Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act. (Check one):
The aggregate market value of common stock held by non-affiliates
as of September 30, 2016 (the last business day of the most recently completed second fiscal quarter) was approximately $503,957,
based on the closing price of $.0211 on September 30, 2016.
As of February 8, 2018, 75,983,201 shares of the common stock
of the registrant were issued and outstanding.
This Annual Report on Form 10-K (this “Report”)
contains “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking
statements may include words such as “anticipate,” “believe,” “estimate,” “intend,”
“could,” “should,” “would,” “may,” “seek,” “plan,” “might,”
“will,” “expect,” “predict,” “project,” “forecast,” “potential,”
“continue” negatives thereof or similar expressions. These forward-looking statements are found at various places
throughout this Annual Report on Form 10-K and include information concerning possible or assumed future results of our operations,
business strategies, future cash flows, financing plans, plans and objectives of management, any other statements regarding future
operations, future cash needs, business plans and future financial results, and any other statements that are not historical facts.
These forward-looking statements represent
our intentions, plans, expectations, assumptions and beliefs about future events and are subject to the following risks and uncertainties,
among others:
• events
that deprive us of the services of our Chief Executive Officer, Jack Jie Qin;
• our
ability to maintain effective quality control systems with respect to our operations;
• our
ability to avoid risks associated with operating outside of the United States; and
• our
ability to secure capital that may be needed to support our business operations.
In light of these risks and uncertainties,
among others, the events described in the forward-looking statements might not occur or might occur to a different extent or at
a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. All subsequent written and oral forward-looking statements concerning other matters addressed
in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this Report. Except to the extent required by law, we undertake no obligation to update
or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions,
circumstances or assumptions underlying such statements, or otherwise.
The words “we,” “us,”
“our,” and the “Company” refer to EFT Holdings, Inc. and our subsidiaries.
PART I
ITEM 1. BUSINESS.
History
EFT Holdings, Inc. (formerly EFT Biotech
Holdings, Inc., HumWare Media Corporation, GRG, Inc., Ghiglieri Corporation and Karat Productions, Inc.) was incorporated in the
State of Nevada on March 19, 1992. Since our acquisition of EFT Biotech, Inc., a Nevada corporation (“EFT Biotech”),
in November 2007, we have followed the same course of business as we do today, that is, the sale of nutritional, personal care,
automotive, house care and other products outside of the United States, primarily in Hong Kong Special Administrative Region (“Hong
Kong” herein) and People’s Republic of China (“China” herein).
Background
Through our website, www.eftb.us, we sell
substantially all of our products in Hong Kong and China to customers who are the end users of our products, to whom we refer
as “Affiliates”, located in those jurisdictions. The content of our website is not incorporated by reference herein.
No sales of our products are made in the United States. Our company is a holding company and we conduct our business through our
subsidiaries and, unless otherwise noted, any reference to our operations includes the operations of our subsidiaries.
Our corporate structure is depicted in
the diagram set forth below.
Trends and Developments
Sales Declines
. Since 2012, our
sales revenues have declined from year to year, from $13,536,120 for 2012 to $250,840 for 2017. This long-term decline is attributable,
primarily, to unjustified actions taken and slanderous statements made by certain third parties in China that damaged our established
goodwill within our network of established Affiliates. We have been unable to seek redress against these persons, due to their
being denizens of China.
Impairment of Land and Building
.
At March 31, 2017, we determined that the fair value of our building in Taipei, Taiwan, had decreased significantly, due to weakness
in the Taiwanese real estate market. In accordance with such determination, an asset impairment loss of $5,615,398 was recorded
for the year ended March 31, 2017.
Impairment of Water Plant
. At March
31, 2017, we had determined that the fair value of our water plant in Heilongjiang Province, China, had decreased significantly.
In accordance with such determination, an asset impairment loss of $634,969 was recorded for Fiscal 2017. No similar item was
recorded during Fiscal 2016.
Beverage Segment
. By the end of
2012, through our subsidiary, Heilongjiang Tianquan Manor Soda Water Ltd. (“Tianquan Soda Water”), we had completed
construction of a production facility to produce bottled natural soda water in Baiquan, Heilongjiang Province, China. Production
of our bottled water product began in April 2013, but, shortly thereafter, production was suspended indefinitely, due to issues
with the production facility and the institution of a lawsuit against Tianquan Soda Water by a contractor involved in the construction
of the production facility.
During the last quarter of Fiscal 2017,
our management determined not to re-start bottling operations at the Tianquan Soda Water production facility and our management
has begun to take actions necessary for the sale of the Tianquan Soda Water production facility. No prediction can be made regarding
the timing of the sale of the plant or if any such sale will ever occur.
Management’s Ongoing Analysis
.
During the fourth quarter of the year ended March 31, 2017, our management began an analysis of several business options that
could allow our company to re-establish itself as a respected sales organization in the China market. This analysis process is
ongoing and is expected to be completed during the fourth quarter of fiscal 2019.
See Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
.
Our Competitive Strengths and Weaknesses
We believe our company has the following
competitive strengths:
• our
lines of excellent products;
• our
sales and marketing contacts in Hong Kong SAR, China and other countries in the region; and
• our
low overhead.
We believe our company has the following
competitive weaknesses:
• our
once-excellent good will with our Affiliates has suffered severely in the wake of injurious actions taken and erroneous statements
made by certain third parties;
• the
process of re-establishing our good will is difficult; and
• our
lack of capital.
Products
Online Segment
.
Nutritional
. Our nutritional products
are non-pharmaceutical nutritional products. They are ingestible through oral liquids, oral sprays, tablets and/or tea. Our oral
sprays are delivered through very fine mist sprayed directly into the mouth. Our containers used to deliver our nutritional products
are small, compact and easy to carry.
Each of our nutritional products is all
natural, made from pure ingredients and designed to address specific objectives of the user. Each nutritional product has been
formulated to address a specific need, symptom and/or condition. We make no claims as to the products’ curing any medical
condition or preventing any medical ailment. Our nutritional products have not been tested nor approved by the U.S. Food and Drug
Administration, as is the case with all non-prescription products.
We currently offer 27 nutritional products,
including those that are intended to promote heart health, immune system support, weight loss, anti-aging, joint health and sleep.
Personal Care
. We currently offer
16 personal care products, including topical creams, a sunscreen, make-up, make-up kits and travel kits.
Automotive
. We currently offer three
automotive products: a fuel additive, a flat tire repair system and a cooling system additive.
House Care
. We currently offer a
single house care product, an all-purpose cleaner known as “Natural Clean”.
Beverage Segment
.
Bottled Water
. By the end of 2012,
through our subsidiary, Tianquan Soda Water, we had completed construction of a production facility to produce bottled natural
soda water in Baiquan, Heilongjiang Province, China. Production of our bottled water product began in April 2013, but, shortly
thereafter, production was suspended indefinitely, due to issues with the production facility and the institution of a lawsuit
against Tianquan Soda Water by a contractor involved in the construction of the production facility.
During the last quarter of Fiscal 2017,
our management determined not to re-start bottling operations at the Tianquan Soda Water production facility and our management
has begun to take actions necessary for the sale of the Tianquan Soda Water production facility. No prediction can be made regarding
the timing of the sale of the plant or if any such sale will ever occur.
Additional Product Information
.
We do not have a return policy and we do not offer refunds. However, we do provide a limited warranty for our products. The specific
warranty terms and conditions vary depending upon the product sold, but, generally, include replacement of defective products
during the six-month period following a sale. Historically, our warranty expenses have not been material.
Manufacturing
Nutritional, Personal Care, Automotive
Care and House Care Products (Online Segment)
. Our nutritional, personal care, automotive care and house care products are
manufactured and packaged under our brands by third parties located in the United States. We have not entered into any long-term
manufacturing or product supply agreements with any of our manufacturers. Rather, we engage these manufacturers only on short-term,
oral agreements. Our management believes that our operating under oral agreements with our manufactures does not present undue
risk to our company, as compared to a circumstance in which we engaged our manufacturers by written agreements.
We order our products directly from manufacturers
on an “as needed” or “expected need” basis. Raw materials used in the manufacture of our products are
readily available and are not in short supply. Further, we are not a party to any agreement for the purchase or delivery of raw
materials.
None of our manufacturers accounts for
a significant portion of our business and any one of these manufacturers could be replaced on short notice, should such an action
be required.
Bottled Soda Water Product (Beverage
Segment)
. By the end of 2012, through our subsidiary, Tianquan Soda Water, we had completed construction of a production facility
to produce bottled natural soda water in Baiquan, Heilongjiang Province, China. Production of our bottled water product began
in April 2013, but, shortly thereafter, production was suspended indefinitely, due to issues with the production facility and
the institution of a lawsuit against Tianquan Soda Water by a contractor involved in the construction of the production facility.
During the last quarter of Fiscal 2017,
our management determined not to re-start bottling operations at the Tianquan Soda Water production facility and our management
has begun to take actions necessary for the sale of the Tianquan Soda Water production facility. No prediction can be made regarding
the timing of the sale of the plant or if any such sale will ever occur.
Sales and Distribution
Sales
. Historically, substantially
all of our sales have been made in Hong Kong and China. We are currently attempting to reverse a six-year decline in sales caused
by actions of certain third parties located in China. During the fourth quarter of the year ended March 31, 2017, our management
began an analysis of several business options that could allow our company to re-establish itself as a respected sales organization
in the China market. This analysis process is expected to be completed during the third quarter of fiscal 2018.
However, we have begun to implement initial
strategies for re-establishing our sales volumes. These efforts are focused on internet marketing strategies that target customers
in Hong Kong and China, the markets in which we believe our line of products enjoys the greatest acceptance. In conjunction with
these internet marketing strategies, we are attempting to revive our once-vibrant word-of-mouth customer referral system.
We sell our line of products exclusively
through our website, www.eftb.us, to our Affiliates, who are our customers, or the end users of our products. We do not make sales
of any of our products in the United States.
We distinguish between first-time customers
and Affiliates, inasmuch as Affiliates are paid commissions for referrals of new customers. To become an Affiliate, a customer
must be referred by another Affiliate and make an initial minimum purchase of $450, including shipping and handling charges. Affiliates
are not required to make any purchases beyond their initial purchases, nor are Affiliates required to pay membership fees, resell
products, recruit new customers or attend any Affiliate meetings. In Hong Kong and China, we offer our Affiliates free educational
classes that offer further information concerning our products and new and interesting ways of using our products.
During the years ended March 31, 2017 and
2016, we received 178 and 183 orders, respectively, and, as of March 31, 2017, we had received a total of 1,259,185 orders, from
our Affiliates, and no Affiliate accounted for a significant portion of our sales volume.
We pay Affiliates a commission on products
ordered from us by new customers and Affiliates attributable to them. The commission we pay is equal to approximately 58% of the
total dollar amount of each order. We account for these commissions as a reduction of the sales price of our products and are
reflected in our consolidated financial statements as such. All commissions earned by Affiliates are held by us in book entry
form. Affiliates are able to apply their respective commissions to pay for their new orders of products. By employing this commission
system, our management believes that we achieve a reduction in operating expense and eliminate cumbersome accounting procedures,
such as issuing checks and reconciling bank statements.
