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EX-31.2 - EXHIBIT 31.2 - EFT Holdings, Inc.v425086_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - EFT Holdings, Inc.v425086_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - EFT Holdings, Inc.v425086_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - EFT Holdings, Inc.v425086_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended            September 30, 2015

 

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

For the transition period from _____ to _______

 

Commission File Number: 000-53730

 

EFT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   22-1211204
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

 

17800 Castleton St., Suite 300

City of Industry, CA 91748

(Address of Principal Executive Offices) (Zip Code)

 

Registrant's telephone number including area code: (626) 581-3335

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

As of the latest practicable date, November 23, 2015, the registrant had 75,983,201 outstanding shares of common stock.

 

 

 

 

INDEX

 

        Page  
           
Part I — Financial Information
           
Item 1.   Financial Statements   4  
    Consolidated Balance Sheets as of September 30, 2015 and March 31, 2015 (Unaudited)   4  
    Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2015 and 2014 (Unaudited)   5  
    Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2015 and 2014 (Unaudited)   6  
    Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2015 and 2014 (Unaudited)   7  
    Notes to Consolidated Financial Statements for the Six Months Ended September 30, 2015 and 2014 (Unaudited)   8  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   20  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   29  
Item 4.   Controls and Procedures   30  
           
Part II — Other Information
           
Item 1.   Legal Proceedings   30  
Item 1A.   Risk Factors   30  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   30  
Item 3.   Defaults Upon Senior Securities   30  
Item 4.   Mine Safety Disclosures   30  
Item 5.   Other Information   30  
Item 6.   Exhibits   31  
Signatures       32  

 

2

 

 

Cautionary Statement

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this quarterly report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2015 as filed with the Securities and Exchange Commission.

 

3

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

EFT HOLDINGS, INC.

 

Consolidated Balance Sheets

(Unaudited)

 

   September 30, 2015   March 31, 2015 
ASSETS        
Current assets          
Cash and cash equivalents  $1,658,145   $2,332,595 
Securities available for sale   883,200    2,132,397 
Inventories   244,580    303,848 
Prepaid expenses   284,709    593,586 
Other receivables   118,402    293,088 
Total current assets   3,189,036    5,655,514 
           
Property and equipment, net   783,539    894,129 
Security deposit   351,993    360,203 
Total assets  $4,324,568   $6,909,846 
LIABILITIES AND EQUITY (DEFICIENCY)          
Current liabilities          
Accounts payable  $1,569,173   $1,073,795 
Commission payable   3,689,964    3,785,004 
Other liabilities   964,996    5,874,187 
Unearned revenues   3,197,996    3,198,776 
Short-term loan   -    281,240 
Contingent liabilities   208,635    214,019 
Total liabilities   9,630,764    14,427,021 
           
Deficiency          
EFT Holdings, Inc. stockholders' deficiency:          
Preferred stock, $0.001 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 September 30, 2015 and March 31, 2015   760    760 
Additional paid in capital   52,854,891    52,854,891 
Retained deficit   (58,031,155)   (60,304,126)
Accumulated other comprehensive loss   (76,994)   (19,178)
Total EFT Holdings, Inc. stockholders’ deficiency   (5,252,498)   (7,467,653)
Non-controlling interest   (53,698)   (49,522)
Total deficiency   (5,306,196)   (7,517,175)
Total liabilities and deficiency  $4,324,568   $6,909,846 

 

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

 

4

 

 

EFT HOLDINGS, INC.

 

Consolidated Statements of Operations

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Sales revenues, net  $145,398   $118,961   $221,714   $348,534 
Shipping charges   12,473    45,004    36,524    113,409 
Total revenues, net   157,871    163,965    258,238    461,943 
                     
Cost of sales   67,841    62,182    115,909    140,531 
Shipping costs   320    26,843    495    32,146 
Total cost of revenues   68,161    89,025    116,404    172,677 
Gross profit   89,710    74,940    141,834    289,266 
Operating expenses:                    
Selling, general and administrative expenses   1,212,407    848,575    2,557,604    2,590,794 
Provision for inventory obsolescence   -    62,255    6,409    119,231 
Royalty expenses - related party   125,000    228,202    250,000    250,000 
Total operating expenses   1,337,407    1,139,032    2,814,013    2,960,025 
Operating loss   (1,247,697)   (1,064,092)   (2,672,179)   (2,670,759)
Other income/(expense)                    
Interest income   26,233    43,097    46,972    94,124 
Interest expense   (506)   (40,560)   (43,419)   (72,256)
Settlement of previously accrued interest for income tax   962,991    -    962,991    - 
Gain/(loss) on disposal of securities available for sale                    
(includes $13,463 and $(53,989) accumulated other                    
comprehensive income/(loss) reclassifications for                    
unrealized net gains on securities available for sale                    
for the six months ended September 30, 2015 and                    
2014, respectively)   (9,258)   (72,849)   (12,850)   (56,677)
Dividend income   -    4,482    -    8,787 
Foreign exchange loss   (108)   (2,339)   (516)   (2,534)
Gain on sale of long-term investment   -    1,445,646    -    2,457,899 
Other income   5,133    2,549    22,190    4,831 
Total other income/(expense)   984,485    1,380,026    975,368    2,434,174 
                     
Income (loss) from continuing operations before income taxes   (263,212)   315,934    (1,696,811)   (236,585)
Income tax expense (benefit)   (3,965,606)   1,872    (3,965,606)   1,872 
Income (loss) from continuing operations   3,702,394    314,062    2,268,795    (238,457)
Discontinued operations                    
Income (loss) from operation of Excalibur   -    (29,326)   -    2,588 
Total income (loss) from discontinued operations   -    (29,326)   -    2,588 
Net income (loss)   3,702,394    284,736    2,268,795    (235,869)
Income from non-controlling interest   1,955    17,043    4,176    2,851 
Net income (loss) attributable to EFT Holdings, Inc.  $3,704,349   $301,779   $2,272,971   $(233,018)
                     
Net income (loss) per share – continuing operations                    
Basic and diluted  $0.05   $0.00   $0.03   $(0.00)
                     
Net income (loss) per share – discontinued operations                    
Basic and diluted  $-   $(0.00)  $-   $0.00 
                     
Net income (loss) per common share attributable to EFT                    
Holdings, Inc.                    
Basic and diluted  $0.05   $0.00   $0.03   $(0.00)
Weighted average common shares outstanding                    
Basic and diluted   75,983,201    75,983,201    75,983,201    75,983,201 

 

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

 

5

 

 

EFT HOLDINGS, INC.

