The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are
an integral part of these consolidated financial statements.
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 consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The Company has negative working capital of $10,847,403
and an accumulated deficit of $53,165,579 as of June 30, 2016, and it reported net operating losses for the past two fiscal
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 consolidated
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going
concern.
The Company expects to continue incurring losses for the foreseeable
future and may need to raise additional capital from external sources in order to continue the long-term efforts contemplated under
its business plan. The Company is in the process of reevaluating its current marketing strategy as it relates to the sale of its
current product line. In addition, the Company is pursuing other revenue streams which could include strategic acquisitions or
possible joint ventures of other business segments.
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 June 30, 2016 and the results of operations and cash flows
for the periods ended June 30, 2016 and 2015. 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 three months ended June 30, 2016 are not necessarily
indicative of the results to be expected for any subsequent periods or for the year ending March 31, 2017. The balance sheet at
March 31, 2016 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, 2016 as included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2016.
Certain amounts in prior period financial statements have
been reclassified to conform to current period presentation.
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 91.7% owned by the Company. All material intercompany transactions and balances have been eliminated.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These estimates and assumptions include determining the fair market value of the Company’s inventory, the collectability
of accounts receivable, the value of deferred taxes and related valuation allowances. Certain of the Company’s estimates,
including evaluating the collectability of accounts receivable and the fair market value of inventory, could be affected by external
conditions, including those particular to the Company’s industry, and general economic conditions. It is possible that these
external factors could have an effect on the Company’s estimates that could cause actual results to differ from the Company’s
estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments
when necessary.
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 three months ended June 30, 2016 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:
|
|
June 30, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Duration (1)
|
|
Corporate bonds
|
|
$
|
196,350
|
|
|
$
|
3,427
|
|
|
$
|
(2,304
|
)
|
|
$
|
197,473
|
|
|
|
4.46
|
|
Corporate notes
|
|
|
574,695
|
|
|
|
8,068
|
|
|
|
(4,781
|
)
|
|
|
577,982
|
|
|
|
1.82
|
|
Total debt securities
|
|
$
|
771,045
|
|
|
$
|
11,495
|
|
|
$
|
(7,085
|
)
|
|
$
|
775,455
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Duration (1)
|
|
Corporate bonds
|
|
$
|
235,901
|
|
|
$
|
2,276
|
|
|
$
|
(2,773
|
)
|
|
$
|
235,404
|
|
|
|
4.67
|
|
Corporate notes
|
|
|
573,497
|
|
|
|
5,720
|
|
|
|
(4,277
|
)
|
|
|
574,940
|
|
|
|
2.07
|
|
Total debt securities
|
|
$
|
809,398
|
|
|
$
|
7,996
|
|
|
$
|
(7,050
|
)
|
|
$
|
810,344
|
|
|
|
|
|
|
(1)
|
Average remaining duration to maturity, in years.
|
All securities were classified as available
for sale as of each date presented.
The following table shows the gross unrealized losses and fair value
of the Company’s investments, aggregated by investment category and length of time that the individual securities have been
in a continuous unrealized loss position, as of June 30, 2016:
|
|
Less than 1 year
|
|
|
1 Year or More
|
|
|
Total
|
|
|
|
Market
|
|
|
Unrealized
|
|
|
Market
|
|
|
Unrealized
|
|
|
Market
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Loss
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,039
|
|
|
$
|
(2,304
|
)
|
|
$
|
70,039
|
|
|
$
|
(2,304
|
)
|
Corporate notes
|
|
|
-
|
|
|
|
-
|
|
|
|
257,732
|
|
|
|
(4,781
|
)
|
|
|
257,732
|
|
|
|
(4,781
|
)
|
Total debt securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
327,771
|
|
|
$
|
(7,085
|
)
|
|
$
|
327,771
|
|
|
$
|
(7,085
|
)
|
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 5
securities in an unrealized
loss position at June 30, 2016. Management does not intend to sell any of the securities classified as available for sale which
have unrealized losses and believes that it is not likely that the Company will have to sell any such securities before a recovery
of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the
underlying securities were purchased and are not the result of deteriorated credit quality. The fair value is expected to recover
as the bonds approach their maturity or re-pricing date or if market yields for such investments decline. Management does not believe
such securities are other-than-temporarily impaired due to reasons of credit quality.