Distribution
. Once full payment
in U.S. Dollars for an order is received, the ordered products are shipped directly from one of our distribution centers located
in either Hong Kong or China to the party who placed the order.
Insurance
We maintain such insurance policies as
our management deems appropriate, given the current level of operations of our company.
Intellectual Property
We regard our trademarks, including packaging
and label design, business know-how, including product delivery systems (spray), and product formulations as having significant
value and as being an important factor in the marketing of our products. Our policy is to establish, enforce and protect our intellectual
property rights using the intellectual property laws.
We use the “EFT” name, a trademark
owned and licensed to us by EFT Assets Limited (“EFT Assets”). EFT Assets is owned by Wendy Qin, who served as a director
of one of our subsidiaries, EFT International Limited, a British Virgin Islands corporation, until March 2015. Ms. Qin is the
sister of our President, Jack Jie Qin. Under the agreement with EFT Assets, as renewed effective April 1, 2017, we are required
to pay a minimum annual royalty to EFT Assets of $500,000 for the first year of the renewed agreement, and a minimum annual royalty
to EFT Assets of $200,000 for each of the remaining nine years of the term of the agreement. The required annual royalty payment
increases, should we obtain certain levels of gross sales, as follows: 5% of the first $30 million of gross sales; 4% of the $10
million of gross sales in excess of $30 million; 3% of the $10 million of gross sales in excess of $40 million; 2% of the $10
million of gross sales in excess of $50 million; and 1% of the $10 million of gross sales in excess of $60 million. For each of
the years ended March 31, 2017 and 2016, we were obligated to pay EFT Assets the amount of $500,000 as a royalty. However, we
have not paid such royalties in full, and the unpaid amounts have been accrued in our consolidated financial statements.
We do not currently hold any patents, registered
trademarks or copyrights.
Government Regulation
We do not make sales of products in the
United States and are not subject to regulation by the U.S. Food and Drug Administration.
Further, government approval is not currently necessary for
the sale of any of our products and the marketing and sale of our products are not subject to governmental regulation in any of
the jurisdictions in which we operate.
Research and Development
We have not and do not engage in any research
and development activities, nor do we contemplate spending any material amount on such activities in the foreseeable future.
Seasonality
Our business is not seasonal in nature.
Employees
Currently, we have three full-time employees
at our executive offices in City of Industry, California, two full and part-time employees at our Kowloon, Hong Kong, office,
no full and part-time employees at our Taipei, Taiwan, office, and no employees at our Tianquan Soda Water production facility.
We adjust the number of employees from time to time, in accordance with the demands of our business.
None of our employees is represented by
a collective bargaining agreement. We believe our employee relations to be good.
Available Information
Our company, EFT Holdings, Inc., files
or furnishes annual, quarterly and current reports, proxy statements and other documents with the U.S. Securities and Exchange
Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may
read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 800 SEC 0330.
Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding
issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at
http://www.sec.gov.
We also make available, free of charge
through our internet website (www.eftb.us), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are
not required to provide a statement of risk factors. Nevertheless, to assure proper disclosure about our company, we are voluntarily
providing the following discussion of risk factors.
The following are risk factors that
could affect our business, financial condition, results of operations and cash flows. These risk factors should be considered
in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K, because these factors
could cause actual results and conditions to differ materially from those projected in forward-looking statements. Before you
invest in our publicly traded securities, you should know that making such an investment involves some risks, including the risks
described below. Additional risks of which we may not be aware or that we currently believe are immaterial may also impair our
business operations or our stock price. If any of the risks actually occur, our business, financial condition, results of operations
or cash flow could be negatively affected. In that case, the trading price of our common stock could decline, and you may lose
all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Annual
Report on Form 10-K, our quarterly reports on Form 10-Q and other documents filed by us from time to time.
Risks Related to Our Financial Condition
We have generated operating losses
for each of the past five years, which creates substantial doubt about our ability to continue as a going concern.
For the fiscal years ended March 31, 2013
through 2017, we have generated operating losses. Our independent registered public accounting firm includes a “going-concern”
audit opinion on our consolidated financial statements included herein. The audit opinion reports substantial doubt about our
ability to continue as a going concern. In the future, we may raise additional capital though equity or debt offerings, although
there is no assurance that this will occur.
See Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
.
Our financial condition has deteriorated
over the past two years; we have a history of operating losses; we expect to incur operating losses in the future; and we may
never achieve profitability.
For the year ended March 31, 2017 (“Fiscal
2017”), we reported a net loss of $9,453,672 and a loss from operations of $9,534,407, compared to the year ended March
31, 2016 (“Fiscal 2016"), when we reported net income of $8,297,294 and an operating loss of $6,205,577.
At March 31, 2017 and 2016, our accumulated
deficit was $61,442,712 and $51,997,694, respectively.
During Fiscal 2017, our operating activities
used $5,006,500 in cash, compared to Fiscal 2016, when our operating activities provided $10,669,460 in cash.
At March 31, 2017, our working capital
deficit was $12,749,561, compared to our working capital deficit of $9,774,297, at March 31, 2016.
Our net income of $8,297,294 for Fiscal
2016 was attributable primarily to a non-recurring event, that is, the recovery of approximately $9,438,000 relating to the provision
for an investment in Taiwan and the reversal of a $963,000 provision for tax liabilities for the years 2008, 2009 and 2010. We
experienced no such event during Fiscal 2017.
We expect to incur operating losses for
the foreseeable future and we may never again achieve or sustain profitability. We may be required to obtain additional capital
to increase our sales efforts or to expand our product lines. Our management believes that our company has access to capital resources
through possible public or private equity offerings, debt financings, corporate collaborations or other means. If the economic
climate in the United States does not continue to improve or deteriorates, our ability to raise additional capital could be negatively
impacted.
Due to continued weakness in the sales
of our products during the first half of calendar 2017, we have taken certain measures that have served to reduce our operating
costs. We may be required to take additional measures to reduce operating costs, in order to conserve our cash in amounts sufficient
to sustain operations and meet our obligations, should we fail to obtain needed capital. These cost-saving measures could impair
our product sales efforts.
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
Matters relating to, or arising from,
the material weakness in our internal controls have had and may continue to have a materially adverse effect on our business,
operating results and financial condition, including increased costs and diversion of management’s attention.
Our management conducted an evaluation
of the effectiveness of our company’s disclosure controls and procedures and an assessment of the effectiveness of its internal
control over financial reporting and concluded that its disclosure controls and procedures, as well as our internal control over
financial reporting, were not effective as of March 31, 2017, due primarily to the material weakness they identified in our internal
control over financial reporting.
See Item 9A. Controls and Procedures
. Should we be unable to remediate the material weakness
promptly and effectively, such weakness could harm our operating results, result in a material misstatement of our financial statements,
cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports
or avoiding or detecting fraud. This, in turn, could result in a loss of investor confidence in the accuracy and completeness
of our financial reports, which could have an adverse effect on our stock performance. Any litigation or other proceeding or adverse
publicity relating to the material weakness could have a material adverse effect on our business and operating results. In addition,
we may incur unanticipated accounting and legal fees in connection with these matters, and our management’s time and attention
has been diverted from our other business operations, which could harm our business.
Risks Related to Our Business –
In General
Current economic conditions may continue
to affect adversely our business and results of operations, which could cause the market value of our common stock to decline.
Our results of operations may be materially
affected, generally, by conditions in the global capital markets and the overall economy, particularly in China. In general, factors
that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels
of employment, energy costs, interest rates and tax rates, as well as the availability of consumer credit and consumer confidence.
In particular, concerns over inflation, energy costs, geopolitical issues, and the availability and cost of credit, have contributed
to increased volatility and diminished expectations for the Chinese economy. In this regard, we are unable to predict the future
performance of the Chinese economy.
A continued or protracted downturn in the
Chinese economy could adversely impact consumer purchases of discretionary items, including demand for our products. This has
led, and could further lead, to reduced consumer spending, which we believe may include consumer spending on nutritional and beauty
products and other discretionary items. In addition, reduced consumer spending may drive us and our competitors to lower prices.
A reduction in consumer spending could significantly reduce our sales and leave us with unsold inventory, which would have a material
adverse effect on our business, financial condition and results of operations.
We regularly maintain cash balances
at a commercial bank in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000.
We regularly maintain cash balances at
a commercial bank in excess of the FDIC insurance limit of $250,000. If the financial position and/or liquidity of this commercial
bank were to become impaired, our financial position and the results of our operations could be negatively affected, to the extent
of account balances held at this commercial bank in excess of the federally insured limit.
We may continue to experience fluctuations
in our operating results.
Our annual and quarterly operating results
have fluctuated and may continue to fluctuate in the future. As a result, period to period comparisons of historical and future
results may not necessarily be meaningful and should not be relied on as an indication of future performance. There can be no
assurance that our current or future internal expectations and outlook for sales, comparable sales, gross profit margins and profitability
will prove to be accurate. Failure to meet internal or market financial expectations going forward, particularly with respect
to sales, gross profit margins and earnings, could result in a decline in and/or increased volatility in the market price of our
common stock.
We are subject to the risks of doing
business abroad.
Substantially all of our Affiliates are
located in Hong Kong and Hong Kong. As such, we are subject to customary risks of doing business abroad, including currency fluctuations,
political or labor instability and potential import restrictions, duties and tariffs. We do not maintain insurance for the potential
lost profits due to such disruptions. Political or economic instability in China or Hong Kong or elsewhere could cause substantial
disruption in our business. This could materially adversely affect our financial condition and results of operations. Heightened
terrorism security concerns could subject exported goods to additional, more frequent or more thorough inspections. This could
delay deliveries or increase costs, which could adversely impact our results of operations. In addition, since we negotiate our
purchase orders with customers in United States dollars, the value of the United States dollar against local currencies could
impact its cost in dollars of production from these manufacturers. We are not currently engaged in any hedging activities to protect
against these currency risks. If there is downward pressure on the value of the dollar, our customers= purchase prices for our
products could increase. We may not be able to offset an increase in production costs with a price increase to our customers.
Entry into new businesses or operations
may divert our management=s attention and consume resources that are necessary to sustain our business.
We may enter into new businesses or operations
in the future, which may result in unforeseen difficulties and expenditures. In addition, the new businesses, operations, products,
or services may disrupt our business, divert our resources and require significant management attention that would otherwise be
available for development of our business. The anticipated benefits of any new businesses, operations, products, or services may
also not be realized or we may be exposed to unknown liabilities.
We are highly dependent on our current
management.
Our success is significantly dependent
upon our current management team. Our success is particularly dependent upon Mr. Jack Jie Qin, our Chairman and CEO. The loss
of his services could have an adverse effect on our company. If we were to lose the services of our officers and directors, we
may experience difficulties in effectively implementing our business plan.
Our principal shareholder owns 69%
of our outstanding common stock and such shareholder’s interests may not be aligned with the interests of our company’s
other shareholders.
