2010-28, an amendment to ASC Topic 350 “Intangibles-Goodwill and Other” which modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendment requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This topic will be effective for periods beginning after December 15, 2010, early adoption is not permitted. The Company does not believe that the adoption of the amendments to ASC 350 will have a material effect on its financial statements.

 

Note 4 - FAIR VALUE MEASUREMENTS

 

ASC Topic 820 defines fair value, establishes a framework for measuring fair value and enhances disclosure requirements for fair value measurements. This topic does not require any new fair value measurements. ASC Topic 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 — Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3 — Unobservable inputs which are supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with ASC Topic 820, the Company measures its securities available for sale at fair value on a recurring basis. The securities available for sale are classified within Level 1 since they are valued using quoted market prices.

 

As discussed in Note 10, the Company’s investment in CTX Virtual Technologies has been valued at fair value, on a non-recurring basis, using Level 3 – unobservable inputs, to reflect the Company’s assessment of its inability to recover its investment in the foreseeable future. Accordingly, on a non-recurring basis, using Level 3 – unobservable inputs, the Company provided an impairment loss of $5.0 million during the year ended March 31, 2011.

 

As discussed in Note 9, the Company’s investment in the transportation equipment of Excalibur has been valued at fair value, on a non-recurring basis, using Level 3 – unobservable inputs, to reflect management’s estimate that the net book value of the transportation equipment owned by Excalibur exceeded its market value. Accordingly, on a non-recurring basis, using Level 3 – unobservable inputs, the Company recorded impairment losses of $5.4 million during the year ended March 31, 2011, and an impairment loss of $6.1 million during the year ended March 31, 2010. As of March 31, 2010, the Company also recorded an impairment loss of $8.9 million to write off the goodwill associated with the Company’s investment in Excalibur.

 

Assets measured at fair value are summarized below:

 

   March 31, 2011 
   Level 1             
   Quoted Prices   Level 2   Level 3     
   in Active Markets for   Significant Other   Significant     
   Identical Assets   Observable Inputs   Unobservable Inputs   Total 
Securities available for sale                    
- Corporate bonds  $16,773,970   $-   $-   $16,773,970 
CTX Virtual Technologies   -    -    -      
Transportation equipment of Excalibur   -    -    11,611,785    11,611,785 
                     
Total assets measured at fair value  $16,773,970   $-   $11,611,785   $28,385,755 

 

F-24
 

 

   March 31, 2010 
   Level 1             
   Quoted Prices   Level 2   Level 3     
   in Active Markets for   Significant Other   Significant     
   Identical Assets   Observable Inputs   Unobservable Inputs   Total 
Securities available for sale  $9,740,712   $-   $-   $9,740,712 
Transportation equipment of Excalibur   -    -    17,065,379    17,065,379 
Total assets measured at fair value  $9,740,712   $-   $17,065,379   $26,806,091 

 

Note 5 - RESTRICTED CASH

 

On August 20, 2009, Taiwan Taipei district court froze Excalibur’s cash of $193,992 as a result of a lawsuit filed by Marinteknik Shipbuilders (S) Pte Ltd (a Singapore company) against Excalibur in the Taiwan Taichung District Court.  The lawsuit claims Excalibur owes service fees and out-of-pocket expenses of $249,731 to Marinteknik Shipbulider (S) PTE Ltd.

 

Note 6 – PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

   March 31,   March 31, 
   2011   2010 
         
Construction in progress  $980,656   $804,410 
Transportation equipment   11,611,785    17,065,379 
Leasehold improvements   507,831    418,582 
Automobiles   239,097    154,724 
           
Computer equipment   162,198    144,696 
Furniture & fixtures   93,939    68,461 
Machinery and equipment   118,145    49,903 
    13,713,651    18,706,155 
Less: Accumulated depreciation   (4,990,877)   (3,335,180)
   $8,722,774   $15,370,975 

 

At March 31, 2011, expenditures of $980,656 had been incurred for construction of a water filter plant for bottled water in Baiquan, China. The Company will begin depreciating the water filter plant when it is placed in service.

 

Note 7 – HELD-TO-MATURITY SECURITIES

 

The following table summarizes realized gains related to the Company’s investments in corporate notes designated as held to maturity as of March 31, 2011:

 

F-25
 

 

Corporate notes:  Net Carrying 
Value
   Sales Proceeds   Gross realized
gain
 
                
Long-term held-to-maturity securities:               
Due after one year through five years  $1,478,480   $1,573,015   $94,535 
Due after five years through ten years   1,068,875    1,151,275    82,400 
Due after ten years   1,706,185    1,773,105    66,920 
Total  $4,253,540   $4,497,395   $243,855 

 

The Company realized a gain of $243,855 on the sale of all of its investments in corporate notes during the year ended March 31, 2011. These notes were sold in order to preserve the Company’s principal, as most of the notes were downgraded by investment rating agencies.

 

The following table summarizes unrealized gains and losses related to the Company’s investments in corporate notes designated as held to maturity as of March 31, 2010:

 

Corporate notes:  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
Short-term held-to-maturity securities:                
Due in one year or less  $507,885   $4,505   $-   $512,390 
Total  $507,885   $4,505   $-   $512,390 
                     
Long-term held-to-maturity securities:                    
Due after one year through five years  $1,482,874   $27,491   $-   $1,510,365 
Due after five years through ten years   1,065,519    -    (15,924)   1,049,595 
Due after ten years   1,706,887    13,771    -    1,720,658 
Total  $4,255,280   $41,262   $(15,924)  $4,280,618 

 

Note 8 - LOANS TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS

 

The Board of Directors of the Company approved a non-interest bearing demand loan in the amount of $1,567,000 on July 25, 2008 to Yeuh-Chi Liu, a vendor to the Company. The $1,567,000 loan was used by Yeuh-Chi Liu to purchase a 3.97% ownership interest in Excalibur (see Note 9) and is collateralized by that interest.  Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. The Company does not expect that this loan will be repaid and the loan was written off as of December 31, 2010. The Company has not yet enforced its interest in the collateral.

 

We use the “EFT” name, a trademark owned and licensed to us by EFT Assets Limited.  We are required to pay an annual royalty to EFT Assets equal to a percentage of our gross sales for the previous fiscal year.  The percentage is 5% for the first $30 million in gross sales, 4% for the $10 million in gross sales in excess of $30 million, 3% for the $10 million in gross sales in excess of $40 million; 2% for the $10 million in gross sales in excess of $50 million; and 1% for the $10 million in gross sales in excess of $60 million.  EFT Assets Limited is owned by a number of persons, including Wendy Qin.  Ms. Qin is the sister of Jack Jie Qin, our President.  During the years ended March 31, 2011, 2010 and 2009 we paid EFT Assets Limited $2,001,681, $2,059,445 and $2,313,137 in royalties.

 

In March 2010, one of the Company’s subsidiaries, EFT International Ltd., entered into a consultancy agreement with JFL Capital Limited, a company in which Wendy Qin serves as a director and is one of the principal shareholders . Under this agreement, EFT International Ltd. engaged JFL Capital Limited to provide EFT International Ltd. consultancy service on administration, financial matters, corporate planning and business development commencing from April 1, 2010.  The agreement may be terminated by either party on three months’ written notice. For the year ended March 31, 2011, EFT International Ltd. paid JFL Capital Limited $315,000. As from April 1, 2011, the annual fee will be increased at the rate of $15,000 each year.

