The financial statements required by this
item begin on page F-1 of this Annual Report on Form 10-K.
The accompanying notes are an integral part
of these audited consolidated financial statements.
The accompanying
notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part
of these audited consolidated financial statements.
The accompanying notes are an integral part
of these audited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 –
ORGANIZATION AND BUSINESS
DESCRIPTION
EFT Holdings, Inc., “EFT Holdings”
or the “Company,” formerly EFT Biotech Holdings, Inc., was incorporated in the State of Nevada on March 19, 1992.
The Company’s business is classified
by management into two reportable segments: online and beverage. These reportable segments are two distinct businesses, each with
a different customer base, marketing strategy and management structure. Substantially all of the Company’s revenue is generated
from Mainland China.
The Company’s online business
sells the Company’s products to “Affiliates” through its website. To become an Affiliate, a customer must
be recommended by another Affiliate, make a minimum purchase of $600, and pay $60 for shipping and handling fees. 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.
In February 2010, the Company assigned
the worldwide distribution and servicing rights to a product known as the “EFT-Phone” to Digital Development Partners,
“Digital,” a previously unrelated company, in exchange for 79,265,000 shares of Digital’s common stock. The shares
acquired represent approximately 91.7% of Digital’s outstanding common stock.
The beverage segment derives revenue and
expenses from the bottled water factory in Baiquan, Heilongjiang Province, China. This bottled water factory started production
in April 2013, but production was suspended because Tianquan was sued by a contractor who constructed the water plant (see Note
12). The production is expected to resume when the lawsuit is closed and final.
Note 2 –
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 in
prior year consolidated financial statements have been reclassified to conform with the current year presentation.
Going concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The Company has negative working capital of $9,774,297
and an accumulated deficit of $51,997,694 at March 31, 2016. In addition, the Company has generated operating losses for the past
two years. These circumstances, among others, raise substantial doubt about the Company’s ability to continue as a going
concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company expects to continue incurring
losses for the foreseeable future and may need to raise additional capital from external sources in order to continue the long-term
efforts contemplated under its business plan. The Company is in the process of reevaluating its current marketing strategy as it
relates to the sale of its current product line. In addition, the Company is pursuing other revenue streams which could include
strategic acquisitions or possible joint ventures of other business segments.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly owned except for Digital, which is 91.7% owned by the
Company. 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 currency
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.
These estimates and assumptions include determining the fair market value of our inventory, the collectability of accounts receivable,
the value of deferred taxes and related valuation allowances. Certain of our estimates, including evaluating the collectability
of accounts receivable and the fair market value of inventory, could be affected by external conditions, including those unique
to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates
that could cause actual results to differ from our estimates. We re-evaluate all of our accounting estimates at least quarterly
based on these conditions and record adjustments when necessary.
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 its 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 evaluate
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.
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
bonds 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 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. 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.
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 improvements 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:
Property and plant
|
50 years
|
Machinery and equipment
|
3-8 years
|
Computers and office equipment
|
3-5 years
|
Automobiles
|
5 years
|
Leasehold improvements
|
5 years
|
Transportation equipment
|
12 years
|
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.
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
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.
Refer to Note 3, “Fair Value Measurements” for additional information on ASC Topic 820.
Stock-Based Compensation
The Company recognizes compensation expense
for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of
the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted
shares; the expense is recognized over the service period for awards expected to vest. The estimation of stock-based awards that
will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such
amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating
expected forfeitures, including types of awards, employee class, and historical experience.
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 services 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 when a formal
arrangement exists with the customers, the price is fixed or determinable, the delivery is completed, no other significant obligations
of the Company exist and collectability is reasonably assured. Payments received before all relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue which is recorded as a liability until the products are delivered. Sales
are recorded when the products are received by Affiliates and risk of ownership has passed.
The Company pays commissions to the Affiliates based upon, among
other things, their purchases from the Company and purchases by other Affiliates who were recommended to the Company. 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’s policy is to pay out commission to Affiliates upon receipt of sales orders
even before revenue can be recognized.
Allowance for Doubtful Accounts
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. The Company
maintained a zero dollar ($0) allowance for doubtful accounts as of March 31, 2016 and 2015.
Warranty
The Company records warranty liabilities
at the time of sale for the estimated costs that may be incurred under its limited 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. 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. Historically, warranty costs have not been material.
As of March 31, 2016, 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.
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 temporary 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.
The following table shows net income per
share calculation:
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Historical Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to EFT Holdings, Inc.
|
|
$
|
8,306,432
|
|
|
$
|
(5,341,102
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares used for basic and diluted net income per share
|
|
|
75,983,201
|
|
|
|
75,983,201
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
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 income on marketable securities classified as available for sale, and foreign currency translation adjustments.
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.
Recent Accounting Pronouncements
In March 2016, FASB issued ASU 2016-08, “Revenue from Contract
with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. The core principle of this ASU
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The intention of
this ASU is to improve the operability and understandability of the implementation guidance on principal versus agent considerations.
This ASU is effective for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted,
but not earlier than annual and interim periods beginning on or after December 15, 2016, for public entities. The Company is currently
evaluating the potential impact of adopting this new standard on its consolidated financial statements and related disclosures.
In July 2015, FASB issued ASU 2015-11, “Simplifying
the Measurement of Inventory”. This ASU applies to inventory that is measured using the first-in, first-out
(“FIFO”) or average cost method. Under the updated guidance, an entity should measure inventory that is within
scope at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for
inventory that is measured using the last-in, first-out (“LIFO”) or retail inventory method. This ASU is
effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early
adoption permitted at the beginning of an interim and annual reporting period. The Company is currently evaluating the impact
of adopting ASU 2015-11 on its consolidated financial statements and related disclosures.
There are no other new accounting pronouncements
adopted or enacted during the year ended March 31, 2016 that had, or are expected to have, a material impact on the Company’s
financial statements.
Note 3 –
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. The securities available for sale are
classified within Level 1 since they are valued using quoted market prices.