Dragon Win Management, Ltd. (“Dragon
Win”) owns a majority of our issued and outstanding common stock. As a result, Dragon Win has substantial influence in determining
the outcome of any corporate transactions or other matters submitted to our shareholders for approval, including mergers, consolidations
and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Dragon
Win may not act in the best interests of our company’s minority shareholders. In addition, without Dragon Win’s consent,
our company could be prevented from entering into transactions that could be beneficial to us. This concentration of ownership
may also discourage, delay or prevent a change in control of our company, which could deprive our minority shareholders of an
opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common stock.
These actions may be taken even if they are opposed by our company’s other shareholders.
See Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
.
The outcome of litigation and other
claims is unpredictable and any rulings not in our favor could have a material adverse effect on our business and results of operations.
We are, and may become, subject to litigation,
claims and administrative proceedings for which it cannot or may not be able to predict or determine the ultimate outcome or quantify
the potential financial impact. Because of the inherent difficulty of predicting the outcome of any legal claims and administrative
proceedings, we cannot provide assurance as to the outcome of any pending or future matters, or, if ultimately determined adversely
to us, the loss, expense or other amounts attributable to any such matter. The resolution of such matter or matters, if unfavorable,
could have a material adverse effect on our business, liquidity and results of operations. See
Item 3. Legal Proceedings
for a more detailed discussion of certain current litigation and other proceedings.
If we become directly subject to
the scrutiny, criticism and negative publicity involving U.S. reporting companies with substantial operations or sales in China,
we may have to expend significant resources to investigate and resolve any negative allegations resulting from such scrutiny,
which could harm our business operations and reputation and could result in a loss of your investment in our common stock, especially
if such allegations cannot be addressed and resolved favorably.
U.S. reporting companies that have substantially
all of their operations or sales in China have been the subject of intense scrutiny, criticism and negative publicity by investors,
financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered
around a lack of effective internal controls over financial accounting resulting in financial and accounting irregularities and
mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As
a result of the scrutiny, criticism and negative publicity, many of these companies are now conducting internal and external investigations
into the allegations and are subject to shareholder lawsuits and SEC enforcement actions. It is not clear what effect such sector
wide scrutiny, criticism and negative publicity would have on the business of our company. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will be required to expend significant resources to
investigate such allegations and/or defend our company. This situation will be costly and time consuming and may distract management
from its efforts in expanding the business of our company. If such allegations are not proven to be groundless, our company, overall,
and our business operations, in particular, could be severely impacted and your investment in our stock could be rendered worthless.
Our network and communications systems
are dependent on third-party providers and are vulnerable to system interruption and damage, which could limit our ability to
operate our business and could have a material adverse effect on our business, financial condition or results of operations.
Our systems and operations and those of
our third-party internet service providers are vulnerable to damage or interruption from fire, flood, earthquakes, power loss,
server failure, telecommunications and internet service failure, acts of war or terrorism, computer viruses and denial of service
attacks, physical or electronic breaches, sabotage, human error and similar events. Any of these events could lead to system interruptions,
processing and order fulfillment delays and loss of critical data for us, our suppliers or our internet service providers, and
could prevent us from processing customer purchases. Any significant interruption in the availability or functionality of our
website or our customer processing, distribution or communications systems, for any reason, could seriously harm our business,
financial condition and operating results.
Because we are dependent on third party
service providers for the implementation and maintenance of certain aspects of our systems and operations and because some of
the causes of system interruptions may be outside of our control, we may not be able to remedy such interruptions in a timely
manner, if at all. As we rely on our third-party service providers, computer and communications systems and the internet to conduct
our business, any system disruptions could have a material adverse effect on our business, financial condition or results of operations.
We must successfully maintain and/or
upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial
condition or results of operations.
We rely on various information technology
systems to manage our operations. Over the last several years, we have implemented, and we continue to implement, modifications
and upgrades to such systems, including changes to legacy systems, replacing legacy systems with successor systems with new functionality,
and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated
with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption
of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention
of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs
of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications
and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In
addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have
a material adverse effect on our business, financial condition or results of operations.
Privacy protection is increasingly
demanding, and we may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity
theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks.
The protection of customer, employee, vendor,
franchisee and other business data is critical to us. Federal, state, provincial and international laws and regulations govern
the collection, retention, sharing and security of data that we receive from and about our employees, customers, vendors and franchisees.
The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years, and may
see the imposition of new and additional requirements by states and the federal government as well as foreign jurisdictions in
which we do business. Compliance with these requirements may result in cost increases due to necessary systems changes and the
development of new processes to meet these requirements by us and our franchisees. In addition, customers and franchisees have
a high expectation that we will adequately protect their personal information. If we or our service provider fail to comply with
these laws and regulations or experience a significant breach of customer, employee, vendor, franchisee or other company data,
our reputation could be damaged and result in an increase in service charges, suspension of service, lost sales, fines or lawsuits.
The use of credit payment systems makes
us more susceptible to a risk of loss in connection with these issues, particularly with respect to an external security breach
of customer information that we or third parties (including those with whom we have strategic alliances) under arrangements with
us control. A significant portion of our sales require the collection of certain customer data, such as credit card information.
In order for our sales channel to function, we and other parties involved in processing customer transactions must be able to
transmit confidential information, including credit card information, securely over public networks. In the event of a security
breach, theft, leakage, accidental release or other illegal activity with respect to employee, customer, vendor, franchisee third
party, with whom we have strategic alliances or other company data, we could become subject to various claims, including those
arising out of thefts and fraudulent transactions, and may also result in the suspension of credit card services. This could cause
consumers to lose confidence in our security measures, harm our reputation as well as divert management attention and expose us
to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. In addition,
if our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix
or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems,
not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies
in these systems could expose us to significant unreserved losses, which could materially and adversely affect our earnings and
the market price of our common stock. Our brand reputation would likely be damaged as well.
Our holding company structure makes
us dependent on our subsidiaries for our cash flow and subordinates the rights of our shareholders to the rights of creditors
of our subsidiaries in the event of an insolvency or liquidation of any of our subsidiaries.
Our company, EFT Holdings, Inc., is a holding
company and, accordingly, substantially all of our operations are conducted through its subsidiaries. Our subsidiaries are separate
and distinct legal entities. As a result, our cash flow depends upon the earnings of our subsidiaries. In addition, we depend
on the distribution of earnings, loans or other payments by our subsidiaries. Our subsidiaries have no obligation to provide our
company with funds for our payment obligations. If there is an insolvency, liquidation or other reorganization of any of our subsidiaries,
our shareholders will have no right to proceed against their assets. Creditors of those subsidiaries will be entitled to payment
in full from the sale or other disposal of the assets of those subsidiaries before our company, as a shareholder, would be entitled
to receive any distribution from that sale or disposal.
Risks Related to our Business –
Online Segment
Because we do not have written agreements
with any of our third-party manufacturers, we may incur material product liability claims, which could increase our costs and
adversely affect our reputation, revenues and operating income.
As a retailer of products designed for
human consumption, we are subject to product liability claims if the use of our products is alleged to have resulted in injury.
Our products consist of vitamins, minerals, herbs and other ingredients that are classified as foods or dietary supplements and
are not subject to pre-market regulatory approval. Our products could contain contaminated substances, and some of our products
contain ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from
human consumption of these ingredients could occur.
Because third-party manufacturers produce
all of our products, we rely on these manufacturers to ensure the integrity of their ingredients and formulations. However, due
to this circumstance, our company may become liable for various product liability claims for products sold by us but not manufactured
by us.
We do not have written agreements with
our third-party manufacturers. Due to this circumstance, we enjoy no indemnification for any product liability claims from any
of our third-party manufacturers. Thus, we may be unable to obtain any recovery from any third-party manufacturers in respect
of any product liability claims against us in connection with products manufactured by any such third party.
Even with our own insurance coverage, product
liability claims could significantly damage our reputation and consumer confidence in our products. Our litigation expenses could
increase as well, which also could have a material adverse effect on our results of operations, even if a product liability claim
is unsuccessful or is not fully pursued.
We may incur material product liability
claims, which could increase our costs and harm our financial condition and operating results.
We may be subjected to various product
liability claims, including claims that products that are ingested by consumers or applied to their bodies contain contaminants,
and that the products include inadequate instructions as to their uses, or include inadequate warnings concerning side effects
and interactions with other substances. It is possible that widespread product liability claims could increase our costs, and
adversely affect our revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase
our costs through higher insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage
in the future.
Resources devoted to product innovation
may not yield new products that achieve commercial success.
Our ability to develop and/or secure rights
to new products depends on, among other factors, our ability to understand evolving customer and market trends and our ability
to translate these insights into sales of such products. Our inability to understand these trends could harm our operating results.
Further, the nutritional supplements industry is characterized by rapid and frequent changes in demand for products and new product
introductions. Our failure to predict accurately these trends could also negatively impact our operating results. To develop and/or
secure rights to new products also requires a material level of investment and entails considerable uncertainty. We may face significant
challenges with regard to a key product launch. Further, products also may fail to achieve commercial viability. Finally, there
is no guarantee that we will be able to respond successfully to competitive products that could render some of our offerings obsolete.
We may experience product recalls,
which could reduce our sales and margin and adversely affect our results of operations.
We may be subject to product recalls, withdrawals
or seizures, if any of our products are believed to cause injury or illness or if we are alleged to have violated governmental
regulations in the manufacturing, labeling, promotion, sale or distribution of such products. Any such recall, withdrawal or seizure
of any of our products would require significant management attention, could result in substantial and unexpected expenditures
and could materially and adversely affect our business, financial condition or results of operations. Furthermore, such a recall,
withdrawal or seizure of any of our products could materially and adversely affect consumer confidence in our company and decrease
demand for our products and the market price of our common stock.
As is common in our industry, we rely on
our third-party manufacturers to ensure that the products they manufacture for us comply with all applicable regulatory and legislative
requirements, as well as the integrity of ingredients and proper formulation. However, our reliance on such manufacturers is not
supported by manufacturing agreements and there is no assurance that our third-party manufacturers will not fail to deliver products
to us that comply with necessary standards, including ingredient usage and formulations. Any such failure on the part of our third-party
manufacturers could materially and adversely affect our business, financial condition and results of operations.
The nature of our product sourcing
and manufacturing may adversely affect our business, financial condition and results of operations.
Currently, all of our products are manufactured
in the United States, though none of our products is sold in the United States. Substantially all of our products are sold to
customers in Hong Kong and China. As a result, our business is subject to the following specific risks:
• political
and economic instability in foreign countries, including heightened terrorism and other security concerns, which could subject
imported or exported goods to additional or more frequent inspections, leading to delays in deliveries or impoundment of goods
or to an increase in transportation costs of raw materials or finished product;
• the
imposition of regulations and quotas relating to exports and imports, including quotas imposed by bilateral agreements between
the United States, from which we source our products, and foreign countries, including China;
• the
imposition of duties, taxes and other charges on exports and imports;
• significant
fluctuation of the value of the U.S. dollar against the Hong Kong Dollar, Chinese Yuan and other foreign currencies;
• difficulty
in staffing and managing international operations and difficulty in maintaining quality control;
• the
strength of international economies;
• restrictions
on the transfer of funds to or from foreign countries; and
• violations
by foreign contractors of labor and wage standards and resulting adverse publicity.