 

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Net income (loss)  $3,702,394   $284,736   $2,268,795   $(235,869)
Other comprehensive income/(loss)                    
Foreign currency translation adjustment   (43,710)   248,231    (39,720)   264,911 
Unrealized income/(loss) on securities available for sale   (4,218)   44,263    (18,095)   59,950 
Comprehensive income   3,654,466    577,230    2,210,980    88,992 
Less: Comprehensive income/(loss) attributable to non-controlling interests   (1,956)   158,002    (4,176)   183,807 
Comprehensive income (loss) attributable to EFT Holdings, Inc.  $3,656,422   $419,228   $2,215,156   $(94,815)

 

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

 

6

 

 

EFT HOLDINGS, INC.

 

Consolidated Statements of Cash Flows

(Unaudited)

 

   Six Months Ended 
   September 30,   September 30, 
   2015   2014 
Cash flows from operating activities:          
Net income (loss) from continuing operations  $2,268,795   $(238,457)
Net income from discontinued operations   -    2,588 
Net income (loss)   2,268,795    (235,869)
Adjustments to reconcile net income (loss) to net cash provided by/(used in) operating activities:          
Depreciation and amortization   78,376    96,538 
(Gain)/loss from securities available for sale   12,850    56,677 
Provision for inventory obsolescence   6,409    119,231 
(Gain)/loss on disposal of fixed assets   11,432    (4,060)
Settlement of previously accrued income tax, penalty and interest   (5,290,788)   - 
Changes in operating assets and liabilities:          
Inventories   51,768    112,704 
Prepaid expenses   297,583    360,531 
Other receivables   149,635    162,085 
Accounts receivable   23,692    65,210 
Accounts payable   495,849    195,968 
Commission payable   (95,040)   (43,749)
Other liabilities   403,955    143,777 
Unearned revenues   (780)   7,560 
Net cash provided by/(used in) continuing operations   (1,586,264)   1,036,603 
Net cash provided by discontinued operations   -    71,303 
Net cash provided by/(used in) operating activities   (1,586,264)   1,107,906 
           
Cash flows from investing activities:          
Additions to property and equipment   (1,249)   - 
Proceeds from disposal of property and equipment   -    20,213 
Purchase of securities available for sale   (33,452)   (2,305,082)
Proceeds from available for sale securities   1,251,706    4,731,867 
Net cash provided by continuing operations   1,217,005    2,446,998 
Net cash provided by discontinued operations   -    120 
Net cash provided by investing activities   1,217,005    2,447,118 
           
Cash flows from financing activities:          
Repayment of short-term loan   (281,240)   (319,245)
Net cash used in continuing operations   (281,240)   (319,245)
Net cash provided by discontinued operations   -    - 
Net cash used in financing activities   (281,240)   (319,245)
           
Effect of exchange rate changes on cash   (23,951)   (775)
           
Net increase/(decrease) in cash   (674,450)   3,235,004 
Cash, beginning of period   2,332,595    1,770,206 
Cash, end of period  $1,658,145   $5,005,210 
           
Supplemental disclosures of cash flow information:          
Interest paid in cash  $2,526   $2,867 

 

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

 

7

 

 

EFT HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - ORGANIZATION

 

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.

 

Note 2 - 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 $6,441,728 and an accumulated deficit of $58,031,155 as of September 30, 2015, and it reported net operating losses for the past two years. 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. 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 be necessary if the Company is unable to continue as a going concern.

 

Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2015 and the results of operations and cash flows for the periods ended September 30, 2015 and 2014. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the six months ended September 30, 2015 are not necessarily indicative of the results to be expected for any subsequent periods or for the year ending March 31, 2016. The balance sheet at March 31, 2015 has been derived from the audited financial statements at that date.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended March 31, 2015 as included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2015.

 

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 Development Partners Inc., “Digital”, which is 91.74% owned by the Company. All material intercompany transactions and balances have been eliminated.

 

Uses of estimates in the preparation of financial statements

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this 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 consolidated financial statements and reported amounts of revenue and expenses during the reporting period. The significant areas requiring the use of management estimates include, but not limited to, the allowance for doubtful accounts receivable, estimated useful life and residual value of property, plant and equipment, provision for staff benefit, inventory markdown allowance, recognition and measurement of deferred income taxes and valuation allowance for deferred tax assets. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results may ultimately differ from those estimates.

 

 

8

 

 

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.

 

Recent accounting pronouncements

 

There are no new accounting pronouncements adopted or enacted during the six months ended September 30, 2015 that had, or are expected to have, a material impact on the Company’s financial statements.

 

Note 4 – SECURITIES AVAILABLE FOR SALE

 

Securities available for sale consist of the following:

 

   September 30, 2015 
   Amortized   Unrealized   Unrealized   Market   Average 
   Cost   Gains   Losses   Value   Duration (1) 
Corporate bonds  $333,804   $339   $(10,883)  $323,260    4.84 
Corporate notes   570,458    -    (10,518)   559,940    2.57 
Total debt securities  $904,262   $339   $(21,401)  $883,200      

 

   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.

 

9

 

 

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 September 30, 2015:

 

   Less than 1 year   1 Year or More   Total 
   Market   Unrealized   Market   Unrealized   Market   Unrealized 
   Value   Losses   Value   Losses   Value   Loss 
Corporate bonds  $-   $-   $240,231   $(10,883)  $240,231   $(10,883)
Corporate notes   -    -    559,940    (10,518)   559,940    (10,518)
Total debt securities  $-   $-   $800,171   $(21,401)  $800,171   $(21,401)

 

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 of cost.

 

There were 13 securities in an unrealized loss position at September 30, 2015. 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 $1,264,556 were sold during the six months ended September 30, 2015. The Company recognized a loss of $12,850 on the sale of those securities.

 

Note 5 – INVENTORIES

 

The components of inventories were as follows:

 

   September 30,
2015
   March 31,
2015
 
Raw materials and supplies  $41,238   $42,302 
Finished goods   203,342    261,546 
   $244,580   $303,848 

 

10

 

  

Note 6 - 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, 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 Limited 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 Limited is owned by a number of persons, including Wendy Qin. Ms. Qin is the sister of Jack Jie Qin, the Company’s president. In March 2015, Wendy Qin resigned her position as a director of EFT Assets Limited. During the six months ended September 30, 2015 and 2014, the royalties payable to EFT Assets Limited for both periods were $250,000.