 

The Company rents a 6,500 square foot office space for its satellite training center in Hong Kong. This office is located at Langham Office Tower, 8 Argyle Street, Suite 3706, Kowloon, Hong Kong SAR.  This space is leased commencing on March 31, 2007 and expiring on March 31, 2012. The leased space is owned by a number of persons, including Wendy Qin, the sister of Jack Jie Qin, our President. Pursuant to the lease, there is no rent for the first two years. Commencing on the third year of the lease, the monthly rent is $50,000.  During the years ended March 31, 2011, 2010 and 2009 we paid the lessor $377,892, $379,355 and $362,271 in rental.

 

F-26
 

 

Note 9 – EXCALIBUR

 

On October 25, 2008, the Company through its wholly-owned subsidiary, EFT Investment, acquired a 48.81% equity interest in Excalibur for $19,193,000. The Company initially loaned funds to Excalibur in July 2008 and subsequently has continued to provide Excalibur with loan capital to fund its operations.

 

As disclosed in Note 8, on July 25, 2008, the Company loaned $1,567,000 to Yeuh-Chi Liu, a vendor to the Company. The proceeds of the loan were used to acquire a 3.97% interest in Excalibur, which was pledged as collateral for the loan. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. In accordance with ASC 810-10-25-43, the interest in Excalibur held by Yeuh-Chi Liu as a result of the loan made to her by the Company should be treated in the same manner as the Company’s own interest. As a result, the Company has concluded that it effectively held control of Excalibur and has consolidated Excalibur beginning at the time the Company acquired its ownership interest.

   

The Company consolidates Excalibur based on a three-month lag with the Company’s reporting periods. All inter-company accounts and transactions were eliminated in consolidation. The following table provides a summary of balance sheet information for Excalibur as of December 31, 2010 and 2009, which is consolidated in the Company’s financial statements as of March 31, 2011 and 2010:

 

   Excalibur International Marine Corporation 
   December 31, 2010   December 31, 2009 
   NTD*   USD   NTD   USD 
Total assets   275,825,320    8,059,124    480,601,504    14,907,918 
Total liabilities   357,481,305    12,247,563    319,434,380    9,908,629 
Net assets   (81,655,985)   (4,188,439)   161,167,124    4,999,289 
48.81%  ownership   (39,856,286)   (2,044,377)   78,665,673    2,440,153 

*NTD: New Taiwan Dollar

 

The following is the shareholder list of Excalibur as of March 31, 2011:

 

Excalibur International Marine Corp. Shareholders’ List
Shareholders’ Name  # of shares   % 
EFT Investment   58,567,750    48.81 
Yeuh-Chi Liu   4,766,000    3.97 
         52.78 
Lu, TsoChun   10,000,000    8.33 
Chiao, Jen-Ho   8,200,000    6.83 
Lin, Ming-i   5,170,000    4.31 
Wang Zhi Yun   5,000,000    4.17 
Wen Investment   4,000,000    3.33 
Steve Hsiao   3,938,250    3.28 
Others   20,358,000    16.97 
Total   120,000,000    100 

 

On August 8, 2010, Excalibur’s ship, the OceanLaLa was damaged when sailing in the Taiwan Strait.  As a result of the damage suffered, the OceanLaLa has been taken out of service.  As a result of the damage, management estimated that the net book value of the equipment exceeded its market value and an impairment loss of $5.4 million has been provided during the year ended March 31, 2011.

 

Additional information concerning Excalibur is included in Notes 13 (Contingent Liabilities) and 18 (Litigation).

 

Note 10- INVESTMENT IN CTX VIRTUAL TECHNOLOGIES

 

In July 2010 the Company lent $5,000,000 to CTX Virtual Technologies, Inc. The loan to CTX was unsecured, bore interest at 8% per year and had a term of one year to July 26, 2011.  At any time during the one-year term, the Company could at its option convert the loan into 8,474,576 units, with each unit consisting of one share of CTX’s common stock and one warrant. Each warrant allows the Company to purchase one additional share of CTX’s common stock at a price of $1.00 at any time on or before June 23, 2015. At any time after January 26, 2011 and before July 26, 2011, CTX could, at its option, cause the loan to be converted into the same 8,474,576 units. If CTX common stock was not listed on either the American Stock Exchange, the OTC Bulletin Board or NASDAQ by February 28, 2011, the number of shares of common stock and warrants issuable on conversion of the loan would be increased by 25%.

 

F-27
 

 

On March 12, 2011, CTX elected to convert the full principal amount of $5,000,000 and paid the Company in full all accrued and unpaid interest owing. Because CTX common stock was not listed on either the American Stock Exchange, the OTC Bulletin Board or NASDAQ by February 28, 2011, the number of shares of common stock and warrants issued on conversion of the loan was increased by 25% to 10,593,220. The common stock of CTX is quoted on the Pink OTC market. On March 31, 2011, the closing market price of CTX common stock, as reported by NASDAQ, was $1.93. However, this company’s common stock is very thinly traded and, as reported by NASDAQ, a total of 174,487 common shares were traded during the year ended March 31, 2011 at an average price (based on reported closing prices) of $1.21. Because of the lack of a sufficiently active market, the Company does not believe that quoted market prices for CTX’s common stock are a reliable indicator of fair value.  Despite repeated inquires and requests to CTX for current financial information that would allow us to assess the recoverability of our investment, we have not been able to obtain any information to enable us to assess the fair value of this investment. Accordingly, management concluded that it would be prudent to conclude, in the absence of persuasive evidence to the contrary, that the investment should be considered impaired and therefore the Company has provided an impairment loss of $5,000,000 during the quarter ended March 31, 2011.

 

Note 11 - OTHER LIABILITIES

 

Other liabilities consist of the following:

   March 31 , 2011   March 31, 2010 
         
Payroll liabilities   35,834    645,900 
Warranty liabilities   88,784    43,346 
Accrued expenses   88,353    - 
Others   91,058    31,452 
   $304,029   $720,698 

 

The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its limited warranty. Changes in the warranty liability for standard warranties which are included in current liabilities on the Company’s Consolidated Balance Sheets are presented in the following tables:

 

   March 31, 2011   March 31, 2010 
Warranty liability as at beginning of period, current  $43,346   $51,684 
Cost accrued/(reversal) of costs   59,312    (8,338)
Service obligations honored   (13,874)   - 
Warranty liability as at end of period, current  $88,784   $43,346 

 

Note 12 – DUE TO RELATED PARTIES

 

   March 31, 2011   March 31, 2010 
Amount due to related parties:  $47,995   $43,427 
           

 

The above amounts are due to Steve Hsiao, a shareholder of Excalibur.

 

Note 13 - CONTINGENT LIABILITIES

 

The Company’s controlled subsidiary, Excalibur, purchased the vessel “OceanLaLa” from a British Virgin Islands (“BVI”) company, Ezone Capital Co. Ltd., in 2008. The purchase price was NTD 708,000,000 ($21,961,660). The vessel was delivered to Excalibur and registered as owned by Excalibur at the end of 2008. The last payment of NTD 77,840,000 ($2,670,881) is still under dispute as Excalibur believes that certain special equipment relating to the OceanLaLa, including special tooling, was not delivered at the time of sale and that Ezone’s director was not acting in good faith and involved in self-dealing.