We operate on very tight delivery
schedules and, if there are delays and expected delivery dates cannot be met, our results of operations could be negatively impacted.
If there are delays in the delivery of
our products, then our Affiliates may be entitled to cancel orders, which would negatively impact our gross profits and, therefore,
our profitability. We may also incur extra costs to meet delivery dates, which would also reduce our profitability.
We operate in a highly competitive
industry; our failure to compete effectively could adversely affect our operating results, revenues and growth prospects.
All of our sales are made outside the United
States. The international nutritional supplements retail industry is large and highly fragmented. Our international competitors
include large international pharmacy chains, major international supermarket chains and other large U.S.-based companies with
international operations. We may not be able to compete effectively and our attempts to do so may require us to reduce our prices,
which may result in lower margins. Failure to effectively compete could adversely affect our market share, revenues and growth
prospects.
In the online sales industry, competitors
attempt to secure contracts with various merchandise brands to offer merchandise to their consumers. We also face competition
for consumers from retailers, duty free retailers, specialty stores, department stores and specialty and general merchandise catalogs,
many of which have greater financial and marketing resources than we have. The online commerce market evolves rapidly and is intensely
competitive. Barriers to entry are minimal and current and new competitors can launch new websites at a relatively low cost. There
is no assurance that we will be able to compete successfully in this market in the future.
We have experienced, and we anticipate
that we will continue to experience for at least the foreseeable future, significant pricing pressure and significantly increased
promotional activity from our competitors; we may face challenges in seeking to provide merchandise at competitive prices that
allow us to become profitable. Continued advancement in technology and increasing access to that technology is paving the way
for growth in the internet consumer industry. In addition, the nutritional supplement and cosmetic e business markets have and
continue to become increasingly competitive and are rapidly evolving. There can be no assurance that we will maintain our competitive
edge or that we will continue to provide only American-made merchandise. If we are unable to successfully compete in this promotional
environment, we could experience reductions in our sales and excessive build-up of merchandise inventories resulting in increased
markdowns and reductions in our gross profit margins, adversely impacting our profitability and cash flows from operating activities.
We face significant inventory risks.
We are exposed to significant inventory
risks that may adversely affect our operating results as a result of new product launches, rapid changes in product cycles, changes
in consumer tastes with respect to our products and other factors. Future success depends on consistently anticipating, gauging
and responding to Affiliates= demands and tastes in the design, pricing, style and production of our products. Our failure to
anticipate, identify or react appropriately and in a timely manner to changes in customer preferences and economic conditions
could lead to lower sales, missed opportunities, excessive inventories and markdowns, each of which could have a material adverse
impact on our business and sales levels.
We must accurately predict these trends
and avoid overstocking or understocking products. All of our products are manufactured by third parties, and we order only on
an “as needed” basis. However, based on ordering trends, we stock certain items that we believe will be in demand
so that they are available for immediate shipping. In the past several years, we have mitigated decreases in sales by lowering
our levels of inventory to preserve cash on hand. Demand for products, however, can change significantly between the time inventory
is ordered and the date of sale. In addition, when we begin selling a new product, it may be difficult to establish vendor relationships,
determine appropriate product selection, and accurately forecast product demand. The acquisition of certain types of inventory,
or inventory from certain sources, may require significant lead time and prepayment, and such inventory may not be returnable.
Any one of the inventory risk factors set forth above may adversely affect our operating results.
If our risk management methods are
not effective, our business, reputation and financial results may be adversely affected.
We have methods to identify, monitor and
manage our risks; however, these methods may not be fully effective. Some of our risk management methods may depend upon evaluation
of information regarding markets, customers or other matters that are publicly available or otherwise accessible by us. That information
may not in all cases be accurate, complete, up to date or properly evaluated. If our methods are not fully effective or we are
not successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition
and operating results could be materially and adversely affected. In addition, our insurance policies may not provide adequate
coverage.
We depend on third parties to manufacture
all of the products we sell and we do not have any written contracts with any of the manufacturers of our products. If we are
unable to maintain these manufacturing relationships or enter into new arrangements, we may fail to meet customer demand and our
net sales and profitability may suffer as a result.
All of our products are manufactured by
third parties. We do not have any written contracts with any of the manufacturers of our products. The fact that we do not have
written contracts with our third-party manufacturers means that they could cease manufacturing these products for us at any time
and for any reason. In addition, our third-party manufacturers are not restricted from manufacturing our competitors’ products.
Our inability to secure adequate and timely supplies of merchandise would harm inventory levels, net sales, gross profit and,
ultimately, our results of operations.
Our third-party manufacturers may
increase the cost of the products we purchase from them.
If our manufacturers increase their prices,
our margins would suffer, unless we are able to pass along these increased costs to our customers. We may not be able to develop
relationships with new vendors and manufacturers at the same prices or at all, and, even if we do establish such relationships,
such new vendors and manufacturers might not allocate sufficient capacity to us to meet our requirements. Furthermore, if we increase
our product orders significantly from the amounts we have historically ordered from our manufacturers, our manufacturers might
be unable to meet this increased demand.
An increase in the price and shortage
of supply of key raw materials could adversely affect our business.
Our products are composed of certain key
raw materials. If the prices of these raw materials were to increase significantly, the prices third party manufacturers charge
us for our products could increase significantly and we may not be able to pass on such increases to our customers. A significant
increase in the price of raw materials that cannot be passed on to customers could have a material adverse effect on our results
of operations and financial condition. In addition, if we no longer are able to obtain products from one or more of our suppliers
on terms reasonable to us or at all, our revenues could suffer. Events such as the threat of political or social unrest, or the
perceived threat thereof, may also have a significant impact on raw material prices and transportation costs for our products.
In addition, the interruption in supply of certain key raw materials essential to the manufacturing of our products may have an
adverse impact on our suppliers’ ability to provide us with the necessary products needed to maintain our customer relationships
and an adequate level of sales.
Our third-party manufacturers may
not continue to produce products that are consistent with our company’s standards or applicable regulatory requirements,
which could harm our brand, cause customer dissatisfaction and require us to find alternative manufacturers of our products.
Our third-party manufacturers may not maintain
adequate controls with respect to product specifications and quality and may not continue to produce products that are consistent
with our quality standards. If we are forced to rely on products of inferior quality, then our customer satisfaction and brand
reputation would likely suffer, which would lead to reduced net sales. In addition, we may be required to find new third-party
manufacturers to supply our products. There can be no assurance that we would be successful in finding third party manufacturers
that make products meeting our standards of quality.
Adverse publicity associated with
our products, ingredients or our Affiliates program, or those of similar companies, could harm our financial condition and operating
results.
We are highly dependent upon consumer perception
of the safety and quality of our products and the ingredients they contain, as well as that of similar products distributed by
other companies. This perception can be significantly influenced by:
• media
attention;
• the
safety, efficacy and quality of our products and ingredients;
• the
safety, efficiency and quality of similar products and ingredients distributed by other companies;
• our
promotional and compensation programs; and
• the
online sales business in general.
A product may be received favorably, resulting
in high sales associated with that product, which sales level may not be sustainable due to changing consumer preferences. Future
scientific research or publicity could be unfavorable to our industry or any of our particular products or the ingredients they
contain and may not be consistent with earlier favorable research or publicity. A future research report or publicity that is
perceived by our consumers as less favorable or that questions earlier research or publicity could have a material adverse effect
on our ability to generate revenues. Adverse publicity in the form of published scientific research or otherwise, whether or not
accurate, that associates consumption of our products or the ingredients they contain or any other similar products distributed
by other companies with illness or other adverse effects, that questions the benefits of our or similar products, or that claims
that such products are ineffective could have a material adverse effect on our reputation and demand for our products.
Adverse publicity concerning any actual
or purported failure by our company to comply with applicable laws and regulations regarding product claims and advertising, good
manufacturing practices, the regulation of its programs, the licensing of our products for sale in our target markets or other
aspects of our business (whether or not resulting in enforcement actions or the imposition of penalties), could have an adverse
effect on our business and could negatively affect our ability to attract Affiliates, which would negatively impact our ability
to generate revenue.
In addition, our Affiliates’ perception
of the safety, quality and efficiency of our products and ingredients, as well as similar products and ingredients distributed
by other companies, could be significantly influenced by media attention, publicized scientific research or findings, widespread
product liability claims or other publicity concerning our products or ingredients or similar products and ingredients distributed
by other companies. Adverse publicity, whether or not accurate or resulting from consumers’ use or misuse of our products,
that associates consumption of its products or ingredients or any similar products or ingredients with illness or other adverse
effects, questions the benefits of our company’s or similar products or claims that any such products are ineffective, inappropriately
labeled or have inaccurate instructions as to their use, could lead to lawsuits or other legal challenges and could negatively
impact our reputation, the market demand for our products or our general business.
Fluctuations in the price, availability
and quality of materials used in our products could have a material adverse effect on our cost of goods sold and our ability to
meet customers’ demands.
Fluctuations in the price, availability
and quality of the materials used in the manufacture of our products by third parties could have a material adverse effect on
the cost of such products to us or our ability to meet customers’ demands. We may not be able to pass on all or any portion
of higher material prices to our customers.
Risks Related to Our Business –
Beverage Segment
We have determined not to re-start
operations in our beverage segment.
During the last quarter of Fiscal 2017,
our management determined not to re-start bottling operations at the Tianquan Soda Water production facility and our management
has begun to take actions necessary for the sale of the Tianquan Soda Water production facility. No prediction can be made regarding
the timing of the sale of the plant or if any such sale will ever occur.
Risks Related to Our Common Stock
Our common stock is thinly traded
and its market price may become highly volatile.
There is currently only a limited market
for our common stock. A limited market is characterized by a relatively limited number of shares in the public float, relatively
low trading volume and a small number of brokerage firms acting as market makers. The market for low priced securities is generally
less liquid and more volatile than securities traded on national stock markets. Wide fluctuations in market prices are not uncommon.
No assurance can be given that the market for our common stock will continue. The price of our common stock may be subject to
wide fluctuations in response to factors such as the following, some of which are beyond our control:
• quarterly
variations in our operating results;
• operating
results that vary from the expectations of investors;
• changes
in expectations as to our future financial performance, including financial estimates by investors;
• reaction
to our periodic filings, or presentations by executives at investor and industry conferences;
• changes
in our capital structure;
• changes
in market valuations of other internet or online service companies;
• announcements
of innovations or new services by us or our competitors;
• announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
• lack
of success in the expansion of our business operations;
• announcements
by third parties of significant claims or proceedings against our company or adverse developments in pending proceedings;
• additions
or departures of key personnel;
• asset
impairment;
• temporary
or permanent inability to offer products or services; and
• rumors
or public speculation about any of the above factors.
There is not now, and there may not
ever be, an active market for our common stock, and we cannot assure you that our common stock will become liquid or that it will
be listed on a securities exchange.