 

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 services on administration, financial matters, corporate planning and business development commencing April 1, 2010, and the annual fee will be increased at the rate of $15,000 each year. The agreement may be terminated by either party on three months’ written notice. For the six months ended September 30, 2015, professional fees payable to JFL Capital Limited was$195,000. For the six months ended September 30, 2014 EFT International Ltd paid $187,500 to JFL Capital Limited.

 

Until June 24, 2015, the Company rented 2,500 square feet of office space for its satellite training center in Hong Kong. The office was located at Langham Office Tower, 8 Argyle Street, Kowloon, Hong Kong SAR. The space that was subject to the lease 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. Until March 31, 2014, the lease was for 6,500 square feet with a monthly rental of $30,900. On May 1, 2014, the Company reduced the rented space to 4,356 square feet in an effort to reduce the Company’s costs and the monthly rental was reduced to $23,972. On November 1, 2014, the Company further reduced the rented space to 2,500 square feet and the monthly rental was reduced to $10,735. Beginning on April 1, 2015 through June 24, 2015, the monthly rent for the 2,500 square feet of rented space increased to $15,319. The lease was terminated on June 24, 2015. During the six months ended September 30, 2015 and 2014, the Company paid the lessor $42,893 and $146,907, respectively, in rent.

 

Note 7 - 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 the facts 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 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 in October 2014, 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.

 

11

 

 

Note 8- INVESTMENT IN CTX VIRTUAL TECHNOLOGIES

 

CTX Virtual Technologies, Inc., “CTX” (Pink Sheets: CTXV), is a technology company that manufactures and distributes mobile telecommunication, IT data management, virtual imaging and mobile data input accessories.

 

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 carried on the cost method. Although the Company appeared at the time of the investment to hold a majority of the common stock outstanding, CTX also had outstanding classes of preferred stock that had super-majority voting rights. As a result, EFT does not control CTX. During the year ended March 31, 2011, the Company recorded a full impairment of the investment, bringing its carrying value to zero.

 

During the six months ended September 30, 2014, the Company sold approximately 5 million shares of its holdings in 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.

 

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Note 9 - OTHER LIABILITIES

 

Other liabilities consist of the following:

 

   September
30, 2015
   March
31, 2015
 
Payroll liabilities  $44,713   $46,289 
Warranty liabilities   1,837    2,025 
Accrued expenses   767,589    384,135 
Provision for tax   13,547    3,985,856 
Interest and penalty for income tax accrued   134,000    1,452,479 
Others   3,310    3,403 
   $964,996   $5,874,187 

 

Note 10 - CONTINGENT LIABILITIES

 

In 2009, the Company’s subsidiary, Tianquan, engaged a general contractor to construct a water manufacturing plant for RMB4,758,600 ($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 RMB698,896 ($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 RMB1,912,000 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 RMB1,326,916 ($213,700) of purported outstanding payments under the contract and interest thereon. The Company filed an appeal with 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, the Company received a favorable decision from Baiquan People’s Court as the court indicated that the company stamps affixed on 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 RMB1,823,787.91 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. The final resolutions of these two cases are now pending.

 

Note 11 – SHORT-TERM LOAN

 

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 is to be repaid over a nine-month period beginning on December 15, 2014. The terms of the agreement allow for the Company to make nine equal payments of $56,753 each.

 

Note 12 – WARRANTS

 

As of March 31, 2014, the Company’s subsidiary Digital had 2,000,000 common stock warrants outstanding, and 330,665 Series A warrants and 330,665 Series B warrants outstanding, which were accounted for as equity instruments. The 2,000,000 common stock warrants expired on June 1, 2014 and permitted the holders to purchase one share of Digital’s common stock at an exercise price of $1.00 per share. The Series A warrants and Series B warrants expired on September 30, 2014 and permitted 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 six months ended September 30, 2015 and 2014, respectively. 

 

13

 

 

Note 13 - 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 six months ended September 30, 2015 and 2014. 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 six months ended September 30, 2015 and 2014.

 

The Company’s Taiwan subsidiary, EFTI, 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 September 30, 2015 and 2014.

 

The income tax expense consists of the following:

 

   Six Months Ended
September 30,
 
   2015   2014 
Current:          
Domestic  $-   $- 
Foreign   -    - 
Under/(over) provision for prior years   -    1,872 
Effect of IRS audit   (3,965,606)   - 
Income tax expense  $(3,965,606)  $1,872 

 

A reconciliation of income taxes, with the amounts computed by applying the statutory federal income tax rate, 37% for the six months ended September 30, 2015 and 2014, to income before income taxes for the six months ended September 30, 2015 and 2014, is as follows:

 

   Six Months Ended
September 30,
 
   2015   2014 
Income tax provision at U.S. statutory rate  $(626,275)  $(85,525)
State tax   -    - 
Deferred tax valuation allowance   774,322    83,225 
Nondeductible expenses   (148,047)   2,300 
Foreign subsidiary income tax   -    - 
Under/(over) provision for prior years   -    1,872 
Effect of IRS audit   (3,965,606)   - 
Income tax expense  $(3,965,606)  $1,872 

 

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 the year ended 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 provision to $8.6 million during the quarter ended December 31, 2014. Even though the Company increased its income tax provision as a result of this report, the Company continued to challenge the IRS findings.

 

After receiving further information from the Company subsequent to the issuance of its original report, the IRS issued a revised report that significantly reduced the amount of tax the Company owes. Accordingly, the Company revised its provision for income taxes, accrued interest and penalty and has reversed $4.1 million of the 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.

 

14

 

 

Note 14 – 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 for 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 three months ended September 30, 2015 and 2014. Income tax allocations have been determined based on statutory rates in the applicable business segment.