 

Gu Zong-Nan (former vice general manager of Excalibur) filed a lawsuit against Excalibur in the Taiwan Shihlin District Court on June 2, 2009, claiming unpaid salary.  The court found that there was a valid agreement between the parties that provided the salary owed by Excalibur did not need to be paid until Excalibur made a profit from its business operations.  Although Excalibur has not been profitable since its inception, a contingent liability of NTD 1,050,000 ($32,528) was recorded.

 

Note 14 – STOCKHOLDERS’ EQUITY

 

F-28
 

 

Common stock

 

As of March 31, 2011 the Company had 4,975,000,000 shares of common stock authorized and 75,983,201 shares issued and outstanding.

 

The Company did not issue any shares of common stock during the year ended March 31, 2011.

 

Warrants

 

Between January and August 2008, the Company sold 14,890,040 Units to non-U.S. residents at a price of $3.80 per Unit.  Each Unit consisted of one share of the Company’s common stock and one warrant.  Each warrant allows the holder to purchase one share of the Company’s common stock at a price of $3.80 per share at any time prior to November 30, 2010. As the only settlement option for the warrants is physical settlement, in which the party designated in the contract as the buyer delivers the full stated amount of cash to the seller, and the seller delivers the full stated number of shares to the buyer, the Company accounted for the warrants as permanent equity and recorded the value of the warrants in additional paid in capital.

 

On September 2, 2010, the Company’s Board of Directors resolved to extend the expiration date of the warrants to November 30, 2011.  Using a binomial option model, the exercise price of the warrants of $3.80 per share, the market value of the Company’s common stock on September 2, 2010 of $2.45 per share, estimated volatility of 85% based on the Company’s historical volatility, a risk-free rate of 0.31% and an assumed dividend rate of zero, the effect of extending the expiration date of the warrants was to increase their value by approximately $7,506,000. Because the warrants are accounted for as equity instruments, the cost associated with extending the expiration date of the warrants is considered to be a cost of capital and therefore had no net effect on the Company’s stockholders’ equity.

 

The Company has the right, but not the obligation to redeem the warrants, on a pro rata basis, at a purchase price of $0.00001 per warrant within thirty days from the tenth consecutive trading day that the closing sales price, or the average of the closing bid and asked price, of the Company’s common stock on the OTC or any public securities market within the United States, is at least $11.00 per share.

 

As of March 31, 2011, the Company’s subsidiary Digital Development Partners Inc. has 2,000,000 common stock warrants outstanding, and 330,665 Series A and 330,665 Series B warrants outstanding, which are accounted for as equity instruments.  The 2,000,000 warrants expire on June 1, 2014 and permit the holders to purchase one share of Digital’s common stock at an exercise price of $1.00 per share. The Series A and Series B warrants expire on September 30, 2014 and permit the holders to purchase one share of Digital’s common stock at an exercise price of $1.00 per share and $1.25 per share, respectively.

 

Note 15 - INCOME TAXES

 

The Company was incorporated in the U.S and has operations in four tax jurisdictions - the United States, the Hong Kong Special Administrative Region (“HK SAR”), Taiwan, and the BVI.

 

The Company generated substantially all of its net income from its BVI operations for the three years ended March 31, 2011.  According to BVI tax law this income is not subject to any taxes. The Company’s HK SAR subsidiaries had no taxable income in the respective periods. The deferred tax assets for the Company’s US operations and HK SAR subsidiaries were immaterial for the three years ended March 31, 2011.

 

The Company’s Taiwan subsidiary, Excalibur, is subject to a 17% standard enterprise income tax based on its taxable net profit. Excalibur has incurred net accumulated operating losses for income tax purposes and believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, it has provided full valuation allowance for the deferred tax assets arising from the losses as of March 31, 2011 and 2010.

 

The income tax expenses consist of the following:

 

   Year Ended March 31, 
   2011   2010   2009 
Current:               
Domestic  $2,400   $2,506   $2,400 
Foreign   -    1,999    - 
Provision for prior years   66,800    -    - 
Deferred   -    -    - 
Income tax expenses  $69,200   $4,505   $2,400 

 

F-29
 

 

The provision for prior years of $66,800 reflects California state taxes due for 2007. The Company’s 2007, 2008 and 2009 tax returns were amended for Sub Part F income items. For federal income tax purposes, the Company had utilized existing net operating loss carrybacks to cover the additional taxable income. However, California does not permit the use of net operating loss carrybacks, resulting in an additional tax liability for 2007.

 

A reconciliation of income taxes, with the amount computed by applying the statutory federal income tax rate (37% for the three years ended March 31, 2011) to income before income taxes for the three years ended March 31, 2011, is as follows:

 

   Year Ended March 31, 
   2011   2010   2009 
             
Income tax at U.S. statutory rate  $(5,701,395)  $(3,103,058)  $940,464 
State tax   2,400    2,506    2,400 
Indefinitely invested earnings / incurred losses of  foreign subsidiaries   5,695,474    3, 101,717    (949,847)
Nondeductible expenses   5,921    3,340    9,383 
Provision for prior years   66,800    -    - 
Income tax expenses  $69,200   $4,505   $2,400 

 

The Company does not have any uncertain tax positions. In accordance with ASC Topic 740, interest associated with unrecognized tax benefits are classified as income tax and penalties are classified in selling, general and administrative expenses in the statements of operations. For the three years ended March 31, 2011, the Company did not have any unrecognized tax benefits and related interest and penalties expenses.  Currently, the Company is not subject to examination by major tax jurisdictions.

 

Note 16 - COMMITMENTS

 

Executive Offices

 

The Company leases 3,367 square feet of space in California that serves as its principal executive offices.  The lease expires in February 2013.  The monthly rent for the fiscal years ended March 31, 2011, 2012 and 2013 is $9,090, $9,454 and $9,832, respectively. Future minimum lease payments under the lease are as follows:

 

Year Ending March 31,     
      
 2012    113,448 
 2013    108,152 

 

The Company rents office space for its satellite training center in Hong Kong.  The lease provides for free rent in the first two years and monthly lease payments approximating $50,000 starting the beginning of the third year and expires on March 31, 2012.  Expensing the 5-year total rent evenly over the life of the lease, the future minimum lease payments under the operating lease are as follows:

 

Year Ending March 31,     
      
 2012    360,000 
 2013    90,000 

 

The Company rents storage space for its satellite training center in Hong Kong.  The lease provides for monthly lease payments approximating $900 starting on January 4, 2011 and expiring on January 3, 2013.  Future minimum lease payments under the operating lease as of March 31, 2011 approximate the following:

 

Year Ending March 31,     
      
 2012    10,800 
 2013    8,100 

 

Total rent expenses for the three years ended March 31, 2011 were $723,060, $653,402 and $494,487, respectively.

 

F-30
 

 

 Employment Agreements

 

Jack Jie Qin

 

On January 1, 2009, the Company entered into an employment agreement with Jack Jie Qin, the Company’s President and Chief Executive Officer. The employment agreement has an initial term of seven years, and will be automatically extended, without any action on the part of Mr. Qin or the Company, for additional, successive one-year periods. The agreement may be terminated by either party on 60 days written notice.