Note 4 –
SECURITIES AVAILABLE
FOR SALE
Securities available for sale consist of the following:
|
|
|
|
|
March 31, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Duration (1)
|
|
Corporate bonds
|
|
$
|
235,901
|
|
|
$
|
2,276
|
|
|
$
|
(2,773
|
)
|
|
$
|
235,404
|
|
|
|
4.67
|
|
Corporate notes
|
|
|
573,497
|
|
|
|
5,720
|
|
|
|
(4,277
|
)
|
|
|
574,940
|
|
|
|
2.07
|
|
Total debt securities
|
|
$
|
809,398
|
|
|
$
|
7,996
|
|
|
$
|
(7,050
|
)
|
|
$
|
810,344
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Duration (1)
|
|
Corporate bonds
|
|
$
|
1,568,102
|
|
|
$
|
13,350
|
|
|
$
|
(5,245
|
)
|
|
$
|
1,576,207
|
|
|
|
4.79
|
|
Corporate notes
|
|
|
567,261
|
|
|
|
-
|
|
|
|
(11,071
|
)
|
|
|
556,190
|
|
|
|
3.07
|
|
Total debt securities
|
|
$
|
2,135,363
|
|
|
$
|
13,350
|
|
|
$
|
(16,316
|
)
|
|
$
|
2,132,397
|
|
|
|
|
|
|
(1)
|
Average remaining duration to maturity, in years.
|
All securities were classified as available
for sale as of each date presented.
The following table shows the gross unrealized
losses and fair value of the Company’s investments, aggregated by investment category and length of time that the individual
securities have been in a continuous unrealized loss position, as of March 31, 2016:
|
|
Less than 1 year
|
|
|
1 Year or More
|
|
|
Total
|
|
|
|
Market
Value
|
|
|
Unrealized
Loss
|
|
|
Market
Value
|
|
|
Unrealized
Loss
|
|
|
Market
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
97,967
|
|
|
$
|
(2,773
|
)
|
|
$
|
97,967
|
|
|
$
|
(2,773
|
)
|
Corporate notes
|
|
|
-
|
|
|
|
-
|
|
|
|
258,065
|
|
|
|
(4,277
|
)
|
|
|
258,065
|
|
|
|
(4,277
|
)
|
Total debt securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
356,032
|
|
|
$
|
(7,050
|
)
|
|
$
|
356,032
|
|
|
$
|
(7,050
|
)
|
Declines in the fair value of available
for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to
the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other
comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things: (i) the length
of time and the extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects of
the issuer; and (iii) the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in cost.
There were 6 securities in an unrealized
loss position at March 31, 2016. Management does not intend to sell any of the securities classified as available for sale which
have unrealized losses and believes that it is not likely that the Company will have to sell any such securities before a recovery
of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the
underlying securities were purchased and are not the result of deteriorated credit quality. The fair value is expected to recover
as the bonds approach their maturity or re-pricing date or if market yields for such investments decline. Management does not believe
such securities are other-than-temporarily impaired due to reasons of credit quality.
Investment securities with a book value
of $1,372,744 were sold during the year ended March 31, 2016. The Company recognized a loss of $30,404 on the sale of those securities.
Note 5 –
INVENTORIES
The components of inventories were as follows:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Raw material and supplies
|
|
$
|
40,537
|
|
|
$
|
42,302
|
|
Finished goods
|
|
|
180,902
|
|
|
|
261,546
|
|
|
|
$
|
221,439
|
|
|
$
|
303,848
|
|
The Company recorded inventory mark-down of $25,612 and
$130,787 for the years ended March 31, 2016 and 2015, respectively.
Note 6 –
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
75,218
|
|
|
$
|
340,783
|
|
Automobiles
|
|
|
154,724
|
|
|
|
154,724
|
|
Property and plant
|
|
|
10,369,073
|
|
|
|
947,333
|
|
Computer equipment
|
|
|
115,943
|
|
|
|
116,603
|
|
Furniture and fixtures
|
|
|
73,480
|
|
|
|
80,241
|
|
Machinery and equipment
|
|
|
349,622
|
|
|
|
361,874
|
|
|
|
|
11,138,060
|
|
|
|
2,001,558
|
|
Less: Accumulated depreciation
|
|
|
(1,008,369
|
)
|
|
|
(1,107,429
|
)
|
|
|
$
|
10,129,691
|
|
|
$
|
894,129
|
|
For the years ended March 31, 2016 and
2015, depreciation expense was $177,442 and $186,948, respectively.
Note 7 –
LOANS TO RELATED PARTIES
AND RELATED PARTY TRANSACTIONS
The Company uses the “EFT”
name, a trademark owned and licensed to it by EFT Assets Limited (“EFT Assets”), a Company that Wendy Qin, a director
of EFT International Ltd., served as a director until March 2015. The Company is required to pay an annual royalty to EFT Assets
equal to a percentage of its 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,
with a minimum annual royalty of $500,000. EFT Assets is owned by a number of persons, including Wendy Qin. Ms. Qin is the sister
of Jack Jie Qin, the Company’s president. During the years ended March 31, 2016 and 2015, the royalties paid to EFT Assets
both were $500,000.
In March 2010, the Company’s
subsidiary, EFT International Ltd., entered into a consulting 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, JFL will provide consulting
services on administration, financial matters, corporate planning and business development commencing from April 1, 2010 for
an annual fee of $315,000. The annual fee is increased at the rate of $15,000 each year start from April 1, 2011. The
agreement may be terminated by either party on three months’ written notice. For the years ended March 31, 2016 and
2015, the Company recorded consulting fees payable to JFL of $390,000 and $375,000, respectively.