Investment securities with a book value of
$39,551 were sold during the three months ended June 30, 2016. The Company recognized a gain of $12 on the sale of those securities.
Note 5 -
INVENTORIES
The components of inventories were as follows:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
Raw materials and supplies
|
|
$
|
39,440
|
|
|
$
|
40,537
|
|
Finished goods
|
|
|
187,465
|
|
|
|
180,902
|
|
|
|
$
|
226,905
|
|
|
$
|
221,439
|
|
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 (“EFT Assets”), a company that Wendy Qin, a director of EFT International Ltd.,
served as a director until March 2015. The Company is required to pay an annual royalty to EFT Assets equal to a percentage of
its gross sales for the previous fiscal year. The percentage is 5% for the first $30 million in gross sales, 4% for the $10 million
in gross sales in excess of $30 million, 3% for the $10 million in gross sales in excess of $40 million; 2% for the $10 million
in gross sales in excess of $50 million; and 1% for the $10 million in gross sales in excess of $60 million, with a minimum annual
royalty of $500,000. EFT Assets is owned by a number of persons, including Wendy Qin. Ms. Qin is the sister of Jack Jie Qin, the
Company’s president. During each of the three months ended June 30, 2016 and 2015, the royalties paid to EFT Assets were
$125,000.
In March 2010, the Company’s subsidiary,
EFT International Ltd., entered into a consulting agreement with JFL Capital Limited (“JFL”), a company in which Wendy
Qin serves as a director and is one of the principal shareholders. Under this agreement, JFL will provide consulting services
on administration, financial matters, corporate planning and business development commencing on April 1, 2010, with an annual fee
of $315,000. The annual fee is increased at the rate of $15,000 each year starting from April 1, 2011. The agreement may be terminated
by either party on three months’ written notice. For the three months ended June 30, 2016 and 2015, the Company recorded
consulting fees payable to JFL of $101,250 and $97,500, respectively.
From April 1, 2014 to April 1, 2015, the Company
rented 2,500 square feet of office space with a monthly rent of $10,735 for its satellite training center located at Suite 3706,
Langham Office Tower, 8 Argyle Street, Kowloon, Hong Kong SAR. From April 1 through June 24, 2015, the monthly rent was $15,319.
The former office location is owned by a number of persons, including Wendy Qin, a director of EFT (HK) Ltd and the sister of Jack
Jie Qin, the Company’s president. During the three months ended June 30, 2015, the Company paid the lessors $42,983.
The lease was terminated on June 24, 2015.
In February 2016, the Company advanced $1,000,000 to President
Jack Qin for the prepayment of amounts relating to business development activities planned by the Company. The advance was
not used and was repaid to the Company in June 2016.
Note 7 -
OTHER CURRENT
LIABILITIES
Accrued and other current liabilities consist
of the following:
|
|
June
30, 2016
|
|
|
March
31, 2016
|
|
Payroll liabilities
|
|
$
|
42,374
|
|
|
$
|
42,593
|
|
Warranty liabilities
|
|
|
1,710
|
|
|
|
1,589
|
|
Accrued commission
|
|
|
591,393
|
|
|
|
1,583,740
|
|
Accrued contingent guarantee
|
|
|
4,452,374
|
|
|
|
4,453,755
|
|
Accrued expenses
|
|
|
358,820
|
|
|
|
379,985
|
|
Interest and penalty for income tax accrued
|
|
|
137,297
|
|
|
|
136,190
|
|
Others
|
|
|
3,170
|
|
|
|
3,922
|
|
|
|
$
|
5,587,138
|
|
|
$
|
6,601,774
|
|
Note 8 -
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
($308,000) 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
($199,536) of purported outstanding payments under the contract and interest thereon. The Company filed an appeal with Qiqihar
Intermediate People’s Court and recorded contingent liabilities of RMB1,326,916 ($199,536). (See Note 12)
Note 9 -
SHORT-TERM LOAN
The Company received a $503,200 loan from a third party, Insurance
Financing, Inc., “IFI”, to finance the directors’ and officers’ insurance premium for the fiscal years
2014 and 2015. 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, 2014. The terms of the agreement allowed for the Company to make nine equal payments of $56,753 each and the loan
was fully repaid during the quarter ended September 30, 2015.