 

During the initial seven year period of the agreement, the Company will pay Mr. Qin an annual base salary of $200,000 per year for the first calendar year. In each subsequent calendar year during the term of the agreement, the Company will pay Mr. Qin an annual base salary determined by the compensation increase scale as reviewed and approved by the Company’s Board of Directors Compensation Committee and approved by the Company’s Board of Directors. Mr. Qin is eligible to receive an annual base salary adjustment in each subsequent calendar year as a cost of living increase at 10% per annum. Mr. Qin is also eligible to receive an annual bonus pursuant to the executive bonus scale in effect for executive employees of the Company.

 

Mr. Qin’s employment agreement also specifies that he is entitled to a minimum of two weeks of paid vacation per year and insurance and other benefits customarily provided to the Company’s executives.  In the event that Mr. Qin’s employment is terminated without cause by the Company or if Mr. Qin terminates the agreement for good reason, or if, following a change in control, Mr. Qin’s employment is terminated or not renewed, the Company has agreed to pay Mr. Qin an amount equal to twice the total of his annual base salary and his target bonus as established by the Compensation Committee and to maintain his benefits for a period of two years. At the expiration of the initial term of the agreement or any successive one-year renewal period, if the Company elects not to renew the agreement, the Company has agreed to pay Mr. Qin an amount equal to the total of his annual base salary and his target bonus as established by the Compensation Committee and to maintain his benefits for a period of one year.

 

Jeffery Cheung

 

On December 20, 2010, we entered into an employment letter with Jeffery Cheung, the Company’s Principal Financial and Accounting Officer.  Mr. Cheung was initially employed as the Company’s Vice President, Finance and, following a successful probationary period, was appointed as the Company’s Principal Financial and Accounting Officer on March 21, 2011.

 

As the Company’s Chief Financial Officer, Mr. Cheung is entitled to a monthly salary of HK$100,000. Mr. Cheung is entitled to an annual performance bonus, and his salary will be adjusted annually at the sole discretion of the Company. Mr. Cheung’s employment agreement also specifies that he is entitled to 12 days of paid vacation per year, which was revised to 14 days thereafter, and other benefits customarily provided to the Company’s executives.

 

Mr. Cheung’s employment agreement may be terminated by either party on two month’s written notice.

 

Pyng Soon

 

On January 1, 2009, the Company entered into an employment agreement with Pyng Soon, the Company’s General Counsel. The employment agreement has an initial term of three years, and will be automatically extended, without any action on the part of Mr. Soon or the Company, for additional, successive one-year periods. The agreement may be terminated by either party on 60 days written notice.

 

During the initial three year period of the agreement, the Company will pay Mr. Soon an annual base salary of $123,000 per year for the first calendar year. In each subsequent calendar year during the term of the agreement, the Company will pay Mr. Soon an annual base salary determined by the compensation increase scale as reviewed and approved by the Company’s Board of Directors Compensation Committee and approved by the Company’s Board of Directors. Mr. Soon is eligible to receive an annual base salary adjustment in each subsequent calendar year as a cost of living increase at 10% per annum. Mr. Soon is also eligible to receive an annual bonus pursuant to the executive bonus scale in effect for executive employees of the Company.

 

Mr. Soon’s employment agreement also specifies that he is entitled to a minimum of three weeks of paid vacation per year and insurance and other benefits customarily provided to the Company’s executives.  In the event that Mr. Soon’s employment is terminated without cause by the Company or if Mr. Soon terminates the agreement for good reason, or if, following a change in control, Mr. Soon’s employment is terminated or not renewed, the Company has agreed to pay Mr. Soon an amount equal to twice the total of his annual base salary and his target bonus as established by the Compensation Committee and to maintain his benefits for a period of two years. At the expiration of the initial term of the agreement or any successive one-year renewal period, if the Company elects not to renew the agreement, the Company has agreed to pay Mr. Soon an amount equal to the total of his annual base salary and his target bonus as established by the Compensation Committee and to maintain his benefits for a period of one year.

 

F-31
 

 

Consultancy Agreement

 

In March 2010, one of the Company’s subsidiaries, EFT International Ltd., entered into a consultancy agreement with JFL Capital Limited, a company in which Wendy Qin, the sister of Jack Jie Qin, our President, serves as a director and is one of the principal shareholders . Under this agreement, EFT International Ltd. engaged JFL Capital Limited to provide EFT International Ltd. consultancy service on administration, financial matters, corporate planning and business development commencing from April 1, 2010. The agreement may be terminated by either party on three months’ written notice. For the year ended March 31, 2011, EFT International Ltd. paid JFL Capital Limited $315,000. As from April 1, 2011, the annual fee will be increased at the rate of $15,000 each year.

 

Note 17 – SEGMENT INFORMATION

 

The Company’s business is classified by management into two reportable business segments: transportation and online. The online business reportable segment is an aggregation of the Company’s online operating segments, which are organized to sell the Company’s products to affiliates through its websites. The online business reportable segment derives revenue from the sales of nutritional products, personal care products and EFT-phones. The transportation business reportable segment derives revenue from transport passengers and cargo between Taiwan and Mainland China through the Taiwan Strait.

 

Although substantially all of the Company’s revenue is generated from Mainland China, the Company is organizationally structured along business segments. The accounting policies of each of the Company’s operating segments are the same as those described in Note 3, “Summary of Significant Accounting Policies.”

 

The following tables provide the business segment information as of and for the year ended March 31, 2011, 2010 and 2009. Income tax allocations have been determined based on statutory rates in the applicable business segment.

 

 

   Year ended March 31, 2011 
   Online
business
   Transportation business   Total 
Sales revenues, net  12,857,257   156,223   13,013,480 
Cost of goods sold   8,035,140    2,632,870    10,668,010 
Gross profit   4,822,117    (2,476,647)   2,345,470 
Operating expenses:               
    Selling, general and administrative expenses   8,058,819    846,774    8,905,593 
      Impairment of investment   5,000,000    -    5,000,000 
      Impairment loss of  transportation equipment   -    5,400,000    5,400,000 
    Impairment loss of loan receivable   -    1,567,000    1,567,000 
    Royalty expenses   2,001,681    -    2,001,681 
    Total operating expenses             22,874,274 
Net operating loss   (10,238,383)   (10,290,421)   (20,528,804)
Other income             841,124 
Loss before income tax             (19,687,680)
                
Total long-lived assets   1,592,997    7,129,777    8,722,774 
                
Additions to long-lived assets   468,854    1,443    470,297 
                

 

   Year ended March 31, 2010 
   Online
business
   Transportation business   Total 
Sales revenues, net  20,782,394   290,772   21,073,166 
Cost of goods sold   6,094,131    3,157,348    9,251,479 
Gross profit   14,688,263    (2,866,576)   11,821,687 
Operating expenses:               
    Selling, general and administrative expenses   7,066,562    2,177,667    9,244,229 
    Impairment of goodwill   -    8,935,848    8,935,848 
    Impairment loss of transportation equipment   -    6,141,261    6,141,261 
    Royalty expenses   2,059,445    -    2,059,445 
    Total operating expenses             26,380,783 
Net operating income (loss)   5,562,256    (20,121,352)   (14,559,096)
Other income             384,658 
Loss before income tax             (14,174,438)
                