There is currently only a limited market
for our common stock. In this venue, an investor may find it difficult to obtain accurate quotations as to the market value of
the common stock and trading of our common stock may be extremely sporadic. For example, several days may pass before any significant
number of shares may be traded. A more active market for the common stock may never develop. In addition, if we fail to meet the
criteria set forth in SEC regulations, various requirements would be imposed by law on broker dealers who sell our securities
to persons other than established customers and accredited investors. Consequently, such regulations may deter broker dealers
from recommending or selling the common stock, which may further affect the liquidity of our common stock.
Our board of directors is authorized
to issue shares of preferred stock, which may have rights and preferences detrimental to the rights of the holders of our common
stock.
Our company is authorized to issue up to
25,000,000 shares of preferred stock, $.001 par value. As of the date of this Annual Report on Form 10-K, we have not issued any
shares of preferred stock. Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences,
as our board of directors may fix and determine from time to time. Any such preferences may operate to the detriment of the rights
of the holders of our common stock.
We do not intend to pay dividends
on our common stock.
We intend to retain earnings, if any, to
provide funds for the implementation of our business strategy. We do not intend to declare or pay any dividends in the foreseeable
future. Therefore, there can be no assurance that holders of our common stock will receive any cash, stock or other dividends
on their shares of our common stock, until we have funds which our board of directors determines can be allocated to dividends.
As a public company, we will incur
audit fees and legal fees in connection with the preparation of our required financial reporting under the Exchange Act, which
costs could reduce or eliminate our ability to earn a profit.
As a public company, we are required to
file periodic reports with the SEC. In order to comply with these requirements, our independent registered public accounting firm
will be required to review our financial statements on a quarterly basis and audit our financial statements on an annual basis.
Moreover, our legal counsel will be required to review and assist in the preparation of such reports. While the fees charged by
these professionals for their services cannot be accurately predicted at this time, it can be expected that these fees will have
a significant impact on our ability to earn a profit. We may be exposed to potential risks resulting from new requirements under
Section 404 of the Sarbanes Oxley Act of 2002. If we cannot provide reliable financial reports or prevent fraud, our business
and operating results could be harmed, investors could lose confidence in our reported financial information and the trading price
of our common stock, if a market ever develops, could drop significantly.
The elimination of monetary liability
of our directors, officers and employees under Nevada law and the existence of indemnification rights in favor of our directors,
officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors,
officers and employees.
Our bylaws contain a specific provision
that eliminates the liability of directors for monetary damages to our company and our shareholders; we intend to give such indemnification
to our directors and officers to the extent provided by Nevada law. We may also have contractual indemnification obligations under
employment agreements with executive officers. Such indemnification obligations could result in our incurring substantial expenditures
to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions
and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their
fiduciary duties and may similarly discourage the filing of derivative litigation by our shareholders against our directors and
officers, even though such actions, if successful, might otherwise benefit our company and our shareholders.
We have been advised that, in the opinion
of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against these types of liabilities,
other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense
of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities
being registered, we will (unless, in the opinion of our counsel, the matter has been settled by controlling precedent) submit
to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter, if it
were to occur, is likely to be very costly and may result in our receiving negative publicity, either of which factors are likely
to materially reduce the market for, and price of, our common stock, if such a market ever develops.
Future sales of our common stock,
or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common
stock in the public market or the perception that these sales could occur, could adversely affect the price of our common stock
and could impair our ability to raise capital through the sale of additional shares. Restricted or control shares may not be sold
in the public market, unless the sale is registered under the Securities Act or an exemption from registration is available. If
a large number of shares are sold on the open market, the price of our common stock could decline.
In the future, we may also issue securities
if we need to raise capital in connection with a capital raise or acquisition. The amount of shares of our common stock issued
in connection with a capital raise or acquisition could constitute a material portion of our then outstanding shares of common
stock.
FINRA sales practice requirements
may limit a shareholder’s ability to buy and sell our common stock.
FINRA has adopted rules that relate to
the application of the SEC’s “penny stock” rules in trading our securities and require that a broker dealer
have reasonable grounds for believing that the investment is suitable for that customer, prior to recommending the investment.
Prior to recommending speculative, low priced securities to their non-institutional customers, broker dealers must make reasonable
efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA
believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers.
FINRA requirements make it more difficult for broker dealers to recommend that their customers buy our common stock, which may
have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers dealers charge
higher transactional fees for penny stock transactions. As a result, fewer broker dealers may be willing to make a market in our
common stock, thereby reducing a shareholder’s ability to resell shares of our common stock.
Our common stock is subject to the
“penny stock” restrictions which may cause a lack of liquidity.
SEC Rule 15g 9 establishes the definition
of a “penny stock”, for purposes relevant to us, as any equity security that has a market price of less than $5.00
per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. Our common stock
will be considered a “penny stock” for the immediately foreseeable future. This classification may severely and adversely
affect the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock
rules require that a broker dealer approve a person’s account for transactions in penny stocks and the broker dealer receive
from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account
for transactions in penny stocks, the broker dealer must obtain financial information and investment experience and objectives
of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that
the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions
in penny stocks.
The broker dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight
form, sets forth the basis on which the broker dealer made the suitability determination and that the broker dealer received a
signed, written agreement from the investor prior to the transaction.
Disclosure also must be made about the
risks of investing in penny stocks in both public offerings and in secondary trading and commissions payable to both the broker
dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor
in cases of fraud in penny stock transactions. Finally, monthly statements must be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker dealers
may not wish to engage in the above referenced necessary paperwork and disclosures and/or may encounter difficulties in their
attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their
shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional
sales practice and disclosure requirements could impede the sale of our common stock. In addition, the liquidity for our common
stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock, in all probability, will
be subject to such penny stock rules for the foreseeable future and our shareholders may find it difficult to sell their common
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Corporate Headquarters
We lease a 3,367 square foot office in
City of Industry, California, that serves as our principal executive offices. The lease expires in February 2021. The current
monthly rent under this lease is approximately $10,200, which will increase incrementally to approximately $11,000, over the lease
term.
Hong Kong Facilities
We currently rent approximately 471 square
feet of office space for a satellite training center located at Room 2110, 21st Floor, 655 Nathan Road, Kowloon, Hong Kong. This
lease expires in March 2019. The monthly rent for these premises is approximately $1,909.
We also rent approximately 3,000 square
feet of storage space in Hong Kong, at a monthly rent of approximately $1,000. This lease expires in March 2019.
Tianquan Soda Water Production Facility
We lease approximately 40,000 square meters
of land located in Baiquan, Heilongjiang Province, China, on which we constructed a bottled soda water production facility. This
land lease commenced on December 31, 2009, and extends for a term of 50 years, with a yearly land use right’s fee of approximately
$3,500. We are currently attempting to sell the bottled soda water production facility.
C1 Building
Until December 2015, we rented a 240 square
foot office space for our operations in Taiwan and the monthly rental was $1,098. The former office was located at No. 376, Ren
Ai Road, Da An District, Taipei. In December 2015, we moved to C1 Building, No. 378, Sec 6, Nanjing E. Road, NeiHu District, Taipei
City 114, Taiwan (the “C1 Building”), ownership of the C1 Building having been transferred to us in October 2015,
as part of a settlement agreement.
ITEM 3. LEGAL PROCEEDINGS
During the year ended March 31, 2017, all
but one of our ongoing legal matters reached their final determinations. Subsequent to March 31, 2017, in December 2017, our lone
remaining legal matter was settled. A description of these completed legal matters is included in Note 15 of our Consolidated
Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION
EFT Holdings, Inc., “EFT Holdings” or the “Company,”
formerly EFT Biotech Holdings, Inc., was incorporated in the State of Nevada on March 19, 1992.
The Company’s business is classified by management into
two reportable segments: online and beverage. These reportable segments are two distinct businesses, each with a different customer
base, marketing strategy and management structure. Substantially all of the Company’s revenue is generated from Mainland
China.
The Company’s online business sells the Company’s
products to “Affiliates” through its website. To become an Affiliate, a customer must be recommended by another Affiliate,
make a minimum purchase of $600, and pay $60 for shipping and handling fees. The Company, through its subsidiaries, uses the internet
as its “storefront” and business platform to sell and distribute American brand products consisting of 27 different
nutritional products, some of which are oral sprays, 21 different personal care products, an environmentally protective automotive
product, an environmentally friendly house cleaner and a flip top portable drinking container.
In February 2010, the Company assigned the worldwide distribution
and servicing rights to a product known as the “EFT-Phone” to Digital Development Partners, “Digital,”
a previously unrelated company, in exchange for 79,265,000 shares of Digital’s common stock. The shares acquired represent
approximately 91.7% of Digital’s outstanding common stock.
The beverage segment derives revenue and expenses from the
bottled water factory in Baiquan, Heilongjiang Province, China. This bottled water factory started production in April 2013, but
production was suspended because Tianquan was sued by a contractor who constructed the water plant (see Note 15).
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassification
Certain amounts in prior year consolidated financial statements
have been reclassified to conform with the current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly owned except for Digital, which is 91.7% owned by the Company. All
inter-company accounts and transactions have been eliminated in consolidation.
Foreign Currency
The Company’s reporting currency is the U.S. dollar.
The Company’s operations in Hong Kong, Taiwan and China use their local currencies as their functional currency. The financial
statements of the subsidiaries are translated into U.S. Dollars, “USD,” in accordance with ASC Topic 830, Foreign
Currency Translation. According to ASC 830, all assets and liabilities are translated at the year-end currency exchange rate,
stockholders’ equity items are translated at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance
with ASC Topic 220, Reporting Comprehensive Income as a Component of Stockholders’ Equity. Foreign exchange transaction
gains and losses are reflected in the statement of operations.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These
estimates and assumptions include determining the fair market value of the Company’s inventory, the collectability of accounts
receivable, the value of deferred taxes and related valuation allowances. Certain of its estimates, including evaluating the collectability
of accounts receivable and the fair market value of inventory, could be affected by external conditions, including those unique
to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates
that could cause actual results to differ from its estimates. The Company re-evaluates all of its accounting estimates at least
quarterly based on these conditions and record adjustments when necessary.
Contingencies
Certain conditions may exist as of the date the financial statements
are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail
to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluate the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable
that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability is accrued in
the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, is disclosed in the footnotes to the financial statements.
Loss contingencies considered to be remote by management are
generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in
time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less. The
Company maintains its accounts in banks and financial institutions in amounts that, at times, may exceed the federally insured
limit. Management believes the Company is not exposed to any significant credit risk on those accounts.
Securities Available for Sale
The Company’s investments in corporate bonds are classified
as available for sale and are reported at fair value, based on quoted prices and market prices, using the specific identification
method. Unrealized gains and losses, net of taxes, are reported as a component of stockholders’ equity. Realized gains and
losses on investments are included in other income, net when realized. Any impairment loss to reduce an investment’s carrying
amount to its fair market value is recognized as an expense when a decline in the fair market value of an individual security
below its cost or carrying value is determined to be other than temporary.