 

   Three Months Ended September 30, 2015 
   Online   Beverage   Unallocated     
   business   business   Items   Total 
Total revenues, net  $157,871   $-   $-   $157,871 
Total cost of revenues   (68,161)   -    -    (68,161)
Gross profit   89,710    -    -    89,710 
Operating expenses:                    
Selling, general and administrative expenses   404,486    40,776    767,145    1,212,407 
Royalty expenses   125,000    -    -    125,000 
Total operating expenses   529,486    40,776    767,145    1,337,407 
Net operating loss   (439,776)   (40,776)   (767,145)   (1,247,697)
Other income   14,935    1    969,549    984,485 
Allocated income tax benefit   -    -    3,965,606    3,965,606 
Income (loss) after income tax   (424,841)   (40,775)   4,168,010    3,702,394 
                     
Total long-lived assets   2,475    780,423    641    783,539 
                     
Additions to long-lived assets   -    -    -    - 

 

   Three Months Ended September 30, 2014 
   Online   Beverage   Unallocated     
   business   business   Items   Total 
Total revenues, net  $163,965   $-   $-   $163,965 
Total cost of revenues   (89,025)   -    -    (89,025)
Gross profit   74,940    -    -    74,940 
Operating expenses:                    
Selling, general and administrative expenses   516,945    55,333    276,297    848,575 
Provision for inventory obsolescence   62,255    -    -    62,255 
Royalty expenses   228,202    -    -    228,202 
Total operating expenses   807,402    55,333    276,297    1,139,032 
Net operating loss   (732,462)   (55,333)   (276,297)   (1,064,092)
Other income/(expense)   (15,421)   (557)   1,396,004    1,380,026 
Allocated income tax expense   -    -    (1,872)   (1,872)
Income (loss) after income tax   (747,883)   (55,890)   1,117,835    314,062 
                     
Total long-lived assets   39,844    954,498    2,524    996,866 
                     
Additions to long-lived assets   -    -    -    - 

 

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   Six Months Ended September 30, 2015 
   Online   Beverage   Unallocated     
   business   business   Items   Total 
Total revenues, net  $258,238   $-   $-   $258,238 
Total cost of revenues   (116,404)   -    -    (116,404)
Gross profit   141,834    -    -    141,834 
Operating expenses:                    
Selling, general and administrative expenses   853,872    87,290    1,616,442    2,557,604 
Provision for inventory obsolescence   6,409    -    -    6,409 
Royalty expenses   250,000    -    -    250,000 
Total operating expenses   1,110,281    87,290    1,616,442    2,814,013 
Net operating loss   (968,447)   (87,290)   (1,616,442)   (2,672,179)
Other income   41,440    1    933,927    975,368 
Allocated income tax benefit   -    -    3,965,606    3,965,606 
Income (loss) after income tax   (927,007)   (87,289)   3,283,091    2,268,795 
                     
Total long-lived assets   2,475    780,423    641    783,539 
                     
Additions to long-lived assets   1,249    -    -    1,249 
                     

 

   Six Months Ended September 30, 2014 
   Online   Beverage   Unallocated     
   business   business   items   Total 
Total revenues, net  $461,943   $-   $-   $461,943 
Total cost of revenues   (172,677)   -    -    (172,677)
Gross profit   289,266    -    -    289,266 
Operating expenses:                    
Selling, general and administrative expenses   895,350    114,457    1,580,987    2,590,794 
Provision for inventory obsolescence   119,231    -    -    119,231 
Royalty expenses   250,000    -    -    250,000 
Total operating expenses   1,264,581    114,457    1,580,987    2,960,025 
Net operating loss   (975,315)   (114,457)   (1,580,987)   (2,670,759)
Other income   86,721    4,785    2,342,668    2,434,174 
Allocated income tax expense   -    -    (1,872)   (1,872)
Income (loss) after income tax   (888,594)   (109,672)   759,809    (238,457)
                     
Total long-lived assets   39,844    954,498    2,524    996,866 
                     
Additions to long-lived assets   -    -    -    - 

 

16

 

  

Note 15 – 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 the 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. The final resolution of this case is pending.

 

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. The final resolution of this case is pending. However, 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 September 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 Excalibur’s purchase of the Ocean La La. 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. The Company is waiting to hear the court’s decision on the amount of defendants’ legal costs the Company is obligated to bear.

 

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 RMB4,758,600 ($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 RMB698,896 ($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 RMB1,912,000 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 RMB1,326,916 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 indicated that the company stamps affixed on 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 RMB1,823,787.91 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. The final resolutions of these two cases are now pending.

 

17

 

 

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 valued at approximately $16.6 million.

 

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. A first amended complaint was filed on July 11, 2014. On October 10, 2014, the court dismissed all class claims with prejudice. On November 19, 2014, the court denied Plaintiffs’ Motion for Relief from the October 10, 2014 Order. On January 7, 2015, the court entered an order dismissing Plaintiffs’ claims for breach of warranty with prejudice and all claims against Jack Qin without prejudice, and clarified that Plaintiff cannot seek disgorgement or state claims based on any stock-related fraud. On January 30, 2015, a second amended complaint was filed alleging individual claims for unfair competition, false advertising and fraud. The second amended complaint sought, among other things, restitution, compensatory and punitive damages and injunctive relief. 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. A first amended complaint was filed on July 11, 2014. On October 10, 2014, the court dismissed all class claims with prejudice. On November 19, 2014, the court denied Plaintiffs’ Motion for Relief from the October 10, 2014 Order. On January 6, 2015, the court entered an order dismissing Plaintiffs’ corporate waste and gift claims, and Plaintiffs’ Racketeer Influenced and Corrupt Organizations (RICO) Act claims based on alleged corporate looting and operation of a pump-and-dump scheme. The court further dismissed Plaintiffs’ deception and common law fraud claims with respect to all defendants except the Company and Jack Qin. On January 30, 2015, a second amended complaint was filed alleging individual claims for operation of an endless chain scheme, deception and common law fraud, and RICO violations. The complaint sought, among other things, compensatory, treble and punitive damages. 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.