From April 1, 2014 to April 1, 2015,
the Company rented 2,500 square feet of the office space with monthly rent of $10,735 for its satellite training center
located at Suite 3706, Langham Office Tower, 8 Argyle Street, Kowloon, Hong Kong SAR. From April 1 through June 24, 2015, the
monthly rent was $15,319. The former office location is owned by a number of persons, including Wendy Qin, a director of EFT
(HK) Ltd and the sister of Jack Jie Qin, the Company’s president. During the years ended March 31, 2016 and 2015, the
Company paid the lessors $42,893 and $223,711, respectively.
In February 2016, the Company
advanced $1,000,000 to President Jack Qin for the prepayment of amounts relating to business development
activities planned by the Company. The advance was not used and was repaid to the Company in June 2016.
Note 8 –
SETTLEMENT OF PREVIOUSLY
WRITTEN-OFF INVESTMENT
EFT Investment Co. Ltd., “EFTI”,
is a wholly-owned subsidiary of the Company in Taiwan. Hong Dong Chen (a.k.a. Thomas Chen), the former General Manager and Director
of EFTI, recommended that the Company purchase an industrial office building located in Taipei, Taiwan, the “Taiwan
Building”. As one of the five towers of the “CBD Project”, of which Meifu Development Co., Ltd. (“Meifu”)
and TransGlobe Life Insurance Inc. (“TransGlobe”) were two of the developers, the Taiwan Building consists of 14 floors
and 144 parking spaces. Cheng Hao Peng (a.k.a. Tom Peng) exercised actual control over both Meifu and TransGlobe.
During the year ended March 31, 2012, EFTI paid NTD600 million (approximately $18.0 million) as a deposit to secure the right to purchase the Taiwan Building per
the agreements governing the investment (the “Taiwan Building Agreements”). EFTI subsequently chose not to
exercise any option it may have had to purchase the building from Meifu and TransGlobe under the Taiwan Building Agreements and
suspended all future payments to either company. EFTI suspected that Thomas Chen had breached his fiduciary duties and
had, jointly with Meifu and TransGlobe, committed fraud and misrepresentation related to the Taiwan Building transactions. The
Company commenced civil proceedings against TransGlobe, MeiFu, Peng Cheng-Hao (President of Meifu) and Thomas Chen pertaining to
the Taiwan Building transactions. (see Note 18)
As required by U.S. GAAP, the Company performed
an impairment analysis related to the deposit on the Taiwan Building every year. As of March 31, 2014, the full amount of deposit
had been impaired. EFTI continued to vigorously pursue the recovery of the full value of the deposit on the Taiwan Building.
On October 15, 2015, the
Company reached a settlement agreement with Meifu and TransGlobe. Pursuant to the settlement agreement, EFTI
received an office building and associated land with fair market value of approximately NTD 305 million (approximately $9.3
million) and cash of approximately NTD 153 million (approximately $4.7 million) from Meifu and cash of approximately NTD 76
million (approximately $2.3 million) from TransGlobe. The Company recorded a gain of $9.4 million from this settlement, net
of all related settlement charges, commissions and fees, in the quarter ended December 31, 2015. As part of the
settlement agreement, the Company agreed that it would pay Meifu up to NTD 130 million (approximately $4 million) and pay
TransGlobe up to NTD 13.5 million (approximately $0.4 million) relating to a tax assessment from the government and this
liability was accrued in the financial statements.
Note 9
–
DECONSOLIDATION
OF SUBSIDIARY – EXCALIBUR
On October 25, 2008, the Company through
its wholly-owned subsidiary, EFT Investment, acquired a 48.81% equity interest in Excalibur International Marine Corporation, “Excalibur”,
for $19,193,000. Between July 2008 and February 2015, the Company made loans to Excalibur aggregating approximately $6.78 million,
which bore interest at 8% per annum and were due from July 2014 to September 2015. The loans were primarily used by Excalibur to
acquire its vessel, the Ocean La La, and to fund operating costs. Since the Company provided funding and exercised control over
Excalibur, Excalibur was treated as a subsidiary and its accounts were consolidated into the Company’s financial statements.
Accordingly, these loans were not reflected in the Company’s consolidated financial statements.
On October 3, 2014, the Ministry of Economic
Affairs of Taiwan issued a letter to the Company stating that the registrations for the issuance of shares of Excalibur on May
16 and June 15, 2007 were judged to be false by the Taiwan High Court. Therefore, these two registrations were cancelled and all
subsequent registrations that followed based upon the untrue basis of the two false share registrations were cancelled as well.
As the acquisition of 48.81% of Excalibur’s
shares by EFT Investment was made after these two invalid share registrations in May and June 2007, the share registration regarding
EFT Investment’s purchase of Excalibur’s shares was also cancelled.
In regards to the historical financial
reporting treatment, considering that the Company has provided financial support to Excalibur’s operations and was committed
to absorb the losses from Excalibur’s operations, the Company has concluded that the investment in Excalibur would be considered
a Variable Interest Entity, “VIE”, in accordance with ASC 810. As a result of the Company’s investment in Excalibur
being considered a VIE, the Company would have consolidated the accounts of Excalibur from the time of its investment and there
would have been no impact on the historical financial statements previously presented for the Company.
In view of the loss of the Company’s
shareholding right and the fact that the Company will not provide financial support to Excalibur in the future, Excalibur was deconsolidated
from the Company’s consolidated accounts effective on October 1, 2014. The Company recognized a loss of $2,622,906 as a result
of disposal of Excalibur during the year ended March 31, 2015, which included gain from disposal of subsidiary of $7,042,255 and
the write-off of intercompany loan receivables from Excalibur of $9,665,161.
Note 10 –
INVESTMENT IN CTX VIRTUAL TECHNOLOGIES
(“CTX”)
The Company currently owns 5,626,914 shares
of common stock of CTX. The original investment of $5,000,000 for 10,593,220 shares of CTX common stock was recorded as a long-term
investment. During the year ended March 31, 2011, the Company recorded a full impairment of the investment, bringing its carrying
value to zero.
During the year ended March 31, 2015, the
Company sold approximately 5 million shares of CTX for approximately $2.5 million less commissions and other fees and reported
a gain of approximately $2.4 million in the accompanying consolidated statement of operations.