Inventories
Inventories are valued at the lower of cost, determined on
a first-in, first-out basis, or market. On a quarterly basis, the Company’s management reviews inventory levels in each
country for estimated obsolescence or unmarketable items as compared with future demand requirements and the shelf life of the
various products. Based on this review, the Company records inventory write-downs when costs exceed expected net realizable value.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and improvements
are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment
is provided using the straight-line method for substantially all assets with estimated lives of:
Property and plant
|
50 years
|
Machinery and equipment
|
3-8 years
|
Computers and office equipment
|
3-5 years
|
Automobiles
|
5 years
|
Leasehold improvements
|
5 years
|
Transportation equipment
|
12 years
|
Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with ASC Topic 360. ASC Topic 360 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the asset’s carrying amount. In that event, a loss is recognized based on the amount by which
the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined
in a similar manner, except that fair market values are reduced for the cost of disposal.
Fair Value of Financial Instruments
ASC Topic 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.
Fair Value Measurements
ASC Topic 820 defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements. ASC Topic 820 does not require any new fair value
measurements, but rather eliminates inconsistencies in guidance found in various other accounting pronouncements. Refer to Note
3, “Fair Value Measurements”, for additional information on ASC Topic 820.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based
compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the
date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares;
the expense is recognized over the service period for awards expected to vest. The estimation of stock-based awards that will
ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such
amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating
expected forfeitures, including types of awards, employee class, and historical experience.
Stock Issued for Services
The Company accounts for equity instruments issued in exchange
for the receipt of goods or services from persons other than employees in accordance with ASC Topic 505. Costs are measured at
the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever
is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined
on the earliest of performance commitment or completion of performance by the provider of goods or services as defined by ASC
Topic 505.
Revenue
The Company’s revenue recognition policy is in accordance
with the requirements of Staff Accounting Bulletin, “SAB,” No. 104, Revenue Recognition, “SAB 104,” ASC
Topic 605, Accounting for Consideration Given by a Vendor to a Customer, Including a Reseller of the Vendor’s Products,
and other applicable revenue recognition guidance and interpretations. Sales revenue is recognized when a formal arrangement exists
with the customers, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company
exist and collectability is reasonably assured. Payments received before all relevant criteria for revenue recognition are satisfied
are recorded as unearned revenue which is recorded as a liability until the products are delivered. Sales are recorded when the
products are received by Affiliates and risk of ownership has passed.
The Company pays commissions to the Affiliates based upon,
among other things, their purchases from the Company and purchases by other Affiliates who were recommended to the Company. Commissions
paid to the Company’s Affiliates are considered to be a reduction of the selling prices of its products, and are recorded
as a reduction of revenue. The Company’s policy is to pay out commission to Affiliates upon receipt of sales orders even
before revenue can be recognized.
Allowance for Doubtful Accounts
The Company routinely assesses the credits authorized to its
customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited. The Company
maintained a zero dollar ($0) allowance for doubtful accounts as of March 31, 2017 and 2016.
Warranty
The Company records warranty liabilities at the time of sale
for the estimated costs that may be incurred under its limited warranty. The Company generally does not provide customers with
right of return, but does provide a warranty, entitling the purchaser to a replacement of defective products within six months
from the date of sale. Warranty reserves are included in other liabilities and the provision for warranty accruals is included
in cost of goods sold in the Consolidated Statements of Operations. Management reviews the adequacy of warranty reserves each
reporting period based on historical experience. Historically, warranty costs have not been material.
As of March 31, 2017, the Company’s estimated warranty
expense was as follows:
Products
sold for
|
|
|
0-2 months
|
2% of cost
|
|
3-4 months
|
1.5% of cost
|
|
5-6 months
|
1% of cost
|
|
Shipping Costs
The Company’s shipping costs are included in cost of
sales for all periods presented.
Income Taxes
The Company follows ASC Topic 740, which requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of
temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end
based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Under ASC Topic 740, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement.
Earnings per Share
Basic net income (loss) per share is computed on the basis
of the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed on the basis
of the weighted average number of common shares and common share equivalents outstanding. Dilutive securities having an anti-dilutive
effect on diluted net income per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the beginning of the period, or at the time of issuance,
if later, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Comprehensive Income
Comprehensive income is defined as the change in equity of
a company during a period from transactions and other events and circumstances excluding transactions resulting from investments
from owners and distributions to owners. For the Company, comprehensive income for the periods presented is comprised of net income,
unrealized income on marketable securities classified as available for sale, and foreign currency translation adjustments.
Segment Reporting
ASC Topic 280, “Disclosure about Segments of an Enterprise
and Related Information” requires use of the management approach model for segment reporting. The management approach model
is based on the way a company’s management organizes segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any
other manner in which management disaggregates a company.
Recent Accounting Pronouncements
In July 2015, FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory”. This ASU applies to inventory that is measured using the first-in, first-out (“FIFO”)
or average cost method. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost
and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable
costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using the
last-in, first-out (“LIFO”) or retail inventory method. This ASU is effective for annual and interim periods beginning
after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim and
annual reporting period. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated
Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic
842). Under this guidance, lessees will be required to recognize on the balance sheet a lease liability and a right-of-use asset
for all leases, with the exception of short-term leases. The lease liability represents the lessee’s obligation to make
lease payments arising from a lease, and will be measured as the present value of the lease payments. The right-of-use asset represents
the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted
for lease prepayment, lease incentives received and the lessee’s initial direct costs. The standard also requires a lessee
to recognize a single lease cost allocated over the lease term, generally on a straight-line basis. The new guidance is effective
for fiscal years beginning after December 15, 2018. ASU 2016-02 is required to be applied using the modified retrospective approach
for all leases existing as of the effective date and provides for certain practical expedients. Early adoption is permitted. The
Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on the Company’s consolidated financial
statements.
In March 2016, FASB issued ASU 2016-08, “Revenue from
Contract with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. The core principle
of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
intention of this ASU is to improve the operability and understandability of the implementation guidance on principal versus agent
considerations. This ASU is effective for annual and interim periods beginning on or after December 15, 2017, and early adoption
will be permitted, but not earlier than annual and interim periods beginning on or after December 15, 2016, for public entities.
The Company is currently evaluating the potential impact of adopting this new standard on its consolidated financial statements
and related disclosures.
In May 2016, FASB issued ASU 2016-12, “Revenue from Contracts
with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients”. The update is to address certain issues
identified by the FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG) in the guidance on assessing collectability,
presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition, the Board
decided to add a project to its technical agenda to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1)
the potential for diversity in practice at initial application and 2) the cost and complexity of applying Topic 606 both at transition
and on an ongoing basis. The amendments in this Update affect entities with transactions included within the scope of Topic 606.
The scope of that Topic includes entities that enter into contracts with customers to transfer goods or services (that are an
output of the entity’s ordinary activities) in exchange for consideration. The amendments to the recognition and measurement
provisions of Topic 606 also affect entities with transactions included within the scope of Topic 610, Other Income. The amendments
in this Update affect the guidance in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606),
which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the
effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards
Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date
of Update 2014-09 by one year. The adoption of this guidance is not expected to have a material impact on the Company’s
Consolidated Financial Statements and related disclosures.
In September 2016, the FASB issued ASU 2016-15, Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This guidance clarifies the presentation requirements
of eight specific issues within the statement of cash flows. The new guidance is effective for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected
to have a significant impact on the Company’s financial statements, as the Company’s treatment of the relevant affected
items within its consolidated statement of cash flows is consistent with the requirements of this guidance.
In December 2017, the Securities and Exchange Commission (“SEC”)
released Staff Accounting Bulletin No. 118 (the “Bulletin”), which provides accounting guidance regarding accounting
for income taxes for the reporting period that includes the enactment of the Tax Act. The Bulletin provides guidance in those
situations where the accounting for certain income tax effects of the Tax Act will be incomplete by the time financial statements
are issued for the reporting period that includes the enactment date. For those elements of the Tax Act that cannot be reasonably
estimated, no effect will be recorded.
The SEC has provided in the Bulletin that in situations where
the accounting is incomplete for certain effects of the Tax Act, a measurement period which begins in the reporting period that
includes the enactment of the Tax Act and ends when the entity has obtained, prepared and analyzed the information is needed in
order to complete the accounting requirements. The measurement period shall not exceed one year from enactment.
In February 2018, the FASB issued ASU 2018-02, “Income
Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Cuts and Jobs Act. This guidance is effective for all entities for fiscal years, and interim periods
within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2018-02 should be
applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this guidance is not expected to have a
material impact on the Company’s Consolidated Financial Statements and related disclosures.
There are no other new accounting pronouncements adopted or
enacted during the year ended March 31, 2017, that had, or are expected to have, a material impact on the Company’s consolidated
financial statements.
NOTE 3 – 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 $12,749,561 and an accumulated
deficit of $61,442,712 at March 31, 2017. In addition, the Company has generated operating losses for the past two years. These
circumstances, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company expects to continue incurring losses for the foreseeable
future and may need to raise additional capital from external sources in order to continue the long-term efforts contemplated
under its business plan. The Company is in the process of reevaluating its current marketing strategy as it relates to the sale
of its current product line. In addition, the Company is pursuing other revenue streams which could include strategic acquisitions
or possible joint ventures of other business segments.
NOTE 4 – SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of the following:
|
|
|
|
|
March 31, 2017
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Market
Value
|
|
|
Average
Duration
(1)
|
|
Corporate bonds
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Corporate notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total debt securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Market
Value
|
|
|
Average
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.
Investment securities with a book value of $816,986 were sold
during the year ended March 31, 2017. The Company recognized a loss of $19,336 on the sale of those securities.
NOTE 5 – INVENTORIES
The components of inventories were as follows:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Raw materials and supplies
|
|
$
|
—
|
|
|
$
|
40,537
|
|
Finished goods
|
|
|
127,410
|
|
|
|
180,902
|
|
|
|
$
|
127,410
|
|
|
$
|
221,439
|
|
The Company recorded inventory mark-down of $47,965 and $25,612
for the years ended March 31, 2017 and 2016, respectively.
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Leasehold improvements
|
|
$
|
75,218
|
|
|
$
|
75,218
|
|
Automobiles
|
|
|
154,724
|
|
|
|
154,724
|
|
Property and plant
|
|
|
4,381,310
|
|
|
|
10,369,073
|
|
Computer equipment
|
|
|
102,553
|
|
|
|
115,943
|
|
Furniture and fixtures
|
|
|
67,731
|
|
|
|
73,480
|
|
Machinery and equipment
|
|
|
39,544
|
|
|
|
349,622
|
|
|
|
|
4,821,080
|
|
|
|
11,138,060
|
|
Less: Accumulated depreciation
|
|
|
(535,674
|
)
|
|
|
(1,008,369
|
)
|
|
|
$
|
4,285,406
|
|
|
$
|
10,129,691
|
|
For the years ended March 31, 2017 and 2016, depreciation expense
was $195,039 and $177,442, respectively.
At March 31, 2017, the Company had determined that the fair
value of the C1 Building in Taipei, Taiwan, had decreased significantly, due to weakness in the Taiwanese real estate market.