The Company renewed coverage for the 2015-2016 periods and received
a new loan in the amount of $462,170 from IFI to finance the directors’ and officers’ insurance premium bearing an
interest rate of 3.60% per annum. The loan was to be repaid over a nine-month period beginning on December 15, 2015. The terms
of the agreement allowed for the Company to make nine equal payments of $52,126 each.
Note 10 -
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 three months ended June 30, 2016 and 2015. According to BVI tax law, this income is not subject to any taxes.
The Company’s HK SAR subsidiaries are subject to a 16.5% profit tax based on its taxable net profit. EFT (HK) Ltd provides
management service to a BVI subsidiary, and the BVI subsidiary reimburses EFT (HK) Ltd for its total operating expenses plus a
5% mark up, and the income is subject to a 16.5% profit tax. The deferred tax assets for the Company’s U.S. operations were
immaterial for the three months ended June 30, 2016 and 2015.
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 June 30, 2016 and 2015.
The income tax expense consists of the following:
|
|
Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Domestic – Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
– State
|
|
|
2,869
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Income tax expense
|
|
$
|
2,869
|
|
|
$
|
-
|
|
A reconciliation of income taxes, with the amounts computed by applying
the statutory federal income tax rate, 37% for the three months ended June 30, 2016 and 2015, to income before income taxes for
the three months ended June 30, 2016 and 2015, is as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Income tax provision (benefit) at U.S. statutory rate
|
|
$
|
(431,056
|
)
|
|
$
|
(529,610
|
)
|
State tax
|
|
|
2,869
|
|
|
|
-
|
|
Deferred tax valuation allowance
|
|
|
430,765
|
|
|
|
528,747
|
|
Nondeductible expenses
|
|
|
291
|
|
|
|
863
|
|
Income tax expense
|
|
$
|
2,869
|
|
|
$
|
-
|
|
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.
The extent of the Company’s operations involves dealing with
uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid
are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes
arising from federal, state and international tax audits. The Company recognizes potential liabilities and records tax liabilities
for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent
to which, additional taxes will be due.
Note 11 -
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 3, “Summary of Significant Accounting Policies.”
The following tables provide the business segment information as
of and for the three months ended June 30, 2016 and 2015. Income tax allocations have been determined based on statutory rates
in the applicable business segment.