The Company intends to sell the remaining
5.6 million shares of CTX that it owns but there can be no assurance that it will be able to do so at favorable prices or at all.
Note 11 –
OTHER LIABILITIES
Other liabilities consist of the following:
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Payroll liabilities
|
|
$
|
42,593
|
|
|
$
|
46,289
|
|
Warranty liabilities
|
|
|
1,589
|
|
|
|
2,025
|
|
Accrued commission
|
|
|
1,583,740
|
|
|
|
-
|
|
Accrued guarantee tax
|
|
|
4,453,755
|
|
|
|
-
|
|
Accrued expenses
|
|
|
379,985
|
|
|
|
384,135
|
|
Provision for tax
|
|
|
-
|
|
|
|
3,985,856
|
|
Interest and penalty for income tax accrued
|
|
|
136,190
|
|
|
|
1,452,479
|
|
Others
|
|
|
3,922
|
|
|
|
3,403
|
|
|
|
$
|
6,601,774
|
|
|
$
|
5,874,187
|
|
Note 12 –
CONTINGENT LIABILITIES
In 2009, the
Company’s subsidiary, Tianquan, engaged a general contractor to construct a water manufacturing plant for RMB 4,758,600
(US$766,000). Upon completion, EFT inspected the plant and found several material construction defects, including, but
not limited to, the fact that the contractor used inferior construction material, inconsistent construction plans and
substandard insulation material. As a result, EFT conditioned its final construction payment to the contractor in the amount
of RMB 698,896 (US$112,500) on the rectification of all construction defects. On March 22, 2012, the contractor brought a
case against EFT in Baiquan People’s Court in Heilongjiang Province seeking approximately RMB 1,912,000 (US$308,400) of
purported outstanding payments under the contract and interest thereon. On January 16, 2014, Tianquan received an
unfavorable decision issued by Baiquan People’s Court in Heilongjiang Province awarding the contractor approximately
RMB 1,326,916 (US$213,700) of purported outstanding payments under the contract and interest thereon. The Company
accrued contingent liabilities as a result of the court’s decision and subsequently filed an appeal. The final
resolutions are now pending. (see Note 18)
Note 13 –
SHORT-TERM LOANS
The Company received a $571,200 loan from
a third party, Insurance Financing, Inc., “IFI”, to finance the directors’ and officers’ insurance premium
for the fiscal years 2013 and 2014. The loan bore an interest rate of 3.60% per annum, and was to be repaid over a nine-month period
which began on December 15, 2013. The terms of the agreement allowed for the Company to make nine equal payments of $64,422 each
and the loan was fully repaid during the quarter ended September 30, 2014.
The Company renewed coverage for the 2014-2015
period and received a new loan in the amount of $503,200 from IFI to finance the directors’ and officers’ insurance
premium bearing an interest rate of 3.60% per annum. The loan was repaid over a nine-month period beginning on December 15, 2014.
The terms of the agreement allowed for the Company to make nine equal payments of $56,753 each.
The Company renewed coverage for the 2015-2016
period and received a new loan in the amount of $462,170 from IFI to finance the directors’ and officers’ insurance
premium bearing an interest rate of 3.60% per annum. The loan is to be repaid over a nine-month period beginning on December 15,
2015. The terms of the agreement allow the Company to make nine equal payments of $52,126 each.
Note 14 –
WARRANTS
As of March 31, 2014, 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 expired 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 expired 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. There were no warrants exercised in the years ended
March 31, 2016 and 2015.
Note 15 –
INCOME TAXES
The Company was incorporated in the United
States and has operations in five tax jurisdictions - the United States, the Hong Kong Special Administrative Region (“HK
SAR”), mainland China, Taiwan, and the BVI.
The Company generated substantially all
of its net income from its BVI operations for the two years ended March 31, 2016 and 2015. According to BVI tax law, this income
is not subject to any taxes. The Company’s HK SAR subsidiaries are subject to a 16.5% profit tax based on its taxable net
profit. EFT (HK) Ltd provides management service to a BVI subsidiary, and the BVI subsidiary reimburses EFT (HK) Ltd for its total
operating expenses plus a 5% mark up, and the income is subject to a 16.5% profit tax. The deferred tax assets for the Company’s
US operations were immaterial for the two years ended March 31, 2016 and 2015.
The Company’s Taiwan subsidiary,
EFT Investment, and its factory in mainland China are subject to a 17% and 25% standard enterprise income tax, respectively, based
on its taxable net profit. These operations have incurred net accumulated operating losses for income tax purposes and management
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, 2016 and 2015.
The income tax expenses consist of the
following:
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Domestic-Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
-State
|
|
|
30,356
|
|
|
|
6,672
|
|
Foreign
|
|
|
(2,073
|
)
|
|
|
2,097
|
|
Effect of IRS audits
|
|
|
(4,107,895
|
)
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Income tax expense (benefit)
|
|
$
|
(4,079,612
|
)
|
|
$
|
8,769
|
|
A reconciliation of income tax expense
(benefit), with the amounts computed by applying the statutory federal income tax rate of 35% to income before income taxes is
as follows:
|
|
Year Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Income tax at U.S. statutory rate
|
|
$
|
1,563,924
|
|
|
$
|
(1,963,265
|
)
|
State tax
|
|
|
30,356
|
|
|
|
6,672
|
|
Deferred tax valuation allowance
|
|
|
(1,419,693
|
)
|
|
|
1,958,132
|
|
Nondeductible expense
|
|
|
(144,231
|
)
|
|
|
5,133
|
|
Foreign subsidiaries income tax (benefit)
|
|
|
(2,073
|
)
|
|
|
2,097
|
|
Effect of IRS audits
|
|
|
(4,107,895
|
)
|
|
|
-
|
|
Income tax expense (benefit)
|
|
$
|
(4,079,612
|
)
|
|
$
|
8,769
|
|
The Company and its subsidiaries file income
tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is
no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for tax years before
2006 (March 31, 2007).