 

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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 14, 2015, Plaintiffs filed a first amended complaint. 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 is currently pending. On May 11, 2015, Plaintiffs filed a second amended and consolidated complaint, alleging claims for operation of an endless chain scheme, deception and common law fraud, unfair competition, false advertising, and RICO violations. On May 29, 2015, the Company filed a motion to dismiss and a motion to strike the class allegations from the second amended and consolidated complaint. On July 21, 2015, the court granted the motion to dismiss with leave to amend, except with regard to the RICO claim, which was dismissed with prejudice. On May 29, 2015, the Company also filed a motion to strike the class allegations from the second amended and consolidated complaint. On July 28, 2015, the court granted the motion to strike in part, finding that certain of Plaintiffs’ counsel was not adequate to represent the putative class. On August 11, 2015, Plaintiffs filed a third amended complaint. On September 1, 2015, the Company filed an answer to the third amended complaint. On September 4, 2015, Plaintiffs filed a supplemental brief in support of their motion for class certification. On September 22, 2015, the Company filed an amended answer to the third amended complaint. On October 19, 2015, the Company filed an opposition to Plaintiffs’ motion for class certification. Plaintiffs’ motion for class certification is currently pending before the court and is scheduled for hearing on December 7, 2015. The Company believes that the claims asserted are without merit and intends to defend against them vigorously.

 

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, wherein the court denied George Curry’s motion. The final resolution of the entire matter is still pending.

 

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 filed an answer to the First Amended Complaint on July 9, 2015.

 

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. The Company believes that the claim asserted is without merit and intends to defend against it vigorously.

 

Note 16 - 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.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Products

 

The Company sells 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 that contains a filter to remove impurities from the water. The Company’s products are biodegradable and are not regulated by federal, state or local environmental laws or environmental laws of its key target markets.

 

The Company generally does not have a return policy but it does provide a warranty for its products. The specific warranty terms and conditions vary depending upon the product sold, but generally include replacement of defective products, but no refunds, during the six month period following a sale. Historically, the Company’s warranty expenses have not been material.

 

Manufacturing

 

The Company’s products are manufactured by third-party vendors and are packaged under its brand. The packaging for its products clearly states the country of manufacture, which is currently the United States in most cases. The Company does not have any long-term supply contracts or agreements with any manufacturers. The Company orders its products directly from vendors, on an “as-needed” or “expected need” basis. Raw materials used in the manufacture of the Company’s products are readily available and are not in short supply. The Company is not a party to any agreement for the purchase or delivery of raw materials.

 

From 2009 through 2012, the Company constructed a factory and water plant to produce bottled natural soda water in Baiquan, Heilongjiang Province, China. The bottled water factory is fully constructed and all manufacturing equipment has been purchased. After obtaining all the required licenses and passing ISO22000 requirements, the factory started production in April 2013, but production was suspended because Tianquan was sued by a contractor who constructed the water plant. The production is expected to resume when the lawsuit is closed.

 

None of the Company’s vendors account for a significant portion of its business and all of them can be replaced on short notice. The Company does not have any binding commitments or manufacturing agreements with any of its vendors.

 

Sales

 

The Company sells its products primarily through its website and only to “Affiliates.” To become an Affiliate, a customer must be referred by another Affiliate and make a minimum purchase of $450 ($400 worth of products plus $50 for shipping and handling fees). After that point, the new Affiliate is not required to make any additional purchases, pay membership fees, buy products, resell products, recruit others, or attend meetings. Free educational classes are offered to the Company’s Affiliates so they can learn more about the Company’s products and how to use them.

 

As of November 9, 2015, the Company had received 1,258,962 orders from its Affiliates, most of whom were located in China and Hong Kong. For the six months ended September 30, 2015, the Company did not have any sales activities in the United States. None of the Company’s Affiliates account for a significant portion of its business.

 

The Company pays its Affiliates a commission on products ordered from the Company. The commission is approximately 58% of the total dollar amount of the order. Commissions are considered a reduction of the sales price of the Company’s products and are reflected in the Company’s financial statements as a reduction in revenue. The commissions earned by each Affiliate are held in book entry form. The Affiliate can use the commissions to pay for new orders. With this process, the Company reduces operating expense and eliminates cumbersome accounting chores such as issuing checks and reconciling bank statements.

 

Full payment is required in U.S. Dollars prior to shipment of any products. In most cases, once payment is received, products ordered are shipped directly by the Company’s third party manufacturers to the Company’s distribution centers in Hong Kong and China. Once the products are received at the distribution centers, they are shipped to the Affiliate placing the order.

 

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EFT-Phone and ToByTo reward program

 

In February 2010, the Company assigned the worldwide distribution and servicing rights to a product known as the “EFT-Phone” to Digital Development Partners, Inc., “Digital”, previously an unrelated company, in exchange for 79,265,000 shares of Digital’s common stock. The shares the Company acquired represent approximately 92% of Digital’s outstanding common stock. The EFT-Phone is a cell phone which uses the Android operating system. 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. Digital began distributing EFT-Phones in July 2010.

 

Starting from December 2010, the Company introduced reward programs to its Affiliates. For example, upon joining a $3,000 program, each Affiliate must pay $3,000 as a non-refundable deposit. When the Affiliate sponsors one new Affiliate, the Company will reward the first Affiliate with a $1,500 instant sponsor bonus. When the first Affiliate sponsors at least two new Affiliates, and those two new Affiliates each also sponsor two new Affiliates, the first Affiliate will have completed the first cycle of the program. The Company will then reward the first Affiliate with an additional $1,500 bonus and deliver an EFT-phone and an e-pad for the cost of $1. After the completion of the first cycle, each Affiliate will enter into the matrix of the second cycle. Upon completion of the second cycle, the Company will reward the first Affiliate with $3,000. For each subsequent cycle thereafter within the matrix, each Affiliate will need to sponsor a new Affiliate in each cycle in order to qualify for the reward.

 

On April 1, 2012, the Company assigned network access rights to ToByTo Limited, “ToByTo”, a third-party company. The network access rights to ToByTo Limited include the right to access EFT’s Affiliate database for ToByTo’s marketing campaign, and provides access to EFT’s e-money system to facilitate sales activities. ToByTo, in return, compensates EFT by paying access fees in an amount equal to 10% of the respective enrollment fee of every Affiliate who enters the ToByTo e-phone program or another agreed upon amount. During the six months ended September 30, 2015, the Company agreed to waive the access fees in lieu of ToByTo agreeing to purchase a portion of the Company’s overstocked inventory.

 

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eZGT Travel Program

 

In May 2011, the Company introduced to its Affiliates a series of travel programs attracting Affiliates to enjoy the benefits of travelling internationally. To participate in the Traveler programs, one must initially make a non-refundable deposit according to the programs’ requirements. When the Affiliate completes a cycle of the program he joined, he will receive a bonus reward and the Affiliate only needs to pay $1 for his or her own trip. The reward system of the travel program is similar to the ToByTo reward program.