In accordance with such determination, an asset impairment loss of $5,615,398 was recorded for the year ended March 31, 2017.
At March 31, 2017, the Company had determined that the fair
value of its water plant in Heilongjiang Province, China, had decreased significantly. In accordance with such determination,
all assets of the water plant were impaired. An asset impairment loss of $634,969 was recorded for the year ended March 31, 2017.
NOTE 7 – LOANS TO RELATED PARTIES AND RELATED PARTY
TRANSACTIONS
EFT Assets Limited
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. For the year ended March 31, 2017, the Company recorded an expense of $500,000 for royalty
fees and paid $125,000 of royalties to EFT Assets. The balance of royalties payable to EFT Assets was $500,000 as of March 31,
2017. For the year ended March 31, 2016, the Company recorded an expense of $500,000 for royalty fees and paid $500,000 of royalties
to EFT Assets. The balance of royalties payable to EFT Assets was $125,000 as of March 31, 2016.
JFL Capital Limited
In March 2010, the Company’s subsidiary, EFT International
Ltd., entered into a consulting agreement with JFL Capital Limited, a company in which Wendy Qin serves as a director and is one
of the principal shareholders. Under this agreement, JFL will provide consulting services on administration, financial matters,
corporate planning and business development commencing from April 1, 2010, for an annual fee of $315,000. The annual fee is increased
at the rate of $15,000 each year start from April 1, 2011. The agreement may be terminated by either party on three months’
written notice. For the year ended March 31, 2017, the Company recorded an expense of $405,000 for consulting fees and paid $97,500
to JFL. The balance of consulting fees payable to JFL was $405,000 as of March 31, 2017. For the year ended March 31, 2016, the
Company recorded an expense of $390,000 for consulting fees and paid $386,250 to JFL. The balance of consulting fees payable to
JFL was $97,500 as of March 31, 2016.
Rent
From April 1, 2014 to April 1, 2015, the Company rented 2,500
square feet of the office space with monthly rent of $10,735 for its satellite training center located at Suite 3706, Langham
Office Tower, 8 Argyle Street, Kowloon, Hong Kong SAR. From April 1 through June 24, 2015, the monthly rent was $15,319. The former
office location is owned by a number of persons, including Wendy Qin, a director of EFT (HK) Ltd and the sister of Jack Jie Qin,
the Company’s president. During the year ended March 31, 2016, the Company paid the lessors $42,893. This lease was terminated
on June 24, 2015.
Advance to Officer
In February 2016, the Company advanced $1,000,000 to President
Jack Qin for the prepayment of amounts relating to business development activities planned by the Company. The advance was not
used and was repaid to the Company in June 2016.
NOTE 8 – SETTLEMENT OF PREVIOUSLY WRITTEN-OFF INVESTMENT
EFT Investment Co. Ltd., “EFTI”, is a wholly-owned
subsidiary of the Company in Taiwan. Hong Dong Chen (a.k.a. Thomas Chen), the former General Manager and Director of EFTI, recommended
that the Company purchase an industrial office building located in Taipei, Taiwan, the “Taiwan Building”. As one of
the five towers of the “CBD Project”, of which Meifu Development Co., Ltd. (“Meifu”) and TransGlobe Life
Insurance Inc. (“TransGlobe”) were two of the developers, the Taiwan Building consists of 14 floors and 144 parking
spaces. Cheng Hao Peng (a.k.a. Tom Peng) exercised actual control over both Meifu and TransGlobe.
During the year ended March 31, 2012, EFTI paid NTD600 million
(approximately $18.0 million) as a deposit to secure the right to purchase the Taiwan Building per the agreements governing the
investment (the “Taiwan Building Agreements”). EFTI subsequently chose not to exercise any option it may have had
to purchase the building from Meifu and TransGlobe under the Taiwan Building Agreements and suspended all future payments to either
company. EFTI suspected that Thomas Chen had breached his fiduciary duties and had, jointly with Meifu and TransGlobe, committed
fraud and misrepresentation related to the Taiwan Building transactions. The Company commenced civil proceedings against TransGlobe,
MeiFu, Peng Cheng-Hao (President of Meifu) and Thomas Chen pertaining to the Taiwan Building transactions. (see Note 15)
As required by U.S. GAAP, the Company performed an impairment
analysis related to the deposit on the Taiwan Building every year. As of March 31, 2014, the full amount of deposit had been impaired.
EFTI continued to vigorously pursue the recovery of the full value of the deposit on the Taiwan Building.
On October 15, 2015, the Company reached a settlement agreement
with Meifu and TransGlobe. Pursuant to the settlement agreement, EFTI received an office building and associated land with fair
market value of approximately NTD 305 million (approximately $9.3 million) and cash of approximately NTD 153 million (approximately
$4.7 million) from Meifu and cash of approximately NTD 76 million (approximately $2.3 million) from TransGlobe. The Company recorded
a gain of $9.4 million from this settlement, net of all related settlement charges, commissions and fees, in the quarter ended
December 31, 2015. As part of the settlement agreement, the Company agreed that it would pay Meifu up to NTD 130 million (approximately
$4 million) and pay TransGlobe up to NTD 13.5 million (approximately $0.4 million) relating to a tax assessment from the government
and this liability was accrued in the financial statements.
NOTE 9 – OTHER LIABILITIES
Other liabilities consist of the following:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Payroll liabilities
|
|
$
|
40,200
|
|
|
$
|
42,593
|
|
Warranty liabilities
|
|
|
1,051
|
|
|
|
1,589
|
|
Accrued commission
|
|
|
18,188
|
|
|
|
1,583,740
|
|
Accrued contingent guaranty
|
|
|
4,718,842
|
|
|
|
4,453,755
|
|
Accrued expenses
|
|
|
380,329
|
|
|
|
379,985
|
|
|
|
|
|
|
|
|
|
|
Interest and penalty for income tax accrued
|
|
|
120,884
|
|
|
|
136,190
|
|
Others
|
|
|
3,065
|
|
|
|
3,922
|
|
|
|
$
|
5,282,559
|
|
|
$
|
6,601,774
|
|
NOTE 10 – CONTINGENT LIABILITIES
In 2009, the Company’s subsidiary, Tianquan, engaged
a general contractor to construct a water manufacturing plant for RMB 4,758,600 (approximately US$766,000). Upon completion, EFT
inspected the plant and found several material construction defects, including, but not limited to, the fact that the contractor
used inferior construction material, inconsistent construction plans and substandard insulation material. As a result, EFT conditioned
its final construction payment to the contractor in the amount of RMB 698,896 (US$112,500) on the rectification of all construction
defects. On March 22, 2012, the contractor brought a case against EFT in Baiquan People’s Court in Heilongjiang Province
seeking approximately RMB 1,912,000 (US$308,400) of purported outstanding payments under the contract and interest thereon. On
January 16, 2014, Tianquan received an unfavorable decision issued by Baiquan People’s Court in Heilongjiang Province awarding
the contractor approximately RMB1,326,916 (US$200,000) 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
(approximately US$200,000). On January 5, 2016, the Company’s subsidiary, Tianquan, received an unfavorable decision issued
by Baiquan People’s Court awarding the contractor approximately RMB827,000 (US$120,000) of purported outstanding payments
under the contract and interest thereon. The Company filed an appeal of the decision. On July 18, 2016, Baiquan People’s
Court dismissed the appeal. The Company revised the contingent liabilities to RMB827,000 (approximately US$120,000). (See Note
15)
NOTE 11 – SHORT-TERM LOANS
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 year ended March 31, 2016.
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 and the loan was fully repaid during the
year ended March 31, 2017.
NOTE 12 – 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’s BVI operations are not subject to any taxes
according to BVI tax law. 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 Company’s U.S. operations are subject to
income tax according to U.S. tax law. The deferred tax assets for the Company’s US operations were immaterial for the two
years ended March 31, 2017 and 2016.
The U.S. Tax Cuts and Jobs Act (Tax Act) was enacted on December
22, 2017, and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory
tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are
referred to as the global intangible low-taxed income tax and the base erosion tax, respectively. The Tax Act requires us to pay
U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the
extent of foreign cash and certain other net current assets and 8% on the remaining earnings. Due to the timing of the enactment
and the complexity involved in applying the provisions of the Tax Act, the Company has not recorded any adjustments according
to Tax Act. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S.
Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments
may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The
accounting for the tax effects of the Tax Act will be completed in 2018.
The Company’s Taiwan subsidiary, EFT Investment, and
its factory in mainland China are subject to a 17% and 25% standard enterprise income tax, respectively, based on its taxable
net profit. These operations have incurred net accumulated operating losses for income tax purposes and management believes that
it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, it has provided
full valuation allowance for the deferred tax assets arising from the losses as of March 31, 2017 and 2016.
The income tax expenses consist of the following:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Domestic - Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
- State
|
|
|
3,858
|
|
|
|
30,356
|
|
Foreign
|
|
|
—
|
|
|
|
(2,073
|
)
|
Effect of IRS audits
|
|
|
(19,785
|
)
|
|
|
(4,107,895
|
)
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
Income tax expense (benefit)
|
|
$
|
(15,927
|
)
|
|
$
|
(4,079,612
|
)
|
A reconciliation of income tax expense (benefit), with the
amounts computed by applying the statutory federal income tax rate of 35% to income (loss) before income taxes is as follows:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax (benefit) at U.S. statutory rate
|
|
$
|
(3,500,550
|
)
|
|
$
|
1,563,924
|
|
State tax
|
|
|
3,858
|
|
|
|
30,356
|
|
Changes in deferred tax valuation allowance
|
|
|
3,499,384
|
|
|
|
(1,419,693
|
)
|
Non-deductible expense
|
|
|
1,166
|
|
|
|
(144,231
|
)
|
Foreign subsidiaries income tax (benefit)
|
|
|
—
|
|
|
|
(2,073
|
)
|
Effect of IRS audits
|
|
|
(19,785
|
)
|
|
|
(4,107,895
|
)
|
Income tax expense (benefit)
|
|
$
|
(15,927
|
)
|
|
$
|
(4,079,612
|
)
|
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.
In December 2013, the IRS concluded its audit of the Company’s
returns for the years 2007 through 2010 and issued an examination report that proposed adjustments of $12.3 million of additional
tax liabilities for the years 2008 through 2010. As a result of this report, the Company increased its income tax liability to
$8.6 million during the quarter ended December 31, 2013.
On June 18, 2014, after receiving further information from
the Company subsequent to the issuance of its original report, the IRS reversed its position on a major issue and has issued a
revised report which significantly reduced the amount of tax the Company owes. Accordingly, the Company has revised its provision
for income taxes and has reversed $4.1 million of the original provision recorded previously.
In September 2015, the Company received the final report from
the IRS related to its audit for the years 2008 through 2010, which concluded that the Company did not owe any additional taxes
for the periods under audit. However, the IRS has alleged that the Company did not file its tax returns for the years 2008 and
2009 on time and has assessed the Company tax and penalties totaling $117,000. The Company believes that the returns were timely
filed and has contested the IRS’s claim. Accordingly, the Company’s provision for tax liabilities plus interest and
penalty has been reduced by $5.3 million in the quarter ended September 30, 2015.