The Company has not provided deferred taxes
on unremitted earnings attributable to international companies that have been considered to be reinvested indefinitely. Because
of the availability of U.S. foreign tax credits, it is not practicable to determine the income tax liability that would be payable
if such earnings were not indefinitely reinvested. In accordance with ASC Topic 740, interest associated with unrecognized tax
benefits is classified as income tax and penalties are classified in selling, general and administrative expenses in the statements
of operations.
In December 2013, the IRS concluded its
audit of the Company’s returns for the years 2007 through 2010 and issued an examination report that proposed adjustments
of $12.3 million of additional tax liabilities for the years 2008 through 2010. As a result of this report, the Company increased
its income tax liability to $8.6 million during the quarter ended December 31, 2013.
On June 18, 2014, after receiving further
information from the Company subsequent to the issuance of its original report, the IRS reversed its position on a major issue
and has issued a revised report which significantly reduced the amount of tax the Company owes. Accordingly, the Company has revised
its provision for income taxes and has reversed $4.1 million of the original provision recorded previously.
In September 2015, the Company received
the final report from the IRS related to its audit for the years 2008 through 2010, which concluded that the Company did not owe
any additional taxes for the periods under audit. However, the IRS has alleged that the Company did not file its tax returns for
the years 2008 and 2009 on time and has assessed the Company tax and penalties totaling $117,000. The Company believes that the
returns were timely filed and has contested the IRS’s claim. Accordingly, the Company’s provision for tax liabilities
plus interest and penalty has been reduced by $5.3 million in the quarter ended September 30, 2015.
The extent of the Company’s operations
involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions.
The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and
resolution of disputes arising from federal, state and international tax audits. The Company recognizes potential liabilities and
records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate
of whether, and the extent to which, additional taxes will be due.
Note 16 –
COMMITMENTS
Lease commitment
The Company has certain operating leases for
office space, training center and storage which will expire between 2017 and 2018. The future minimum lease payments are as follows:
For the year ended March 31,
|
|
|
|
|
|
|
|
2017
|
|
$
|
230,790
|
|
|
|
|
|
|
2018
|
|
$
|
131,139
|
|
The Company also leases a 40,000 square
meter property from Yongqin county of Baiquan, Heilongjiang Province, the PRC and constructed a bottled water factory there. The
land is leased commencing on December 31, 2009 for a term of fifty years, with a yearly land use right’s fee of $3,709.
Total rent expenses for the years ended
March 31, 2016 and 2015, were $250,741 and $370,271, respectively.
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 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.
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.
Note 17 –
SEGMENT INFORMATION
The Company’s business is classified
by management into two reportable business segments: online and beverage. 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 and access fees from its network platform. The beverage business reportable segment derives revenue and expense
from the bottled water factory in Baiquan, Heilongjiang Province, the PRC. Unallocated items comprise mainly corporate expenses
and corporate assets.
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 2, “Summary of Significant Accounting
Policies.”
The following tables provide the business
segment information as of and for the years ended March 31, 2016 and 2015. Income tax allocations have been determined based on
statutory rates in the applicable business segment.
|
|
Year ended March 31, 2016
|
|
|
|
Online
|
|
|
Beverage
|
|
|
Unallocated
|
|
|
|
|
|
|
business
|
|
|
business
|
|
|
items
|
|
|
Total
|
|
Total revenues, net
|
|
$
|
441,372
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
441,372
|
|
Total cost of revenues
|
|
|
(238,015
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(238,015
|
)
|
Gross profit
|
|
|
203,357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203,357
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,773,648
|
|
|
|
188,804
|
|
|
|
3,920,870
|
|
|
|
5,883,322
|
|
Provision for inventory obsolescence
|
|
|
25,612
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,612
|
|
Royalty expenses
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
Total operating expenses
|
|
|
2,299,260
|
|
|
|
188,804
|
|
|
|
3,920,870
|
|
|
|
6,408,934
|
|
Net operating loss
|
|
|
(2,095,903
|
)
|
|
|
(188,804
|
)
|
|
|
(3,920,870
|
)
|
|
|
(6,205,577
|
)
|
Other income
|
|
|
69,389
|
|
|
|
2
|
|
|
|
10,353,868
|
|
|
|
10,423,259
|
|
Allocated income tax benefit
|
|
|
2,073
|
|
|
|
-
|
|
|
|
4,077,539
|
|
|
|
4,079,612
|
|
Income (loss) after income tax
|
|
|
(2,024,441
|
)
|
|
|
(188,802
|
)
|
|
|
10,510,537
|
|
|
|
8,297,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
|
1,433
|
|
|
|
698,125
|
|
|
|
9,430,133
|
|
|
|
10,129,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
1,249
|
|
|
|
-
|
|
|
|
9,299,641
|
|
|
|
9,300,890
|
|
|
|
Year ended March 31, 2015
|
|
|
|
Online
|
|
|
Beverage
|
|
|
Unallocated
|
|
|
|
|
|
|
business
|
|
|
business
|
|
|
items
|
|
|
Total
|
|
Total revenues, net
|
|
$
|
967,831
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
967,831
|
|
Total cost of revenues
|
|
|
(356,680
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(356,680
|
)
|
Gross profit
|
|
|
611,151
|
|
|
|
-
|
|
|
|
-
|
|
|
|
611,151
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,125,387
|
|
|
|
218,151
|
|
|
|
2,861,585
|
|
|
|
5,205,123
|
|
Provision for inventory obsolescence
|
|
|
130,787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130,787
|
|
Royalty expenses
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
Total operating expenses
|
|
|
2,756,174
|
|
|
|
218,151
|
|
|
|
2,861,585
|
|
|
|
5,835,910
|
|
Net operating loss
|
|
|
(2,145,023
|
)
|
|
|
(218,151
|
)
|
|
|
(2,861,585
|
)
|
|
|
(5,224,759
|
)
|
Other income
|
|
|
161,990
|
|
|
|
4,725
|
|
|
|
2,353,268
|
|
|
|
2,519,983
|
|
Allocated income tax expense
|
|
|
(2,097
|
)
|
|
|
-
|
|
|
|
(6,672
|
)
|
|
|
(8,769
|
)
|
Loss after income tax
|
|
|
(1,985,130
|
)
|
|
|
(213,426
|
)
|
|
|
(514,989
|
)
|
|
|
(2,713,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
|
19,760
|
|
|
|
872,881
|
|
|
|
1,488
|
|
|
|
894,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Note 18
–
LITIGATION
On October 1, 2010, EFT Investment Co.