 

On April 1, 2012, the Company assigned network access rights to eZGT Limited, a third party. The network access rights to eZGT Limited include the right to access EFT’s Affiliate database for eZGT’s marketing campaign, and provides access to EFT’s e-money system to facilitate sales activities. eZGT Limited, in return, compensates EFT by paying access fees in an amount equal to 10% of the respective enrollment fee of every Affiliate who enters the $300 and $3,000 travel programs or another agreed upon amount. However, for Affiliates who enter the $800 and $8,000 travel programs, eZGT will only pay access fees in the amount of $30 and $300, respectively. During the six months ended September 30, 2015, the Company agreed to waive the access fees in lieu of eZGT Limited agreeing to purchase a portion of the Company’s overstocked inventory for an agreed upon period of time.

 

Market Environment

 

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 the Company does. Continued advancement in technology and increasing access to that technology is paving the way for growth in direct marketing. The Company also faces 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 the Company has. Notwithstanding the foregoing, the Company believes that it is well-positioned within the Asian consumer market with its current plan of supplying U.S. merchandise brands to consumers and that its exposure to both the Asian and American cultures gives it a competitive advantage. There can be no assurance that the Company will maintain its competitive edge or that the Company will continue to provide solely U.S.-made merchandise.

 

The Company’s 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 the Company’s major markets. The current worldwide downturn is expected to adversely affect the Company’s sales and liquidity for the foreseeable future. Although the Company has mitigated decreases in sales by lowering its levels of inventory to preserve cash on hand, the Company does not know when the downturn will subside and when consumer spending will increase from its current depressed levels. Even if consumer spending increases, the Company is not sure when consumer spending will increase for its products, which will affect its 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 affect adversely spending on nutritional and beauty products and other discretionary items, such as the Company’s products. In addition, reduced consumer spending may force the Company and its competitors to lower prices. These conditions may adversely affect the Company’s revenues and profits. In addition, the Company expects future operations to be affected by ToByTo’ marketing and distribution of EFT phones, eZGT’s marketing of the travel program and the Company’s water bottling operations.

 

22

 

 

Results of Operations

 

Comparison for the Three Months Ended September 30, 2015 and 2014

 

Sales revenues, net

 

Sales revenues, net increased to approximately $145,000 for the three months ended September 30, 2015 from approximately $119,000 for the three months ended September 30, 2014 primarily due to an increase in product sales demand. Sales revenues, net excludes revenue from shipping charges and reflects the deduction of commission expense. The Company’s policy is to pay commissions to Affiliates upon receipt of sales orders even before revenue can be recognized. In addition, sales orders dropped from $ 360,820 to $37,600 which caused commission expense to decrease to $23,900 for the three months ended September 30, 2015 from $195,550 for the three months ended September 30, 2014.

 

The Company’s revenue recognition policy is in accordance with the requirements of Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (“SAB 104”), ACT 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 reasonable assured. Transportation income is generated form 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 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.

 

Shipping charges

 

Shipping charges decreased to approximately $12,000 for the three months ended September 30, 2015 from approximately $45,000 for the three months ended September 30, 2014 mainly due to a decrease in sales.

 

Cost of sales

 

Cost of sales consists mainly of merchandise purchased from vendors. Cost of sales increased to approximately $68,000 for the three months ended September 30, 2015 from approximately $62,000 for the three months ended September 30, 2014. Cost of sales as a percentage of gross sales for the three months ended September 30, 2015 was 62%, which is 41% higher than the same period last year mainly due to increases in vendor price and promotional sales of products at cost during the period. The gross sales of products declined from approximately $303,000 for the three months ended September 30, 2014 to $110,000 for the three months ended September 30, 2015, or 63%. The sales of promotional products increased to approximately $60,000 for the three months ended September 30, 2015 from $12,000 for the three months ended September 30, 2014.

 

Gross profit

 

Gross profit increased to approximately $90,000 for the three months ended September 30, 2015 compared to approximately $75,000 for the three months ended September 30, 2014. Gross profit, as a percentage of total revenue, was 56.8% during the current period compared with 45.7% for the three months ended September 30, 2014. The increase in gross profit was due to a decrease in shipping costs to approximately $300 for the three months ended September 30, 2015 from $27,000 for the three months ended September 30, 2014.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased to approximately $1,212,000 for the three months ended September 30, 2015 compared to $849,000 for the three months ended September 30, 2014, mainly due to a significant increase in legal fees. This increase in legal fees was offset partially by lower rental charges for the Hong Kong office.

 

Inventory obsolescence

 

Inventory obsolescence decreased to nil for the three months ended September 30, 2015 as compared to $62,255 for the three months ended September 30, 2014, mainly due to significantly lower amounts of inventory either at or nearing obsolescence in the current period as compared to the same period last year.

 

Royalty expenses

 

Royalty expenses decreased to $125,000 for the three months ended September 30, 2015 as compared to approximately $228,000 for the three months ended September 30, 2014. This decrease was due to an adjustment to recognize the expense based on prorated minimum annual payments instead of actual sales revenues. Since the current year annualized sales do not meet the minimum sales required to comply with the terms of the agreement, an adjustment was made during the period ended September 30, 2015 to recognize the expense based on the prorated minimum contract amount for the three months ended September 30, 2015.

 

Interest income

 

Interest income decreased to approximately $26,000 for the three months ended September 30, 2015 as compared to approximately $43,000 for the three months ended September 30, 2014. Interest income decreased primarily due to a decrease in investments in corporate bonds as compared to the prior period.

  

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Interest expense

 

Interest expense decreased to approximately $506 for the three months ended September 30, 2015 as compared to $41,000 for the three months ended September 30, 2014. The decrease was mainly due to accrued interest of approximately $40,000 related to the provision for tax liabilities for the years 2008 to 2010 in the three months ended September 30, 2014.

 

Other income (expense)

 

Other income (expense) decreased to income of $985,000 for the three months ended September 30, 2015 from income of $1,380,000 for the three months ended September 30, 2014. The change was mainly due to the Company’s sales of 2.93 million shares of CTX for approximately $1,446,000 in the three months ended September 30, 2014.