|
|
Three months ended June 30, 2016
|
|
|
|
Online
|
|
|
Beverage
|
|
|
Unallocated
|
|
|
|
|
|
|
business
|
|
|
business
|
|
|
items
|
|
|
Total
|
|
Total revenues, net
|
|
$
|
92,655
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
92,655
|
|
Total cost of revenues
|
|
|
(55,042
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(55,042
|
)
|
Gross profit
|
|
|
37,613
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,613
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
419,925
|
|
|
|
47,852
|
|
|
|
623,843
|
|
|
|
1,091,620
|
|
Provision for inventory obsolescence
|
|
|
9,572
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,572
|
|
Royalty expenses
|
|
|
125,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125,000
|
|
Total operating expenses
|
|
|
554,497
|
|
|
|
47,852
|
|
|
|
623,843
|
|
|
|
1,226,192
|
|
Net operating loss
|
|
|
(516,884
|
)
|
|
|
(47,852
|
)
|
|
|
(623,843
|
)
|
|
|
(1,188,579
|
)
|
Other income/(expense)
|
|
|
21,992
|
|
|
|
-
|
|
|
|
(409
|
)
|
|
|
21,583
|
|
Allocated income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,869
|
)
|
|
|
(2,869
|
)
|
Loss after income tax
|
|
|
(494,892
|
)
|
|
|
(47,852
|
)
|
|
|
(627,121
|
)
|
|
|
(1,169,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
|
1,078
|
|
|
|
645,780
|
|
|
|
9,413,842
|
|
|
|
10,060,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1,659
|
|
|
|
1,659
|
|
|
|
Three months ended June 30, 2015
|
|
|
|
Online
|
|
|
Beverage
|
|
|
Unallocated
|
|
|
|
|
|
|
business
|
|
|
business
|
|
|
items
|
|
|
Total
|
|
Total revenues, net
|
|
$
|
100,367
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,367
|
|
Total cost of revenues
|
|
|
(48,243
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,243
|
)
|
Gross profit
|
|
|
52,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,124
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
449,386
|
|
|
|
46,514
|
|
|
|
849,297
|
|
|
|
1,345,197
|
|
Provision for inventory obsolescence
|
|
|
6,409
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,409
|
|
Royalty expenses
|
|
|
125,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125,000
|
|
Total operating expenses
|
|
|
580,795
|
|
|
|
46,514
|
|
|
|
849,297
|
|
|
|
1,476,606
|
|
Net operating loss
|
|
|
(528,671
|
)
|
|
|
(46,514
|
)
|
|
|
(849,297
|
)
|
|
|
(1,424,482
|
)
|
Other income/(expense)
|
|
|
26,505
|
|
|
|
-
|
|
|
|
(35,622
|
)
|
|
|
(9,117
|
)
|
Allocated income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss after income tax
|
|
|
(502,166
|
)
|
|
|
(46,514
|
)
|
|
|
(884,919
|
)
|
|
|
(1,433,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
|
2,640
|
|
|
|
836,722
|
|
|
|
1,096
|
|
|
|
840,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Note 12 -
LITIGATION
On October 1, 2010, EFT Investment Co. Ltd., “EFTI”,
filed a lawsuit against Hsiao Zhong-Xing, former general manager of Excalibur, and Lu Zhuo-Jun, former vice general manager of
Excalibur, collectively “Defendants,” in the Taiwan Shihlin District Prosecutor’s Office. EFTI alleges, among
other things, that Defendants committed the offences of capital forging, fraud, breach of trust, and document fabrication. On April
30, 2013, the Taiwan Shihlin District Court found that both Hsaio Zhong-Xing and Lu Zhuo-Jun were guilty of fraudulent increase
of paid-up capital and dismissed all other charges. As a result, Hsiao Zhong-Xing received a six-month jail sentence and Lu Zhuo-Jun
received a five-month jail sentence. Both of their jail sentences can be converted into a fine. On May 27, 2013, the Shihlin District
Prosecutor filed an appeal in the Taiwan High court for reconsideration of the judgment entered by the District Court. On February
19, 2014, the Taiwan High Court sustained the District Court’s decision and found Hsaio Zhong-Xing guilty and sentenced him
to a mandatory ten month jail sentence; and found Lu Zhuo-Jun guilty and sentenced him to a mandatory eight-month jail sentence.
This decision is final and confirmed. Based on the Taiwan Shihlin District Court’s judgment of fraudulent increase of paid-up
capital, Excalibur filed a civil lawsuit against Hsiao Zhong-Xing, Lu Zhuo-Jun and Jiao Ren-He on January 7, 2014 for the unpaid
capital amount of NTD 475,312,500. On January 13, 2015, being the largest creditor of Excalibur, EFTI filed a submission to the
court to apply to join the case and the court’s decision is pending. On April 14, 2015, Excalibur filed with the court to
withdraw the case and the court approved.