Ltd., “EFTI”, 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 Prosecutor’s Office.
EFTI alleges, among other things, that Defendants committed the offences of capital forging, fraud, breach of trust, and document
fabrication. On April 30, 2013, the Taiwan Shihlin District Court found that both Hsaio Zhong-Xing and Lu Zhuo-Jun were guilty
of fraudulent increase of paid-up capital and dismissed all other charges. As a result, Hsiao Zhong-Xing received a six-month jail
sentence and Lu Zhuo-Jun received a five-month jail sentence. Both of their jail sentences can be converted into a fine. On May
27, 2013, the Shihlin District Prosecutor filed an appeal in the Taiwan High court for reconsideration of the judgment entered
by the District Court. On February 19, 2014, the Taiwan High Court sustained the District Court’s decision and found Hsaio
Zhong-Xing guilty and sentenced him to a mandatory ten-month jail sentence; and found Lu Zhuo-Jun guilty and sentenced him to a
mandatory eight-month jail sentence. This decision is final and confirmed. Based on the Taiwan Shihlin District Court’s judgment
of fraudulent increase of paid-up capital, Excalibur filed a civil lawsuit against Hsiao Zhong-Xing, Lu Zhuo-Jun and Jiao Ren-He
on January 7, 2014 for the unpaid capital amount of NTD 475,312,500. On January 13, 2015, being the largest creditor of Excalibur,
EFTI filed a submission to the court to apply to join the case and the court’s decision is pending. On April 14, 2015, Excalibur
filed with the court to withdraw the case and the court approved.
EFTI filed a civil lawsuit against Jiao
Ren-Ho, Chang Hui-Ying, Hsiao Zhong-Xing, and Lu Zhuo-Jun, collectively “Defendants,” in the Taiwan Shihlin District
court on February 12, 2010. EFTI alleges Defendants committed tortious acts, including but not limited to the offences of capital
forging, fraud, breach of trust and document fabrication. The Shihlin District Court found in favor of all Defendants in the case.
EFTI filed an appeal in the appellate court for reconsideration of the judgment entered by the District Court. The appellate court
remanded the case to District Court for a second review and the District Court found in favor of all defendants for the second
time. EFTI therefore filed a second appeal in the appellate court for reconsideration of the judgment entered by the District Court.
On December 7, 2015, the appellate court dismissed the appeal.
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 NTD 8,050,832, equivalent to approximately $254,700. On August 20, 2009, the Taiwan Taipei district
court froze Excalibur’s cash of $203,402 in response to the suit. A contingent liability for the restricted cash has been
recorded. As EFTI is Excalibur’s largest creditor, in consideration of recovering the frozen cash, EFTI filed a submission
to the court to apply to join the case on January 13, 2015. On June 16, 2015, the Taiwan High Court Taichung Branch Court sustained
the decision of the Taiwan Taichung District Court in favor of Marinteknik. As Excalibur is no longer EFTI’s subsidiary,
EFTI cannot appeal the case and the case has been closed.
On August 2, 2010, the Company commenced
a legal proceeding against Marinteknik Shipbuilders (S) Pte Ltd. and six 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 the Company’s investment in Excalibur.
The Company claims that the wrongful actions of the defendants resulted in damages of $19,000,000 to the Company. On December 11,
2012, the High Court issued a decision whereby it dismissed the Company’s actions against Marinteknik and Lim Lan Eng (Priscilla),
a director of Marinteknik. On January 8, 2013, the Company filed an appeal against the decision made by the High Court. On November
29, 2013, the appellate court issued its order and sustained the High Court’s decision and awarded legal fees to the defendants.
The Company has accrued a liability in the amount of $200,000 for the legal costs. The High Court dismissed the appeal by the Company,
but criticized the defendants, stating that their actions were “wholly lacking in probity” and “likely also to
have been unlawful”. After seeking further legal advice and balancing all factors, however, it was decided that commencing
further legal proceedings on this matter is not beneficial to the commercial interests of the Company. On October 15, 2015, the
High Court determined that the Company is obligated to bear the defendants’ legal costs of approximately SGD 307,000. On
February 18, 2016, the Commercial Affairs Department issued a letter to confirm completion of the investigation of the report by
the Company regarding Lim Lam Eng (Priscilla) and Marinteknik Shipbuilders (S) Pte Ltd. and confirmed their view that no evidence
of a criminal offense was disclosed and they will not be pursuing the matter further. On March 4, 2016, the Company received a
letter from the defendants’ solicitor stating that legal proceedings against the Company have been commenced for the claim
of the taxed amount of approximately SDG 85,000.
On June 9, 2016, Lim Lan
Eng Priscilla and Marinteknik filed an action against EFTI in the Supreme Court of the State of New York, County of New York. The action seeks summary judgment on their claims for fees in the sum of $162,720.38, arising out of
the Singapore High Court’s determination that plaintiffs were entitled to an award of their fees and costs in
connection with the Singapore litigation. EFTI intends to defend and contest the
relief sought. A determination as to the plaintiffs’ motion for summary judgment has not been made.