On October 19, 2016, the Internal Revenue Service has abated
the Company’s tax penalty for 2008 of $19,785 as part of a settlement agreement whereby the Company has agreed to pay the
2009 penalty and interest.
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 13 – COMMITMENTS
Lease Commitment
The Company has certain operating leases for office space,
training center and storage which will expire between 2017 and 2021. The future minimum lease payments are as follows:
For the year ended March 31,
|
|
|
|
2018
|
|
$
|
161,940
|
|
2019
|
|
|
157,852
|
|
2020
|
|
|
131,762
|
|
2021
|
|
|
119,633
|
|
2022
|
|
|
3,492
|
|
2023 and thereafter
|
|
|
135,315
|
|
Total minimum lease payments
|
|
$
|
709,994
|
|
The Company also leases a 40,000 square meter property from
Yongqin county of Baiquan, Heilongjiang Province, the PRC and constructed a bottled water factory there. The land is leased commencing
on December 31, 2009, for a term of fifty years, with a yearly land use right’s fee of approximately $3,500.
Total rent expenses for the years ended March 31, 2017 and
2016, were $236,449 and $250,741, respectively.
Employment Agreements
Jack Jie Qin
On January 1, 2009, the Company entered into an employment
agreement with Jack Jie Qin, the Company’s president and chief executive officer. The employment agreement has an initial
term of seven years, and will be automatically extended, without any action on the part of Mr. Qin or the Company, for additional,
successive one-year periods. The agreement may be terminated by either party on 60 days’ written notice.
During the initial seven-year period of the agreement, the
Company will pay Mr. Qin an annual base salary of $200,000 per year for the first calendar year. In each subsequent calendar year
during the term of the agreement, the Company will pay Mr. Qin an annual base salary determined by the compensation increase scale
as reviewed and approved by the Company’s Compensation Committee of the Board of Directors and approved by the Company’s
full Board of Directors. Mr. Qin is eligible to receive an annual base salary adjustment in each subsequent calendar year as a
cost of living increase at 10% per annum. Mr. Qin is also eligible to receive an annual bonus pursuant to the executive bonus
scale in effect for executive employees of the Company.
In the event that Mr. Qin’s employment is terminated
without cause by the Company or if Mr. Qin terminates the agreement for good reason, or if, following a change in control, Mr.
Qin’s employment is terminated or not renewed, the Company has agreed to pay Mr. Qin an amount equal to twice the total
of his annual base salary and his target bonus as established by the Compensation Committee and to maintain his benefits for a
period of two years. At the expiration of the initial term of the agreement or any successive one-year renewal period, if the
Company elects not to renew the agreement, the Company has agreed to pay Mr. Qin an amount equal to the total of his annual base
salary and his target bonus as established by the Compensation Committee and to maintain his benefits for a period of one year.
NOTE 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 from its network platform. The beverage business reportable segment derives revenue and expense from the bottled water
factory in Baiquan, Heilongjiang Province, the PRC. Unallocated items comprise mainly corporate expenses and corporate assets.
Although substantially all of the Company’s revenue is
generated from Mainland China, the Company is organizationally structured along business segments. The accounting policies of
each of the Company’s operating segments are the same as those described in Note 2, “Summary of Significant Accounting
Policies.”
The following tables provide the business segment information
as of and for the years ended March 31, 2017 and 2016. Income tax allocations have been determined based on statutory rates in
the applicable business segment.
|
|
Year ended March 31,
2017
|
|
|
|
Online Business
|
|
|
Beverage
Business
|
|
|
Unallocated
Items
|
|
|
Total
|
|
Total revenues, net
|
|
$
|
275,931
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
275,931
|
|
Total costs of revenues
|
|
|
(169,510
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(169,510
|
)
|
Gross profit
|
|
|
106,421
|
|
|
|
—
|
|
|
|
—
|
|
|
|
106,421
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,672,033
|
|
|
|
89,978
|
|
|
|
1,080,485
|
|
|
|
2,842,496
|
|
Impairment of land and building
|
|
|
—
|
|
|
|
634,969
|
|
|
|
5,615,398
|
|
|
|
6,250,367
|
|
Provision for inventory obsolescence
|
|
|
47,965
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,965
|
|
Royalty expenses - related party
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
Total operating expenses
|
|
|
2,219,998
|
|
|
|
724,947
|
|
|
|
6,695,883
|
|
|
|
9,640,828
|
|
Net operating loss
|
|
|
(2,113,577
|
)
|
|
|
(724,947
|
)
|
|
|
(6,695,883
|
)
|
|
|
(9,534,407
|
)
|
Other income (loss)
|
|
|
69,271
|
|
|
|
—
|
|
|
|
(4,463
|
)
|
|
|
64,808
|
|
Allocated income tax benefits
|
|
|
—
|
|
|
|
—
|
|
|
|
15,927
|
|
|
|
15,927
|
|
Net loss
|
|
$
|
(2,044,306
|
)
|
|
$
|
(724,947
|
)
|
|
$
|
(6,684,419
|
)
|
|
$
|
(9,453,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
519
|
|
|
$
|
—
|
|
|
$
|
4,284,887
|
|
|
$
|
4,285,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,761
|
|
|
$
|
1,761
|
|
|
|
Year ended March 31,
2016
|
|
|
|
Online Business
|
|
|
Beverage
Business
|
|
|
Unallocated
Items
|
|
|
Total
|
|
Total revenues, net
|
|
$
|
441,372
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
441,372
|
|
Total costs of revenues
|
|
|
(238,015
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(238,015
|
)
|
Gross profit
|
|
|
203,357
|
|
|
|
—
|
|
|
|
—
|
|
|
|
203,357
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,773,648
|
|
|
|
188,804
|
|
|
|
3,920,870
|
|
|
|
5,883,322
|
|
Provision for inventory obsolescence
|
|
|
25,612
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,612
|
|
Royalty expenses - related party
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500,000
|
|
Total operating expenses
|
|
|
2,299,260
|
|
|
|
188,804
|
|
|
|
3,920,870
|
|
|
|
6,408,934
|
|
Net operating loss
|
|
|
(2,095,903
|
)
|
|
|
(188,804
|
)
|
|
|
(3,920,870
|
)
|
|
|
(6,205,577
|
)
|
Other income
|
|
|
69,389
|
|
|
|
2
|
|
|
|
10,353,868
|
|
|
|
10,423,259
|
|
Allocated income tax benefits
|
|
|
2,073
|
|
|
|
—
|
|
|
|
4,077,539
|
|
|
|
4,079,612
|
|
Net income (loss)
|
|
$
|
(2,024,441
|
)
|
|
$
|
(188,802
|
)
|
|
$
|
10,510,537
|
|
|
$
|
8,297,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
1,433
|
|
|
$
|
698,125
|
|
|
$
|
9,430,133
|
|
|
$
|
10,129,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
$
|
1,249
|
|
|
$
|
—
|
|
|
$
|
9,299,641
|
|
|
$
|
9,300,890
|
|
NOTE 15 – LITIGATION
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 its solicitor
RHT requesting legal fees in the amount of approximately SGD 85,000. The Company refused to pay the solicitor’s legal fees
because the Company believed that it was inadequately represented by the solicitor. On June 19, 2016, the solicitor filed a claim
with the High Court of Singapore for the legal fees in the amount of approximately SGD85,000. On October 31, 2016, the High Court
issued a judgment in favor of the solicitor for that amount plus interest and costs.
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 sought 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. After consulting with counsel,
EFTI declined to contest the summary judgment and judgment was entered in the Supreme Court for the sum of $162,720.38 in favor
of the plaintiffs.
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 order awarding the contractor approximately RMB827,000 of purported outstanding
payments under the contract and accrued interest. On August 17, 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.
On November 9, 2016, the Company filed an enforcement application to require the subcontractor to reimburse the Company the amount
of RMB 120,000 for testing fees and legal fees in the amount of RMB 3,980.
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 thereafter submitted a default judgment package. On September 6, 2016, the
court, after reviewing the default judgment package, entered judgment against CTX, and in favor of the Company, in the amount
of $2,500,000.
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. The trial was thereafter continued
to November 7, 2017, and, then, to December 5, 2017. In October 2017, the Company and Mr. Curry settled their respective claims,
in exchange for a mutual dismissal and the agreement of Mr. Curry to testify at the then-scheduled trial. Finally, on December
4, 2017, the Company resolved its lawsuit against Buckman Buckman & Reid and Peter Lau, to the parties’ mutual satisfaction.
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 16 – SUBSEQUENT EVENTS
Trademark License Agreement (Renewal)
In April 2017, the Company entered into a renewal of an expiring
Trademark License Agreement, pursuant to which the Company uses the “EFT” name, with an affiliated company, EFT Assets
Limited (“EFT Assets”). EFT Assets is owned by Wendy Qin, who served as a director of one of the Company’s subsidiaries,
EFT International Limited, a British Virgin Islands corporation, until March 2015. Ms. Qin is the sister of the Company’s
President, Jack Jie Qin. Under the agreement with EFT Assets, as renewed effective April 1, 2017, the Company is required to pay
a minimum annual royalty to EFT Assets of $500,000 for the first year of the renewed agreement, and a minimum annual royalty to
EFT Assets of $200,000 for each of the remaining nine years of the term of the agreement. The required annual royalty payment
increases, should we obtain certain levels of gross sales, as follows: 5% of the first $30 million of gross sales; 4% of the $10
million of gross sales in excess of $30 million; 3% of the $10 million of gross sales in excess of $40 million; 2% of the $10
million of gross sales in excess of $50 million; and 1% of the $10 million of gross sales in excess of $60 million.
Settlement of Lawsuit
In December 2017, the Company resolved its lone remaining legal
matter, a lawsuit against Buckman Buckman & Reid and Peter Lau, which was resolved to the parties’ mutual satisfaction.
Under the settlement, the Company was paid an initial sum of approximately $567,555 in July 2018 and, since July 2018, has received
approximately $13,888 per month, which monthly payments are to continue through March 2021.
Stock Purchase Agreement
In February 2018, the Company entered into Stock Purchase Agreement
with an unrelated third party, JFL Capital Ltd., pursuant to which the Company sold all of the capital stock of its subsidiary,
EFT Investment Co. Ltd. (EFTI). The gross purchase price under the Stock Purchase Agreement is $3,010,000, with the net purchase
price of $1,200,000, after deduction for the following debt of EFTI: (a) $1,000,000 owed by EFTI to EFT Assets Limited (EFT Assets),
which is be paid to EFT Assets by JFL Capital, and (b) $800,000 owed by EFTI to the Company, which debt was cancelled by the Company.
Payment of the $1,200,000 net amount is to be made to the Company in monthly installments of $50,000, until paid.
The Company has reviewed its subsequent events through the
date these consolidated financial statements were issued and has determined that no other material subsequent events have occurred
through such date.
ITEM 16. FORM 10-K SUMMARY
Not applicable.