 

Settlement of previously accrued interest for income tax

 

In September 2015, the Company reversed accrued interest of approximately $963,000 related to the settlement of the provision for tax liabilities for the years 2008 to 2010 confirmed by the final report received from the IRS.

 

Income tax expense (benefit)

 

Income tax benefit was approximately $3,966,000 for the three months ended September 30, 2015 as compared to expenses of approximately $2,000 for the three months ended September 30, 2014. The change was mainly due to the reversal of the overaccrual for the provision of tax liabilities for the years 2008 to 2010 confirmed by the final report received from the IRS in September 2015.

 

Results of Operations

 

Comparison for the Six Months Ended September 30, 2015 and 2014

 

Sales revenues, net

 

Sales revenues, net decreased to approximately $222,000 for the six months ended September 30, 2015 from approximately $349,000 for the six months ended September 30, 2014, primarily due to a decline in sales demand from the Company’s Affiliates. Sales revenues, net excludes revenue from shipping charges and reflects the deduction of commission expense. The Company’s policy is to pay commissions to Affiliates upon receipt of sales orders even before revenue can be recognized. In addition, sales orders dropped from $ 745,710 to $307,850 which caused commission expense to decrease to $179,600 for the six months ended September 30, 2015 from $432,250 for the six months ended September 30, 2014.

 

24

 

 

Shipping charges

 

Shipping charges decreased to approximately $36,500 for the six months ended September 30, 2015 from approximately $113,400 for the six months ended September 30, 2014 mainly due to a decrease in sales.

 

Cost of sales

 

Cost of sales decreased to approximately $115,900 for the six months ended September 30, 2015 from approximately $140,500 for the six months ended September 30, 2014, due to a reduction in sales. Gross sales of products declined from approximately $738,700 to $308,500, or 58%. However, cost of sales of products declined by 17.7% from $141,000 for the six months ended September 30, 2014 to $116,000 for the six months ended September 30, 2015 mainly due to the sales of promotional products of $42,000 and $93,000, respectively for the same periods. Despite the items that were sold at discounted prices, cost of sales as a percentage of gross sales for the six months ended September 30, 2015 was 38%, which was 19% higher than the same period last year mainly due to vendor price increases during the period.

 

Gross profit

 

Gross profit decreased to approximately $142,000 for the six months ended September 30, 2015 compared to approximately $289,000 for the six months ended September 30, 2014. Gross profit, as a percentage of total revenue, was 55% during the current period compared with 63% for the six months ended September 30, 2014. The decrease in gross profit was due to a reduction in gross sales and the high volume of sales of promotional products at cost during the current period.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses slightly decreased to approximately $2,558,000 for the six months ended September 30, 2015 compared to approximately $2,591,000 for the six months ended September 30, 2014 mainly due to lower rental charges and wages.

 

Inventory obsolescence

 

Inventory obsolescence decreased to $6,409 for the six months ended September 30, 2015 as compared to $119,231 for the six months ended September 30, 2014, mainly due to significantly lower amounts of inventory either at or nearing obsolescence in the current period as compared to the six months ended September 30, 2014.

 

Royalty expenses

 

Royalty expenses remained at $250,000 for the six months ended September 30, 2015 and 2014.

 

Interest income

 

Interest income decreased to approximately $47,000 for the six months ended September 30, 2015 as compared to approximately $94,000 for the six months ended September 30, 2014. Interest income decreased primarily due to a decrease of investments in corporate bonds as compared to the prior period.

 

25

 

 

Interest expense

 

Interest expense decreased to approximately $43,000 for the six months ended September 30, 2015 as compared to approximately $72,000 for the six months ended September 30, 2014. The decrease was mainly due to the decrease of accrued interest expenses of $70,000 related to the provision for tax liabilities for the years 2008 to 2010 in the six months ended September 30, 2014.

 

Other income (expense)

 

Other income (expense) decreased to approximately $975,000 for the six months ended September 30, 2015 from $2,434,000 for the six months ended September 30, 2014. The decrease was mainly due to the Company’s sales of shares of CTX for an aggregate of $2.4 million during the six months ended September 30, 2014.

 

Settlement of previously accrued interest for income tax

 

In September 2015, the Company reversed accrued interest of approximately $963,000 related to the settlement of the provision for tax liabilities for the years 2008 to 2010 confirmed by the final report received from the IRS.

 

Income tax expense (benefit)

 

Income tax benefit was approximately $3,966,000 for the six months ended September 30, 2015 as compared to expenses of approximately $2,000 for the six months ended September 30, 2014. The change was mainly due to the reversal of the overaccrual for the provision of tax liabilities for the years 2008 to 2010 confirmed by the final report received from the IRS in September 2015.

 

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Capital Resources and Liquidity

 

The following table shows the Company’s sources of cash for the six months ended September 30, 2015 and 2014.

 

   Six Months Ended September 30, 
   2015   2014 
Net cash provided by (used in) operating activities  $(1,586,264)  $1,107,906 
Net cash provided by investing activities   1,217,005    2,447,118 
Net cash used in financing activities   (281,240)   (319,245)
Effect of exchange rate changes on cash   (23,951)   (775)
Net increase/(decrease) in cash  $(674,450)  $3,235,004 

 

Operating activities

 

For the six months ended September 30, 2015, net cash used in operating activities was $1,586,264. This was primarily due to net income of $2,268,795 adjusted by non-cash related expenses that included depreciation expense of $78,376, loss on disposal of fixed assets $11,432, losses realized from the sales of securities available for sale of $12,850 and a net increase in working capital items of $1,326,662, which were offset by the settlement of previously accrued income tax, penalty and interest of $5,290,788.

 

For the six months ended September 30, 2014, net cash provided by operating activities was $1,107,906. This was primarily due to a net loss of $235,869 adjusted by non-cash related expenses that included depreciation expense of $96,538, provision for inventory obsolescence of $119,231, loss realized from the sale of securities available for sale of $56,677 and a net increase in working capital items of $1,004,086.

 

Investing activities

 

Net cash provided by investing activities for the six months ended September 30, 2015 was $1,217,005, primarily due to proceeds from the sale of corporate bonds.

 

Net cash provided by investing activities for the six months ended September 30, 2014 was $2,447,118 mainly due to proceeds from the sale of corporate bonds of $4,731,867, which were partially offset by the purchase of $2,305,082 of corporate bonds.