EFTI filed a civil lawsuit against Jiao Ren-Ho, Chang Hui-Ying,
Hsiao Zhong-Xing, and Lu Zhuo-Jun, collectively “Defendants,” in the Taiwan Shihlin District court on February 12,
2010. EFTI alleges Defendants committed tortious acts, including but not limited to the offences of capital forging, fraud, breach
of trust and document fabrication. The Shihlin District Court found in favor of all Defendants in the case. EFTI filed an appeal
in the appellate court for reconsideration of the judgment entered by the District Court. The appellate court remanded the case
to District Court for a second review and the District Court found in favor of all Defendants for the second time. EFTI therefore
filed a second appeal in the appellate court for reconsideration of the judgment entered by the District Court. On December 7,
2015, the appellate court dismissed the appeal.
Marinteknik Shipbuilders (S) Pte Ltd., a Singapore company, filed
a lawsuit against Excalibur in the Taiwan Taichung District Court on July 9, 2009 for unpaid service fees and out-of-pocket expenses
of NTD 8,050,832, equivalent to approximately $254,700. On August 20, 2009, the Taiwan Taipei district court froze Excalibur’s
cash of $203,402 in response to the suit. A contingent liability for the restricted cash has been recorded. As EFTI is Excalibur’s
largest creditor, in consideration of recovering the frozen cash, EFTI filed a submission to the court to apply to join the case
on January 13, 2015. On June 16, 2015, the Taiwan High Court Taichung Branch Court sustained the decision of the Taiwan Taichung
District Court in favor of Marinteknik. As Excalibur is no longer EFTI’s subsidiary, EFTI cannot appeal the case and the
case has been closed.
On August 2, 2010, the Company commenced a legal proceeding against
Marinteknik Shipbuilders (S) Pte Ltd. and six other persons in the High Court of the Republic of Singapore alleging fraud, misrepresentation,
and deceit on the part of the defendants with respect to the Company’s investment in Excalibur. The Company claims that the
wrongful actions of the defendants resulted in damages of $19,000,000 to the Company. On December 11, 2012, the High Court issued
a decision whereby it dismissed the Company’s actions against Marinteknik and Lim Lan Eng (Priscilla), a director of Marinteknik.
On January 8, 2013, the Company filed an appeal against the decision made by the High Court. On November 29, 2013, the appellate
court issued its order and sustained the High Court’s decision and awarded legal fees to the defendants. The Company has
accrued a liability in the amount of $200,000 for the legal costs. The High Court dismissed the appeal by the Company, but criticized
the defendants, stating that their actions were “wholly lacking in probity” and “likely also to have been unlawful”.
After seeking further legal advice and balancing all factors, however, it was decided that commencing further legal proceedings
on this matter is not beneficial to the commercial interests of the Company. On October 15, 2015, the High Court determined that
the Company is obligated to bear the defendants’ legal costs of approximately SGD 307,000. On February 18, 2016, the Commercial
Affairs Department issued a letter to confirm completion of the investigation of the report by the Company regarding Lim Lam Eng
(Priscilla) and Marinteknik Shipbuilders (S) Pte Ltd. and confirmed their view that no evidence of a criminal offense was disclosed
and they will not be pursuing the matter further. On March 4, 2016, the Company received a letter from the defendants’ solicitor
stating that legal proceedings against the Company have been commenced for the claim of the taxed amount of approximately SDG 85,000.
On June 9, 2016, Lim Lan Eng Priscilla and Marinteknik filed an
action against EFTI in the Supreme Court of the State of New York, County of New York. The action seeks summary judgment on their
claims for fees in the sum of $162,720.38, arising out of the Singapore High Court’s determination that plaintiffs were entitled
to an award of their fees and costs in connection with the Singapore litigation. EFTI intends to defend and contest the relief
sought. A determination as to the plaintiffs’ motion for summary judgment has not been made.