Total long-lived assets   1,276,846    14,094,129    15,370,975 
                
Additions to long-lived assets   993,800    359,448    1,353,248 

 

F-32
 

 

   Year ended March 31, 2009 
   Online
business
   Transportation business   Total 
Sales revenues, net  18,504,434   10,774   18,515,208 
Cost of goods sold   7,984,949    250,179    8,235,128 
Gross profit   10,519,485    (239,405)   10,280,080 
Operating expenses:               
    Selling, general and administrative expenses   4,308,881    772,883    5,081,764 
    Marketing expenses   2,307,144    -    2,307,144 
    Royalty expenses   2,313,137    -    2,313,137 
    Total operating expenses             9,702,045 
Net operating income (loss)   1,590,323    (1,012,288)   578,035 
Other income             235,128 
Loss before income tax             813,163 
                
Total long-lived assets   360,156    21,660,257    22,020,413 
                
Additions to long-lived assets   276,654    -    276,654 
                

 

 

Note 18 - LITIGATION

 

In October 2008, the Company acquired, through a wholly-owned subsidiary, 48.81% of the capital stock of Excalibur International Marine Corporation, a Taiwan corporation, for $19,193,000.  Excalibur owns a high speed ship which, until August 2010, transported passengers and cargo between Taiwan and mainland China through the Taiwan Strait.  Excalibur’s ship, the OceanLaLa, was capable of carrying up to 370 passengers and 630 tons of cargo.

 

Excalibur purchased the OceanLaLa from Ezone Capital Co. Ltd., prior to its acquisition by the Company.  The last payment of NTD 77,840,000 ($2,670,881) was withheld by Excalibur since Excalibur believed that special tooling was not delivered at the time of sale and that Ezone’s director was not acting in good faith and was involved in self-dealing.

 

EFT Investment Co. Ltd. filed a lawsuit against Jiao Ren-Ho (former chairman of Excalibur) in the Taiwan Shihlin District Prosecutors office on February 12, 2010. EFT Investment Co. Ltd. alleges, among other things, that Jiao Ren-Ho committed the offences of capital forging, fraud, breach of trust, and document fabrication.

 

EFT Investment Co. Ltd. filed a lawsuit against Chang Hui-Ying, Excalibur’s former accountant in the Taiwan Shihlin District Prosecutors office in March 2010. The claims of EFT Investment Co. Ltd. against Chang Hui-Ying are based upon the audit of Excalibur’s financial statements by Chang Hui-Ying. EFT Investment Co. Ltd. alleges, among other things, that Chang Hui-Ying committed the offences of capital forging, fraud, breach of trust, and document fabrication.

 

EFT Investment Co. Ltd. filed a lawsuit against Hsiao Zhong-Xing (former general manager of Excalibur) and Lu Zhuo-Jun (former vice general manager of Excalibur) (collectively "Defendants") in the Taiwan Shihlin District Prosecutors office on October 1, 2010. EFT Investment Co. Ltd. alleges, among other things, that Defendants committed the offences of capital forging, fraud, breach of trust, and document fabrication.

 

F-33
 

 

Gu Zong-Nan (former vice general manager of Excalibur) filed a lawsuit against Excalibur in the Taiwan Shihlin District Court on June 2, 2009, claiming unpaid salary and severance payments. In April 2010, the Taiwan Shihlin District Court denied the claims as the court found that (i) there was a valid agreement between the parties that provided the salary owed by Excalibur would not be paid until Excalibur makes profit from its operations and (ii) Gu Zong-Nan held a managerial position in Excalibur and as a result is not entitled to any severance payment according to the Labor Standard Law of Taiwan.  Excalibur has suffered net losses since inception, however, a contingent liability for the unpaid salary remains.

 

Marinteknik Shipbuilders (S) Pte Ltd. (a Singapore company) filed a lawsuit against Excalibur in the Taiwan Taichung District Court on July 9, 2009 for unpaid service fees and out-of-pocket expenses of NTD8,050,832 (approximately $280,000).  On August 20, 2009, the Taiwan Taipei district court froze Excalibur’s cash of $193,992 in response to the suit. The final resolution of this case is pending. However, a contingent liability for the restricted cash has remained.

 

Jiao Ren-Ho (former chairman of Excalibur) filed a lawsuit against Excalibur in the Taiwan Shihlin District Court claiming Excalibur’s special meeting of shareholders held on January 12, 2010, and the actions taken at the meeting, including the removal of Mr. Jiao as an officer and the chairman of Excalibur, were unlawful.  Monetary damages were not claimed in the suit. On October 12, 2010, the Shihlin District Court rendered its judgment in favor of Excalibur, ruling that Excalibur’s special meeting of shareholders held on January 12, 2010 and the actions taken at the meeting, including the removal of Mr. Jiao as an officer and the chairman of Excalibur were lawful.  Subsequently, Mr. Jiao has filed an application to the Court of Appeal in Shihlin District Court to review the lower court’s decision.

 

On August 2, 2010 the Company commenced a legal proceeding against Marinteknik Shipbuilders (S) Pte Ltd., and three other persons in the High Court of the Republic of Singapore alleging fraud, misrepresentation, and deceit on the part of the defendants with respect to Excalibur’s purchase of the OceanLaLa. The Company claims that the wrongful actions of the defendants resulted in damages of $19,000,000 to the Company.

 

On August 18, 2010 Excalibur received a statement of claim (equivalent to a complaint in the US) from Ezone Capital Co., Ltd., demanding approximately 2,000,000 Euros (approximately $2,800,000) for the unpaid balance of the purchase price of the OceanLaLa (see Note 13).   Excalibur has denied the claims of Ezone on the basis that the OceanLaLa was defective, unseaworthy, and not fit for its intended purpose. Excalibur has also filed a counterclaim against Ezone seeking a full refund of all amounts paid for the OceanLaLa, as well as reimbursement for amounts spent on maintenance and repairs.

 

Note 19 - SUBSEQUENT EVENTS

 

On May 2, 2011, Jack Qin, as an agent, entered into agreements to purchase an office building located in Taipei, Taiwan. The office building is under construction and will be completed by the end of 2013.  The total purchase price for the office building, which consists of 14 floors and 144 parking spaces, is approximately $248 million.  On May 31, 2011, EFT Investment Co. Ltd. (Taiwan) assumed the same rights and obligations under these agreements.  As of the date of this filing, the Company’s Board has not approved the purchase of the building.  The Company has made payments of $21 million toward the purchase price as of August 11, 2011.  The Company intends to retain one floor of the office building for its own business operation and plans to sell the majority of the remaining floors.

 

Pursuant to the terms of these agreements, the Company is obliged to pay the remaining twelve (12) outstanding installments with various amounts due over the next twenty-six (26) months till the completion of the building project. The next payment, in the amount of approximately 14 million, is due on November 21, 2011.  Each subsequent quarterly payment, starting from April 20, 2012, is approximately $4 million. Finally, the residual payment of approximately 170 million is due at the time of completion of the building.

 

F-34
 

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this annual report, an evaluation was carried out by our management, with the participation of our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of March 31, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

 

Based on that evaluation, our management concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process, under the supervision of our principal executive officer and our principal financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with United States generally accepted accounting principles (GAAP). Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

 

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses which were identified as of March 31, 2011 are listed in the report of our independent registered public accounting firm on our internal control over financial reporting. See Item 8 of this Annual Report on Form 10-K.