 

Financing activities

 

Net cash used in financing activities for the six months ended September 30, 2015 was $281,240, due to the repayment of a short-term loan for financing of the Company’s current year directors’ and officers’ liability insurance policy. For more information please see Note 11 to the consolidated financial statements in this Report.

 

Net cash used in financing activities for the six months ended September 30, 2014 was $319,245, primarily due to repayment of a short-term loan for financing of the Company’s directors’ and officers’ insurance policy.

 

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Working Capital

 

   September 30,
2015
   March 31,
2015
 
Current assets  $3,189,036   $5,655,514 
Current liabilities   9,630,764    14,427,021 
Working capital (deficiency)  $(6,441,728)  $(8,771,507)

 

Historically, cash and cash equivalents and securities available for sale have been the Company’s primary sources of liquidity. The Company believes its existing cash and cash equivalents will not be sufficient to meet its working capital requirements for the next 12-month period. The overall working capital position improved to a deficiency of $6.4 million at September 30, 2015 compared to a deficiency of $8.7 million at March 31, 2015 as a result of the reversal of more than $5.2 million of tax liabilities associated with the final report received from the IRS in September 2015.

 

There is no assurance that the Company will be able to obtain further funds required for its continued working capital requirements. The ability of the Company to meet its financial obligations and commitments will depend primarily upon the continued financial support of its directors and shareholders, the continued issuance of equity to new shareholders, and its ability to achieve and maintain profitable operations.

 

There is substantial doubt about the Company’s ability to continue as a going concern as the continuation of the Company’s business is dependent upon obtaining further long-term financing, collection of the Company’s prepayment on development in progress of $20.7 million and achieving a profitable level of operations. The issuance of additional equity securities by the Company could result in a significant dilution of the equity interests of its current shareholders. Obtaining commercial loans, assuming those loans would be available, will increase the Company’s liabilities and future cash commitments.

 

Balance Sheet Items

 

Material changes in the Company’s balance sheet items between September 30, 2015 and March 31, 2015 are discussed below:

 

Securities Available for Sale

 

Securities available for sale decreased to $883,200 at September 30, 2015 compared to $2,132,397 at March 31, 2015, as the Company sold certain securities to fund operations.

 

Inventories

 

Inventory decreased to $244,580 at September 30, 2015 compared to $303,848 at March 31, 2015 due to the sale of overstocked products or products nearing expiration during the six months ended September 30, 2015 to third parties, since the Company only orders products on an “as needed” basis to avoid overstocking and lower inventory levels are adequate to meet the current demand.

 

Property and Equipment

 

Property and equipment decreased to $783,539 at September 30, 2015 compared to $894,129 at March 31, 2015, as a result of scheduled depreciation expense being recorded.

 

Accounts Payable

 

Accounts payable increased to $1,569,173 at September 30, 2015 compared to $1,073,795 at March 31, 2015 due to an increase in unpaid legal fees during the period.

 

Commission Payable

 

Commission payable slightly decreased to $3,689,964 at September 30, 2015 compared to $3,785,004 at March 31, 2015 due to lower commissions earned by Affiliates during the six months ended September 30, 2015.

  

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Other Liabilities

 

Other liabilities decreased to $964,996 at September 30, 2015 compared to $5,874,187 at March 31, 2015. The decrease of $4,909,191 is mainly due to the reversal of an accrual of tax liabilities associated with the IRS audit for the years 2008-2010. As discussed earlier, the final report received from the IRS in September 2015 stated that the Company did not owe any additional taxes for these periods with the exception of $117,000 of tax and penalty related to the timely filing of the 2008 and 2009 tax returns.

Unearned Revenue

 

Unearned revenue slightly decreased to $3,197,996 at September 30, 2015 compared to $3,198,776 at March 31, 2015. The recording of unearned revenue results from temporary delays associated with the recognition of revenue related to the sale of products or services to Affiliates.

 

Contractual Obligations and Commitments

 

The Company’s contractual obligations and commitments as of September 30, 2015 did not materially change from the amounts set forth in its Annual Report on Form 10-K for the year ended March 31, 2015.

 

Commitments for Capital Expenditures

 

Except as otherwise disclosed herein, the Company does not have any commitments for any material capital expenditures. The Company does not have any commitments or arrangements from any person to provide it with any additional capital.

 

Except as disclosed in this Item 2, the Company does not know of any trends or demands that affected, or are reasonably likely to affect, its capital resources or liquidity.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its financial condition.

 

Significant Accounting Policies/Recent Accounting Pronouncements

 

See Item 1- Note 3 to the financial statements included as part of this report for a description of the Company’s significant accounting policies and recent accounting pronouncements which have, or potentially may have, a material impact on its financial statements.

 

Critical Accounting Policies and Estimates

 

The Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Company’s significant accounting policies are discussed in Note 2 “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2015, as filed with the U.S. Securities and Exchange Commission (“SEC”) on July 14, 2015.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

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Item 4.Controls and Procedures.

 

  (a) Disclosure Controls and Procedures

 

The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Jack Jie Qin and William E. Sluss, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2015, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Qin and Sluss concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015.

 

The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

  (b) Changes in Internal Controls

 

There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2015 that is reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

See Note 17 to the financial statements included as part of this Report.

 

Item 1A.Risk Factors.

 

Not applicable.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.Defaults upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

Item 5.Other Information.

 

None.

 

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Item 6.Exhibits.

 

Exhibits

 

Exhibit No.: Description:
31.1* Rule 13a-14(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Jack Jie Qin.
   
31.2* Rule 13a-14(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Sluss.
   
32.1* Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Jack Jie Qin.
   
32.2* Section 1350 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Sluss.
   
101* The following materials from the EFT Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 23, 2015 formatted in Extensible Business Reporting Language (XBRL):

  

  (i) Consolidated Balance Sheets (Unaudited),
  (ii) Consolidated Statements of Income (Unaudited),
  (iii) Consolidated Statements of Comprehensive Income (Unaudited),
  (iv) Consolidated Statements of Changes in Equity (Unaudited),
  (v) Consolidated Statements of Cash Flows (Unaudited), and
  (vi) related notes

  

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements 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.
    (Registrant)
     
Date: November 23, 2015 By:  /s/ Jack Jie Qin
    Jack Jie Qin
    Principal Executive Officer
     
  By: /s/ William E. Sluss
    William E. Sluss
    Principal Financial Officer

 

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