In 2009, the Company’s subsidiary, Heilongjiang
Tianquan Manor Soda Drinks Co. Ltd., “Tianquan”, engaged a general contractor, the “Contractor”, to
construct a water manufacturing plant, the “Plant”, for RMB 4,758,600 ($776,300). Upon completion, the Company
inspected the Plant and found several material construction defects, including, but not limited to, the fact that the
Contractor used inferior construction material, inconsistent construction plans and substandard insulation material. As a
result, in 2010, the Company conditioned its final construction payment to the Contractor in the amount of RMB 698,896
($112,500) on the rectification of all construction defects. On March 22, 2012, the Contractor brought a case against
Tianquan in Baiquan People’s Court in Heilongjiang Province seeking approximately RMB 1,912,000 of purported
outstanding payments under the contract and interest thereon. On January 16, 2014, the Company’s subsidiary, Tianquan,
received an unfavorable decision issued by Baiquan People’s Court in Heilongjiang Province awarding the contractor
approximately 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 concluded that the company stamps affixed to all of the
Contractor’s legal documents were fake. On November 5, 2014, the subcontractor brought another civil case against
Tianquan in the Baiquan People’s Court in Heilongjiang Province seeking RMB 1,823,787 of purported outstanding payments
under the same contract and interest thereon. On December 8, 2014, Tianquan filed a civil lawsuit against the sub-contractor
for compensation for material construction defects. On December 31, 2015, the two cases were reheard at the Baiquan
People’s Court and the sub-contractor changed the claim to the amount of RMB 1,123,266. On January 5, 2016, the
Company’s subsidiary, Tianquan, received an unfavorable decision issued by Baiquan People’s Court awarding the
contractor approximately RMB 827,000 of purported outstanding payments under the contract and interest thereon. The Court
ordered the subcontractor to reimburse the amount of RMB 120,000 for testing fees to the Company. The Company filed an appeal
of the two cases. On July 18, 2016, Baiquan People’s Court dismissed the appeal of the order awarding the contractor
approximately RMB827,000 of purported outstanding payments under the contract and interest thereon. The appeal of the civil
lawsuit against the subcontractor for compensation for material construction defects is still pending.
On August 8, 2012, the Company filed a complaint against Edward
Carter, a former consultant, in the Superior Court of California, county of Los Angeles, in which the Company alleges, among other
things, that Mr. Carter breached his consulting contract, fiduciary duty and committed fraud and misrepresentation in respect to
the Company’s investment in CTX Virtual Technologies, Inc., “CTX”, as sponsored by Buckman, Buckman & Reid,
Inc., “BB&R”, a financial consulting firm and placement agent. This matter was dismissed as part of a mutual settlement
that was entered into between the parties on or around February 25, 2015.
On January 28, 2013, EFTI filed a criminal complaint against Tom
Peng a.k.a. Cheng Hao Peng, President of Meifu Development Co., Ltd., “Meifu”, Thomas Chen, a.k.a. Hong Dong Chen,
former General Manager and Director of EFTI, Steven Peng, a.k.a. Tien Te Peng, Vice Chairman of Transglobe Life Insurance Inc.,
“Transglobe”, Xian Jue Liu, Chairman of Transglobe , Shih Kuei Chang, General Manager of Meifu, Yi Feng Cheng, Real
Estate Department Manager of Transglobe, and Da Min Wu, an individual, collectively called “Defendants”, in the Taipei
District Prosecutor’s Office. EFTI alleges, among other things, that Thomas Chen colluded with Tom Peng and other Defendants,
and that Thomas Chen had made numerous misrepresentations to the Company and EFTI in connection with transactions related to a
building in Taiwan, of which Meifu and Transglobe were developers. The Company also alleges that Thomas Chen breached his fiduciary
duty, as the General Manager of EFTI, by binding EFTI in various agreements and making payments from EFTI to Meifu and Transglobe,
which are named Defendants, and that the Defendants had committed violations of securities law, insurance law, corporation law
and tax law, as well as money laundering, fraud and breach of trust.