 

Certain material weaknesses listed in the above report are related to our FMA web-based application. This web-based application was developed by a third party software vendor called FMA and is utilized by us to perform member account administration and down-line management, and to execute member transactions (including buying products, transferring and depositing funds, stock purchases, and funding pre-paid debit cards). Our management utilizes the FMA application as a system of record for customer transactions, commission calculations, and for financial reporting.

 

As a result of the aforementioned material weaknesses, our management concluded that our internal control over financial reporting as of March 31, 2011 was not effective.

 

Management’s Planned Corrective Actions

 

In order to remediate the documented material weaknesses, our management plans to implement the following corrective measures:

 

  a) A third party will be engaged to perform application vulnerability scanning to identify vulnerabilities, and also to perform application and network level penetration testing to attempt to exploit the identified vulnerabilities within the FMA application, and our corporate network.  Resulting vulnerabilities will be addressed and corrected; and

 

  b) Additional controls and procedures will be implemented within the program change and code development process, to allow for proper segregation of duties and prevention of a single resource from controlling the entire process.

 

15
 

 

Attestation Report of the Registered Public Accounting Firm

 

Our independent registered public accounting firm that audited the March 31, 2011 financial statements included in this Annual Report on Form 10-K has issued us an attestation report on our internal control over financial reporting.  This report is included in Part II, Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference.

 

Changes in Internal Controls over Financial Reporting

 

As disclosed in our prior year’s Annual Filing on Form 10-K, management concluded our internal control over financial reporting was not effective as of March 31, 2010. Management identified the material weakness related to the lack of sufficient complement of personnel with an appropriate level of accounting and financial reporting experience commensurate with our financial reporting requirements.

 

To address and remediate the material weakness in our internal control over financial reporting, we implemented the following measures during fiscal year 2011 to change or enhance the design and operating effectiveness of our internal control over financial reporting.

 

  · We hired a chief financial officer with previous experience as the chief financial officer of a publicly traded company listed in the United Kingdom. The new chief financial officer is a fellow member of Certified General Accountants (Canada) and Association of Chartered Certified Accountants.

 

  · We hired additional experienced staff accountants to enhance our ability to segregate responsibilities and provide additional oversight in the various accounting functions.

 

  · We implemented new internal controls to properly evaluate revenue recognition criteria.

 

  · We implemented new internal controls to sufficiently mitigate cut-off errors in revenue.

 

  · We implemented new internal controls related to the proper oversight of work performed by our controller.

 

  · We implemented new internal controls over the period-end financial reporting process.

 

  · We implemented new internal controls to deter or mitigate management override.

 

  · We implemented new internal controls to correctly and accurately record business combinations.

 

  · We also implemented controls over our controlled subsidiary, Excalibur International Marine Corporation.

 

We have since reviewed and documented new controls regarding these control deficiencies and have trained our personnel involved in such controls.  The control weaknesses have also been remediated by an additional level of review by senior personnel at the Company.  We tested the newly implemented controls and found them to be effective and have concluded as of March 31, 2011, that these previously disclosed material weaknesses have been remediated.

 

Other than the remedial measures described above, there were no other changes in our internal control over financial reporting that have materially affected, or are likely to materially affect our internal control over financial reporting during the three months ended March 31, 2011.

 

Historical Reports

 

As described in Note 2 of this Report, we have restated our consolidated financial statements for the periods from the three-month period ended December 31, 2008 to the three-month period ended December 31, 2009 to reflect the consolidation of Excalibur International Marine Corporation (“Excalibur”) from the time we acquired our interest in Excalibur on October 25, 2008, rather than accounting for such investment in Excalibur under the equity method.

 

We disclosed the following material weakness in our internal control over financial reporting in our Annual Report for the year ended March 31, 2010:

 

Company did not have sufficient internal controls over its variable interest entity Excalibur International Marine Corporation as of December 31, 2009, the date used for the consolidation of Excalibur International Marine Corporation's financial statements.

 

16
 

 

Since the Company took control of Excalibur on October 25, 2008, we also should have disclosed the existence of a material weakness in our internal control over financial reporting relating to our control over Excalibur in our Annual Report for the year ended March 31, 2009. Accordingly, our management has reassessed the effectiveness of our internal control over financial reporting as of March 31, 2009 and concluded that our internal control over financial reporting was not effective as of such date.

 

As described in Note 2 of this Report, we have restated our consolidated financial statements for the three months and the year ended March 31, 2010 to eliminate certain pre-transaction expenses related to Digital Development Partners, Inc. (“Digital”). These expenses related to pre-transaction expenses previously recorded by Digital and the non-controlling shareholders’ portion thereof, pre-existing goodwill recorded and an offsetting net gain previously recognized relating to the transaction. The net effect of these adjustments on our net loss for the year ended March 31, 2010 was not material. However, the incorrect accounting for these pre-transaction expenses relating to our transaction with Digital indicates the existence of an additional material weakness in our internal control over financial reporting, which should have been disclosed in our Annual Report for the year ended March 31, 2009. The incorrect accounting was primarily due to an error in judgment by the accounting staff at the time the transaction was recorded. Due to the complexity of the transaction, an accounting technical specialist should have been consulted with respect to the proper accounting for the transaction, as we would deem it a “Significant Non-Recurring Transaction” (i.e., one in which an incorrect recording of the transaction could lead to a finding of a significant deficiency or a material weakness in one of our controls). To remediate this material weakness in our internal control over financial reporting, we currently use a specialist to assist us in accounting for these types of transactions. In addition, we have employed new members of the accounting staff who are more experienced in accounting for these types of transactions and whose stronger technical ability enhances our ability to recognize the need to employ consultants with specific technical expertise in connection with our evaluation of certain accounting issues from time to time. As a result, we believe that we have remediated the material weakness in our internal control over financial reporting that led to the incorrect accounting for pre-transaction expenses relating to our transaction with Digital.

 

Our management has also re-evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008, March 31, June 30, September 30 and December 31, 2009 and March 31, June 30, September 30 and December 31, 2010 and concluded that our disclosure controls and procedures were not effective as of such dates.

 

17
 

 

PART III

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table shows the beneficial ownership of our common stock as of May 31, 2011 by (i) each of our directors and executive officers, (ii) all directors and executive officers as a group, and (iii) each owner of more than 5% of our common stock.

 

Name  

Number of Shares

Beneficially Owned

   

Percent of Shares

Outstanding

 
Jack Jie Qin     1,000       *  
Jeffery Cheung            
Jerry B. Lewin            
Visman Chow            
Norman Ko            
Pyng Soon            
Dragon Win Management, Ltd. (1)     50,099,000       65.93 %
Officers and directors as a group (6 persons)     1,000       *  

 

* Less than 1%.

 

(1) Liu Dong Xin and Zhou Hai Long are the controlling persons of Dragon Win.

 

Due to the ownership by Dragon Win of more than 50% of our common stock (which includes the right to vote a majority of the shares at any meeting of our shareholders), we are a controlled corporation, as that term is defined in Section 801(a) of the NYSE Amex Company Guide.