In 2009, the Company’s subsidiary,
Heilongjiang Tianquan Manor Soda Drinks Co. Ltd., “Tianquan”, engaged a general contractor, the “Contractor”,
to construct a water manufacturing plant, the “Plant”, for RMB 4,758,600 ($776,300). Upon completion, the Company inspected
the Plant and found several material construction defects, including, but not limited to, the fact that the Contractor used inferior
construction material, inconsistent construction plans and substandard insulation material. As a result, in 2010, the Company conditioned
its final construction payment to the Contractor in the amount of RMB 698,896 ($112,500) on the rectification of all construction
defects. On March 22, 2012, the Contractor brought a case against Tianquan in Baiquan People’s Court in Heilongjiang Province
seeking approximately RMB 1,912,000 of purported outstanding payments under the contract and interest thereon. On January 16, 2014,
the Company’s subsidiary, Tianquan, received an unfavorable decision issued by Baiquan People’s Court in Heilongjiang
Province awarding the contractor approximately RMB 1,326,916 of purported outstanding payments under the contract and interest
thereon. Tianquan filed an appeal with the Qiqihar Intermediate People’s Court on January 27, 2014. On August 18, 2014, the
Qiqihar Intermediate People’s Court issued a judgment rescinding the unfavorable decision issued by the Baiquan People’s
Court and ordered the case to be reheard at the Baiquan People’s Court. On September 25, 2014, Tianquan received a favorable
decision from Baiquan People’s Court as the court concluded that the company stamps affixed to all of the Contractor’s
legal documents were fake. On November 5, 2014, the sub-contractor brought another civil case against Tianquan in the Baiquan People’s
Court in Heilongjiang Province seeking RMB 1,823,787 of purported outstanding payments under the same contract and interest thereon.
On December 8, 2014, Tianquan filed a civil lawsuit against the sub-contractor for compensation for material construction defects.
On December 31, 2015, the two cases were reheard at the Baiquan People’s Court and the sub-contractor changed the claim to
the amount of RMB 1,123,266. On January 5, 2016, the Company’s subsidiary, Tianquan, received an unfavorable decision issued
by Baiquan People’s Court awarding the contractor approximately RMB 827,000 of purported outstanding payments under the contract
and interest thereon. The Court ordered the subcontractor to reimburse the amount of RMB 120,000 for testing fees to the Company.
The Company filed an appeal of the two cases and the final resolutions are now pending.
On August 8, 2012, the Company filed a
complaint against Edward Carter, a former consultant, in the Superior Court of California, county of Los Angeles, in which the
Company alleges, among other things, that Mr. Carter breached his consulting contract, fiduciary duty and committed fraud and misrepresentation
in respect to the Company’s investment in CTX Virtual Technologies, Inc., “CTX”, as sponsored by Buckman, Buckman
& Reid, Inc., “BB&R”, a financial consulting firm and placement agent. This matter was dismissed as part of
a mutual settlement that was entered into between the parties on or around February 25, 2015.
On January 28, 2013, EFTI filed a criminal
complaint against Tom Peng a.k.a. Cheng Hao Peng, President of Meifu Development Co., Ltd., “Meifu”, Thomas Chen, a.k.a.
Hong Dong Chen, former General Manager and Director of EFTI, Steven Peng, a.k.a. Tien Te Peng, Vice Chairman of Transglobe Life
Insurance Inc., “Transglobe”, Xian Jue Liu, Chairman of Transglobe , Shih Kuei Chang, General Manager of Meifu, Yi
Feng Cheng, Real Estate Department Manager of Transglobe, and Da Min Wu, an individual, collectively called “Defendants”,
in the Taipei District Prosecutor’s Office. EFTI alleges, among other things, that Thomas Chen colluded with Tom Peng and
other Defendants, and that Thomas Chen had made numerous misrepresentations to the Company and EFTI in connection with transactions
related to a building in Taiwan, of which Meifu and Transglobe were developers. The Company also alleges that Thomas Chen breached
his fiduciary duty, as the General Manager of EFTI, by binding EFTI in various agreements and making payments from EFTI to Meifu
and Transglobe, which are named Defendants, and that the Defendants had committed violations of securities law, insurance law,
corporation law and tax law, as well as money laundering, fraud and breach of trust.
On June 6, 2013, the Company filed a civil
complaint in Los Angeles, California against Meifu Development Co., Ltd., Transglobe Life Insurance Inc. and certain individuals
related to the purchase of the Taiwan Building. On January 27, 2014, the Company voluntarily dismissed the civil complaints without
prejudice in Los Angeles, California, in return for a good faith settlement negotiation initiated by such defendants. However,
due to a lack of good faith of the defendants in negotiation of a settlement, on May 30, 2014, the Company re-filed civil complaints
against Meifu Development Co. Ltd., Transglobe Life Insurance, Inc., Tom Peng and Thomas Chen in the Los Angeles Supreme Court,
alleging deceit, conversion, breach of fiduciary duty and other illegal acts against the Company.
On June 4, 2015, the Superior Court of
California, County of Los Angeles, ruled that because the Company has its principal place of business in California, the matter
was stayed to allow the Company time to file in the appropriate forum. The Court further ordered that Taiwan is a suitable forum
for the Company’s complaint. An order to show cause was set for December 4, 2015.
On September 9, 2015, the court dismissed
this legal action against all of the defendants with prejudice. A subsequent settlement was reached on October 15, 2015 by all
parties. As part of the terms of the settlement, the Company will receive both real property and cash. (See Note 8)
On July 23, 2013, the Taipei District Prosecutor’s
Office issued a non-indictment decision on charges of fraud against the Defendants, which the Company believes is unwarranted.