On June 6, 2013, the Company filed a civil complaint in Los Angeles,
California against Meifu Development Co., Ltd., Transglobe Life Insurance Inc. and certain individuals related to the purchase
of the Taiwan Building. On January 27, 2014, the Company voluntarily dismissed the civil complaints without prejudice in Los Angeles,
California, in return for a good faith settlement negotiation initiated by such defendants. However, due to a lack of good faith
of the defendants in negotiation of a settlement, on May 30, 2014, the Company re-filed civil complaints against Meifu Development
Co. Ltd., Transglobe Life Insurance, Inc., Tom Peng and Thomas Chen in the Los Angeles Supreme Court, alleging deceit, conversion,
breach of fiduciary duty and other illegal acts against the Company.
On June 4, 2015, the Superior Court of California, County of Los
Angeles, ruled that because the Company has its principal place of business in California, the matter was stayed to allow the Company
time to file in the appropriate forum. The Court further ordered that Taiwan is a suitable forum for the Company’s complaint.
An order to show cause was set for December 4, 2015.
On September 9, 2015, the court dismissed this legal action against
all of the defendants with prejudice. A subsequent settlement was reached on October 15, 2015 by all parties. As part of the terms
of the settlement, the Company will receive both real property and cash. (See Note 9)
On July 23, 2013, the Taipei District Prosecutor’s
Office issued a non-indictment decision on charges of fraud against the Defendants, which the Company believes is
unwarranted. The decision not to indict the Defendants was made despite the fact that the Taiwan Investigation Bureau,
Ministry of Justice had confirmed that Thomas Chen, the former GM of EFTI, has received and/or has intended to receive secret
profits from Tom Peng, who admitted his full control over Meifu and Transglobe. A report by the Taiwan Investigation Bureau,
Ministry of Justice, further revealed, among other fraudulent activities, that Tom Peng and his son, Steven Peng, a.k.a. Tien
Te Peng, were involved in illegal inter-company transactions and illegal related party transactions. Documents received by
the Company through court petition indicated that, on June 14, 2013, the Prosecutor in Taiwan, despite what the Company
believes to have been ample evidence of illegality, instructed the Taiwan Investigation Bureau to halt all further
investigations into EFTI’s criminal complaint prior to his written decision not to indict the Defendants. Subsequently,
on August 22, 2013, EFTI completed the filing of the appeal with the Taiwan High Prosecutor’s Office for
reconsideration of the non-indictment charges against the Defendants. This appeal was rejected on August 29, 2013, which the
Company believes was not enough time for the Prosecutor’s Office to fully reconsider the appeal. On September 12, 2013,
EFTI filed a final petition to the Taipei District Court for judgment of the decision made by the Taiwan High
Prosecutor’s Office, but the petition was rejected on March 5, 2014. On October 15, 2015, the Company reached a
settlement agreement with the defendants and the civil case in the Los Angeles Supreme Court was dismissed with
prejudice.
On November 27, 2013, a class action entitled Li, et al. v. EFT
Holdings, Inc., et al. was filed on behalf of a putative class of all purchasers of one or more of the Company’s products
against the Company and Jack Qin in the United States District Court for the Central District of California. On April 29, 2015,
the court consolidated this action with the Wang, et al. v. EFT Holdings, Inc., et al. action. On May 7, 2015, Plaintiffs voluntarily
dismissed the claims of the individual plaintiffs without prejudice.
On November 27, 2013, a class action entitled Li, et al. v. Qin,
et al. was filed on behalf of a putative class of all purchasers of the Company’s products against the Company and certain
of its current and former officers and directors in the United States District Court for the Central District of California. On
April 29, 2015, the court consolidated this action with the Wang, et al. v. EFT Holdings, Inc., et al. action. On May 7, 2015,
Plaintiffs voluntarily dismissed the claims of the individual plaintiffs without prejudice.