 

The address of each shareholder listed above, with the exception of Dragon Win, is in care of us at 17800 Castleton St., Suite 300, City of Industry, CA 91748.  The address of Dragon Win is Palm Grove Houses, P.O. Box 438, Road Town, Tortola, British Virgin Islands.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

See Item 7 of this report (Capital Resources and Liquidity subsection) for information concerning our outstanding loans to Excalibur International Marine Corporation.

 

See Note 8 of the Notes to the Consolidated Financial Statements contained in Item 8 for information concerning our loan to Yeuh-Chi Liu and the related transactions with EFT Assets Limited, JFL Capital Limited and Wendy Qin.

 

Any proposed transaction with a related party is reviewed by our Board of Directors.  In reviewing the proposed transaction, the Board considers the related party’s relationship with us, all conflicts of interest that may exist or otherwise arise on account of the transaction, the material facts relating to the proposed transaction, and whether the transaction is on terms comparable to those that could be obtained in arms-length dealing with an unrelated third party.

 

As set forth in Item 10, each of Mr. Lewis, Mr. Chow and Mr. Ko are independent directors as that term is defined in Section 803.A of the NYSE Amex Company Guide.

 

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PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a) The following documents are filed as part of this report:

 

(1) Consolidated Financial Statements:

 

  · Reports of Independent Registered Public Accounting Firm

 

  · Consolidated Balance Sheets

 

  · Consolidated Statements of Operations

 

  · Consolidated Statements of Changes in Stockholders’ Equity

 

  · Consolidated Statements of Cash Flows

 

  · Notes to the Consolidated Financial Statements

 

(2) Consolidated Financial Statement Schedule:

 

All schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto.

 

(3) Exhibits:

 

Exhibit No.: Description:
   
3.1(1) Articles of Incorporation of GRG, Inc. (now EFT Holdings, Inc.).
   
3.1.1(1) Articles of Merger filed December 28, 2004 between HumWare Media Corporation, World Wide Golf Web, Inc. and GRG, Inc.
   
3.1.2(1) Certificate of Amendment, effective November 7, 2007, to the Articles of Incorporation of HumWare Media Corporation
   
3.1.3(9) Articles of Merger filed December 13, 2010 between QCSC, Inc. and EFT Biotech Holdings, Inc.
   
3.2(3) By-laws
   
4.1(1) Form of Common Stock Certificate
   
4.2(1) Form of Warrant to purchase one share of Common Stock for a purchase price of $3.80 per share until the second anniversary date of the date of issuance
   
10.1(3) Share Exchange Agreement, dated as of the 1st day of November, 2007, by and among EFT Holdings, Inc. (formerly HumWare Media Corporation), a Nevada corporation; certain EFT Shareholders and EFT BioTech Corporation, a Nevada corporation
   
10.2(2) Subscription Agreement for Units in connection with the Registrant’s Regulation S Private Placement
   
10.3(3) + Employment Agreement, dated May 10, 2008, between EFT BioTech Holdings, Inc. and Sharon Tang
   
10.4(5) $500,000 Loan Agreement (the “Agreement”), dated November 24, 2008, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.5(5) First Extension of $500,000 Loan, dated December 25, 2008
   
10.6(5) Second Extension of $500,000 Loan, dated May 25, 2009
   

 

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10.7(6) $2,000,000 Loan Agreement (the “Agreement”) and promissory note, dated September 23, 2008, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.8(5) First Extension of $2,000,000 Loan, dated November 25, 2008
   
10.9(5) Second Extension of $2,000,000 Loan, dated May 25, 2009
   
10.10(6) $600,000 Loan Agreement, dated May 13, 2009, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.11(6) Addendum to $600,000 Loan Agreement, dated May 13, 2009, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.12 (7) $330,000 Loan Agreement, dated July 14, 2008, between EFT BioTech  Holdings, Inc. (Lender) and Yeuh-Chi Liu (Borrower)
   
10.13 (7) Addendum to $330,000 Loan Agreement, dated July 15, 2008, between BioTech Holdings, Inc. and Yeuh-Chi Liu
   
10.14 (7) $1,567,000 Loan Agreement, dated July 25, 2008, between BioTech Holdings, Inc. (Lender) and Yeuh-Chi Liu (Borrower)
   
10.15(8) Subscription agreement with Excalibur International Marine Corporation
   
10.16(8) Extension of $2,000,000 loan with Excalibur International Marine Corporation
   
10.17(8) Extension of $600,000 loan with Excalibur International Marine Corporation
   
10.18(8) Extension of $500,000 loan with Excalibur International Marine Corporation
   
10.19(9) Consultancy Agreement, dated March 31, 2010, between EFT International Limited and JFL Capital Limited
   
10.20(9) Employment Agreement, dated January 1, 2009, between EFT Biotech Holdings Inc. and Jack Jie Qin
   
10.21(9) Employment Letter, dated December 20, 2010, between EFT (HK) Limited and Chueng, Chung Man Cyril
   
10.22(9) Employment Agreement, dated January 1, 2009, between EFT Biotech Holdings Inc. and Pyng Soon
   
10.23(9) English Translation of Form of Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park
   
10.24(9) English Translation of Agreement Regarding the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated May 31, 2011, among Jack Jie Qin, Meifu Development Co., Ltd. and EFT Investment Co., Ltd.
   
10.25(9) English Translation of Agreement Regarding the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated May 31, 2011, among Jack Jie Qin, Transglobe Life Insurance Inc. and EFT Investment Co., Ltd.
   
10.26(9) English Translation of Amendment Agreement to the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated July 1, 2011, among Jack Jie Qin, Meifu Development Co., Ltd. and EFT Investment Co., Ltd.
   
10.27(9) English Translation of Agreement to Amend the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated July 7, 2011, among Jack Jie Qin, Transglobe Life Insurance Inc. and EFT Investment Co., Ltd.
   
14.1(3) Code of Ethics
   

 

20
 

 

21.1(9) List of Subsidiaries
   
31 Rule 13a-14(a) Certifications
   
32 Section 1350 Certifications

 

______________________________

 

+ Management Contract.

 

(1) Filed as an exhibit to Form 10 (File No.: 001-34222) as filed with the SEC on December 10, 2008 and incorporated by reference herein.

 

(2) Filed as an exhibit to Form 10-Q for the quarter ended December 31, 2008 (File No.: 001-34222) as filed with the SEC on February 13, 2009 and incorporated by reference herein.

 

(3) Filed as an Exhibit to Amendment No. 1 to Form 10 (File No.: 001-34222)as filed with the SEC on April 13, 2009 and incorporated by reference herein.

 

(4) Filed as an Exhibit to Amendment No. 2 to Form 10 (File No.: 001-34222) as filed with the SEC on April 21, 2009 and incorporated by reference herein.

 

(5) Filed as an Exhibit to Form 10-K (File No.: 001-34222) as filed with the SEC on July 17, 2009 and incorporated by reference herein.

 

(6) Filed as an Exhibit to Amendment No. 4 to Form 10 (File No.: 001-34222) as filed with the SEC on September 3, 2009 and incorporated by reference herein.

 

(7) Filed as an Exhibit to Amendment No. 5 to Form 10 (File No.: 001-34222) as filed with the SEC on October 19, 2009 and incorporated by reference herein.