The decision not to indict the Defendants was made despite the fact that the Taiwan Investigation Bureau, Ministry of Justice had
confirmed that Thomas Chen, the former GM of EFTI, has received and/or has intended to receive secret profits from Tom Peng, who
admitted his full control over Meifu and Transglobe. A report by the Taiwan Investigation Bureau, Ministry of Justice, further
revealed, among other fraudulent activities, that Tom Peng and his son, Steven Peng, a.k.a. Tien Te Peng, were involved in illegal
inter-company transactions and illegal related party transactions. Documents received by the Company through court petition indicated
that, on June 14, 2013, the Prosecutor in Taiwan, despite what the Company believes to have been ample evidence of illegality,
instructed the Taiwan Investigation Bureau to halt all further investigations into EFTI’s criminal complaint prior to his
written decision not to indict the Defendants. Subsequently, on August 22, 2013, EFTI completed the filing of the appeal with the
Taiwan High Prosecutor’s Office for reconsideration of the non-indictment charges against the Defendants. This appeal was
rejected on August 29, 2013, which the Company believes was not enough time for the Prosecutor’s Office to fully reconsider
the appeal. On September 12, 2013, EFTI filed a final petition to the Taipei District Court for judgment of the decision made by
the Taiwan High Prosecutor’s Office, but the petition was rejected on March 5, 2014. On October 15, 2015, the Company reached
a settlement agreement with the defendants and the civil case in the Los Angeles Supreme Court was dismissed with prejudice.
On November 27, 2013, a class action entitled
Li, et al. v. EFT Holdings, Inc., et al. was filed on behalf of a putative class of all purchasers of one or more of the Company’s
products against the Company and Jack Qin in the United States District Court for the Central District of California. On
April 29, 2015, the court consolidated this action with the Wang, et al. v. EFT Holdings, Inc., et al. action. On May 7,
2015, Plaintiffs voluntarily dismissed the claims of the individual plaintiffs without prejudice.
On November 27, 2013, a class action entitled
Li, et al. v. Qin, et al. was filed on behalf of a putative class of all purchasers of the Company’s products against the
Company and certain of its current and former officers and directors in the United States District Court for the Central District
of California. On April 29, 2015, the court consolidated this action with the Wang, et al. v. EFT Holdings, Inc., et al.
action. On May 7, 2015, Plaintiffs voluntarily dismissed the claims of the individual plaintiffs without prejudice.
On January 30, 2015, a class action entitled
Wang, et al. v. EFT Holdings, Inc., et al. was filed on behalf of a putative class of all purchasers of the Company’s products
against the Company and certain of its current and former officers and directors in the United States District Court for the Central
District of California. On April 29, 2015, the court consolidated this action with the Li, et al. v. Qin, et al. and Li,
et al. v. EFT Holdings, Inc., et al. actions. On May 7, 2015, Plaintiffs filed a motion for class certification, which was
fully briefed by the parties. On December 14, 2015, the court denied Plaintiffs’ motion for class certification. On
April 6, 2016, the parties stipulated to a voluntary dismissal of Plaintiffs’ claims with prejudice.
On December 6, 2013, the Company named
George Curry, a former director and officer of the Company, as one of the defendants in the Superior Court of California, County
of Los Angeles, with reference to the CTX investment transaction, in which the Company alleges, among other things, that Mr. Curry
breached his fiduciary duty and committed fraud and misrepresentation in respect of the Company’s investment in CTX.
On April 18, 2014, George Curry filed a
Notice of Removal for the above action to be brought in the District Court of California, Los Angeles (Western District). In the
same action, he brought a counterclaim against the Company, Jack Qin and Pyng Soon and sought implied and equitable indemnity,
declaratory relief and apportionment of fault. On or around December 11, 2014, George Curry filed a motion for summary judgment
against the Company and all other cross-defendants in the matter. The motion was heard on February 26, 2015 and court denied George
Curry’s motion. Thereafter, a second motion for summary judgment was filed by Mr. Curry. That motion was denied as well.
The final resolution of the entire matter is still pending. Trial is currently scheduled for Feburary 7, 2017. In addition, the
Court consolidated the trial of this matter with that of the Company’s lawsuit against CTX, Buckman, Buckman & Reid and
Peter Lau.
On March 4, 2015, the Company filed a civil
lawsuit in the United States District Court, Central District of California, against CTX, Buckman, Buckman & Reid, Cliff Rhee
and Peter Lau alleging breach of covenant of good faith and fair dealing, breach of fiduciary duty, fraud, misrepresentation, concealment,
negligent misrepresentation and negligence.
On April 14, 2015, Defendant CTX filed
a motion to dismiss. On May 28, 2015, the court granted CTX’s motion, in part, with leave to amend. The Company filed a First
Amended Complaint on June 8, 2015, asserting causes of action for: (1) breach of covenant of good faith and fair dealing; (2) breach
of fiduciary duty; (3) fraud-misrepresentation; and (4) fraud-concealment. On June 24, 2015, CTX filed an answer to the First Amended
Complaint. Buckman, Buckman & Reid and Peter Lau also filed a motion to dismiss the Complaint. The Court granted the motion
with respect to the breach of fiduciary duty claim, with leave to amend, but denied it as to all other claims. After the Company’s
filing of its First Amended Complaint, Buckman, Buckman & Reid and Peter Lau filed an answer to the First Amended Complaint
on July 9, 2015.
On May 26, 2016, the Court struck CTX’s Answer
to the Complaint and entered default. The Company is in the process of preparing a default package.
On April 1, 2016, Buckman,
Buckman & Reid and Peter Lau filed a motion with the court to compel the matter to arbitration, thereby seeking to avoid a
jury trial. The Company opposed the motion, arguing that there was no applicable arbitration provision, and seeking to retain the
right to a jury trial. After extensive briefings, and following oral argument, on June 2, 2016, the Court denied Buckman, Buckman
& Reid and Peter Lau’s motion to compel arbitration. The Court thereafter scheduled the trial for February 7, 2017.
On June 22, 2015, a complaint entitled
Greenstone Holdings, Inc. v. EFT Holdings, Inc., et al. was filed in the United States District Court for the Central District
of California, asserting a claim for express indemnity against the Company, in excess of $150,000. After negotiations,
the Company entered into a confidential settlement with Greenstone Holdings, Inc. on April 14, 2016.
Note 19 –
SUBSEQUENT EVENTS
The Company has reviewed its subsequent events through the date
these consolidated financial statements were issued and has determined that no material subsequent events have occurred through
such date.