On January 30, 2015, a class action entitled Wang, et al. v. EFT
Holdings, Inc., et al. was filed on behalf of a putative class of all purchasers of the Company’s products against the Company
and certain of its current and former officers and directors in the United States District Court for the Central District of California.
On April 29, 2015, the court consolidated this action with the Li, et al. v. Qin, et al. and Li, et al. v. EFT Holdings, Inc.,
et al. actions. On May 7, 2015, Plaintiffs filed a motion for class certification, which was fully briefed by the parties. On December
14, 2015, the court denied Plaintiffs’ motion for class certification. On April 6, 2016, the parties stipulated to a voluntary
dismissal of Plaintiffs’ claims with prejudice.
On December 6, 2013, the Company named George Curry, a former director
and officer of the Company, as one of the defendants in the Superior Court of California, County of Los Angeles, with reference
to the CTX investment transaction, in which the Company alleges, among other things, that Mr. Curry breached his fiduciary duty
and committed fraud and misrepresentation in respect of the Company’s investment in CTX.
On April 18, 2014, George Curry filed a Notice of Removal for the
above action to be brought in the District Court of California, Los Angeles (Western District). In the same action, he brought
a counterclaim against the Company, Jack Qin and Pyng Soon and sought implied and equitable indemnity, declaratory relief and apportionment
of fault. On or around December 11, 2014, George Curry filed a motion for summary judgment against the Company and all other cross
defendants in the matter. The motion was heard on February 26, 2015 and the court denied George Curry’s motion. Thereafter,
a second motion for summary judgment was filed by Mr. Curry. That motion was denied as well. The final resolution of the entire
matter is still pending. Trial is currently scheduled for February 7, 2017. In addition, the Court consolidated the trial of this
matter with that of the Company’s lawsuit against CTX, Buckman, Buckman & Reid and Peter Lau.
On March 4, 2015, the Company filed a civil lawsuit in the United
States District Court, Central District of California, against CTX, Buckman, Buckman & Reid, Cliff Rhee and Peter Lau alleging
breach of covenant of good faith and fair dealing, breach of fiduciary duty, fraud, misrepresentation, concealment, negligent misrepresentation
and negligence.
On April 14, 2015, Defendant CTX filed a motion to dismiss. On May
28, 2015, the court granted CTX’s motion, in part, with leave to amend. The Company filed a First Amended Complaint on June
8, 2015, asserting causes of action for: (1) breach of covenant of good faith and fair dealing; (2) breach of fiduciary duty; (3)
fraud-misrepresentation; and (4) fraud-concealment. On June 24, 2015, CTX filed an answer to the First Amended Complaint. Buckman,
Buckman & Reid and Peter Lau also filed a motion to dismiss the Complaint. The Court granted the motion with respect to the
breach of fiduciary duty claim, with leave to amend, but denied it as to all other claims. After the Company’s filing of
its First Amended Complaint, Buckman, Buckman & Reid and Peter Lau filed an answer to the First Amended Complaint on July 9,
2015.
On May 26, 2016, the Court struck CTX’s Answer to the Complaint
and entered a default judgment. The Company is in the process of preparing a default package.
On April 1, 2016, Buckman, Buckman & Reid and Peter Lau filed
a motion with the court to compel the matter to arbitration, thereby seeking to avoid a jury trial. The Company opposed the motion,
arguing that there was no applicable arbitration provision, and seeking to retain the right to a jury trial. After extensive briefings,
and following oral argument, on June 2, 2016, the Court denied Buckman, Buckman & Reid and Peter Lau’s motion to compel
arbitration. The Court thereafter scheduled the trial for February 7, 2017.
On June 22, 2015, a complaint entitled Greenstone Holdings, Inc.
v. EFT Holdings, Inc., et al. was filed in the United States District Court for the Central District of California, asserting a
claim for express indemnity against the Company, in excess of $150,000. After negotiations, the Company entered into a confidential
settlement with Greenstone Holdings, Inc. on April 14, 2016.
Note 13 -
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.