 

(8) Filed as an Exhibit to Amendment No. 9 to Form 10 (File No.: 001-34222) as filed with the SEC on April 16, 2010.

 

(9) Filed as an Exhibit to Form 10-K (File No.: 000-53730) as filed with the SEC on August 25, 2011.

 

21
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  EFT HOLDINGS, INC.
     
  By: /s/ Jack Jie Qin
    Jack Jie Qin, Principal Executive Officer
     
  Date: June 20, 2012

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack Jie Qin his attorney-in-fact and agent, with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or substitutes, may do or cause to be done by virtue hereof.

 

 

Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Jack Jie Qin       June 20, 2012
Jack Jie Qin   Director and Principal Executive Officer    
         
/s/ Jerry B. Lewin        
Jerry B. Lewin   Director   June 20, 2012
         
/s/ Visman Chow        
Visman Chow   Director   June 20, 2012
         
/s/ Norman Ko        
Norman Ko   Director   June 20, 2012
         
/s/ William E. Sluss        
William E. Sluss   Principal Financial and Accounting Officer   June 20, 2012
         

 

 

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Index to Exhibits

 

Exhibit No.: Description:
   
3.1(1) Articles of Incorporation of GRG, Inc. (now EFT Holdings, Inc.).
   
3.1.1(1) Articles of Merger filed December 28, 2004 between HumWare Media Corporation, World Wide Golf Web, Inc. and GRG, Inc.
   
3.1.2(1) Certificate of Amendment, effective November 7, 2007, to the Articles of Incorporation of HumWare Media Corporation
   
3.1.3(9) Articles of Merger filed December 13, 2010 between QCSC, Inc. and EFT Biotech Holdings, Inc.
   
3.2(3) By-laws
   
4.1(1) Form of Common Stock Certificate
   
4.2(1) Form of Warrant to purchase one share of Common Stock for a purchase price of $3.80 per share until the second anniversary date of the date of issuance
   
10.1(3) Share Exchange Agreement, dated as of the 1st day of November, 2007, by and among EFT Holdings, Inc. (formerly HumWare Media Corporation), a Nevada corporation; certain EFT Shareholders and EFT BioTech Corporation, a Nevada corporation
   
10.2(2) Subscription Agreement for Units in connection with the Registrant’s Regulation S Private Placement
   
10.3(3) + Employment Agreement, dated May 10, 2008, between EFT BioTech Holdings, Inc. and Sharon Tang
   
10.4(5) $500,000 Loan Agreement (the “Agreement”), dated November 24, 2008 , between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.5(5) First Extension of $500,000 Loan, dated December 25, 2008
   
10.6(5) Second Extension of $500,000 Loan, dated May 25, 2009
   
10.7(6) $2,000,000 Loan Agreement (the “Agreement”) and promissory note, dated September 23, 2008, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.8(5) First Extension of $2,000,000 Loan, dated November 25, 2008
   
10.9(5) Second Extension of $2,000,000 Loan, dated May 25, 2009
   
10.10(6) $600,000 Loan Agreement, dated May 13, 2009, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.11(6) Addendum to $600,000 Loan Agreement, dated May 13, 2009, between the EFT Biotech Holdings, Inc. (as the Lender), EFT Investment Co., LTD., and Excalibur International Marine Corporation (as the Borrower).
   
10.12 (7) $330,000 Loan Agreement, dated July 14, 2008, between EFT BioTech  Holdings, Inc. (Lender) and Yeuh-Chi Liu (Borrower)
   
10.13 (7) Addendum to $330,000 Loan Agreement, dated July 15, 2008, between BioTech Holdings, Inc. and Yeuh-Chi Liu
   
10.14 (7) $1,567,000 Loan Agreement, dated July 25, 2008, between BioTech Holdings, Inc. (Lender) and Yeuh-Chi Liu (Borrower)
10.15(8) Subscription agreement with Excalibur International Marine Corporation
   
10.16(8) Extension of $2,000,000 loan with Excalibur International Marine Corporation
   

 

23
 

 

10.17(8) Extension of $600,000 loan with Excalibur International Marine Corporation
   
10.18(8) Extension of $500,000 loan with Excalibur International Marine Corporation
   
10.19(9) Consultancy Agreement, dated March 31, 2010, between EFT International Limited and JFL Capital Limited
   
10.20(9) Employment Agreement, dated January 1, 2009, between EFT Biotech Holdings Inc. and Jack Jie Qin
   
10.21(9) Employment Letter, dated December 20, 2010, between EFT (HK) Limited and Chueng, Chung Man Cyril
   
10.22(9) Employment Agreement, dated January 1, 2009, between EFT Biotech Holdings Inc. and Pyng Soon
   
10.23(9) English Translation of Form of Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park
   
10.24(9) English Translation of Agreement Regarding the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated May 31, 2011, among Jack Jie Qin, Meifu Development Co., Ltd. and EFT Investment Co., Ltd.
   
10.25(9) English Translation of Agreement Regarding the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated May 31, 2011, among Jack Jie Qin, Transglobe Life Insurance Inc. and EFT Investment Co., Ltd.
   
10.26(9) English Translation of Amendment Agreement to the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated July 1, 2011, among Jack Jie Qin, Meifu Development Co., Ltd. and EFT Investment Co., Ltd.
   
10.27(9) English Translation of Amendment Agreement to the "Pre-sale Building Unit Purchase and Sale Agreement, A5 Building, Taipei Enterprise Headquarters Park," dated July 1, 2011, among Jack Jie Qin, Transglobe Life Insurance Inc. and EFT Investment Co., Ltd.
   
14.1(3) Code of Ethics
   
21.1(9) List of Subsidiaries
   
31 Rule 13a-14(a) Certifications
   
32 Section 1350 Certifications

 

_________________________

 

+ Management Contract.

 

(1) Filed as an exhibit to Form 10 (File No.: 001-34222) as filed with the SEC on December 10, 2008 and incorporated by reference herein.

 

(2) Filed as an exhibit to Form 10-Q for the quarter ended December 31, 2008 (File No.: 001-34222) as filed with the SEC on February 13, 2009 and incorporated by reference herein.

 

(3) Filed as an Exhibit to Amendment No. 1 to Form 10 (File No.: 001-34222) as filed with the SEC on April 13, 2009 and incorporated by reference herein.

 

(4) Filed as an Exhibit to Amendment No. 2 to Form 10 (File No.: 001-34222) as filed with the SEC on April 21, 2009 and incorporated by reference herein.

 

(5) Filed as an Exhibit to Form 10-K (File No.: 001-34222) as filed with the SEC on July 17, 2009 and incorporated by reference herein.

 

(6) Filed as an Exhibit to Amendment No. 4 to Form 10 (File No.: 001-34222) as filed with the SEC on September 3, 2009 and incorporated by reference herein.

 

24
 

 

(7) Filed as an Exhibit to Amendment No. 5 to Form 10 (File No.: 001-34222) as filed with the SEC on October 19, 2009 and incorporated by reference herein.

 

(8) Filed as an Exhibit to Amendment No. 9 to Form 10 (File No.: 001-34222) as filed with the SEC on April 16, 2010.

 

(9) Filed as an Exhibit to Form 10-K (File No.: 000-53730) as filed with the SEC on August 25, 2011.

 

25