UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _______
Commission File Number: 0-53730
EFT BIOTECH HOLDINGS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Nevada 22-1211204
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 Castleton St., Suite 300
City of Industry, CA 91748
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (626) 581-3335
N/A
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Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Larger accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
As of February 9, 2011, the registrant had 75,983,205 outstanding shares of
common stock.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3-22
Item 2. Management's Discussion and Analysis of 23-28
Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 28-29
About Market Risk
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sale of Equity 30
Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities 30
Item 4. (Removed and Reserved) 30
Item 6. Exhibits 30
SIGNATURES
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
3
EFT BIOTECH HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 2010 March 31, 2010
----------------- --------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 27,518,587 $ 29,434,509
Securities available for sale 12,106,817 9,740,712
Inventories 2,837,466 2,971,713
Prepaid expenses 923,211 475,092
Convertible note receivable 5,000,000 -
------------- -------------
Total current assets 48,386,081 42,622,026
Restricted cash 193,992 193,992
Other receivables 255,861 96,914
Property and equipment, net 9,659,991 15,370,975
Held-to-maturity securities - 4,763,165
Loan to related parties 33,000 2,034,100
Security deposit 702,692 658,575
Goodwill 5,000 5,000
------------- -------------
Total assets $ 59,236,617 $ 65,744,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,856,346 $ 2,346,835
Other liabilities 6,776,324 7,101,106
Unearned revenues 3,606,259 2,673,680
Due to related parties 44,872 43,427
------------- -------------
Total current liabilities 13,283,801 12,165,048
Contingent liabilities 3,001,603 2,904,957
------------- -------------
Total liabilities 16,285,404 15,070,005
Stockholders' equity
EFT Biotech Holdings, Inc.
stockholders' equity:
Preferred stock, $.001 par value,
25,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.00001 par value,
4,975,000,000 shares authorized,
75,983,205 shares issued and
outstanding at December 31, 2010
and March 31, 2010 760 760
Additional paid in capital 52,854,891 52,854,891
Retained deficits (7,780,784) (3,821,924)
Accumulated other comprehensive loss (74,767) (469,326)
------------- -------------
45,000,100 48,564,401
Noncontrolling interest (2,048,887) 2,110,341
------------- -------------
Total stockholders' equity 42,951,213 50,674,742
------------- -------------
Total liabilities and stockholders'
equity $ 59,236,617 $ 65,744,747
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
EFT BIOTECH HOLDINGS, INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2010 2009 2010 2009
---------------------------- ---------------------------
Sales revenues, net $ 3,305,807 $ 3,362,196 $ 10,857,113 $ 12,476,956
Shipping charge 854,770 965,520 2,606,500 3,015,090
Transportation income - Excalibur 81,329 - 139,113 -
------------- ------------- ------------- -------------
4,241,906 13,602,726 15,492,046 4,327,716
Cost of goods sold 1,696,916 1,048,913 4,098,657 3,374,844
Shipping cost 531,885 334,879 1,516,778 923,247
Operating costs - Excalibur 522,930 - 1,433,502 -
------------- ------------- ------------- -------------
2,751,731 7,048,937 4,298,091 1,383,792
Gross profit 1,490,175 2,943,924 6,553,789 11,193,955
Operating expenses:
Selling, general and administrative
expenses 2,566,350 2,377,059 7,802,794 6,903,728
Depreciation (2,905) 21,605 978,913 54,802
Impairment loss of loan receivable 1,567,000 - 1,567,000 -
Impairment loss of transportation
equipment 1,164,091 - 5,364,091 -
------------- ------------- ------------- -------------
Total operating expenses 5,294,536 2,398,664 15,712,798 6,958,530
Net operating income (loss) (3,804,361) 545,260 (9,159,009) 4,235,425
Other income (expense)
Interest income 254,770 426,577 764,984 725,971
Gain on disposal of
held-to-maturities securities 243,855 - 243,855 -
Gain on disposal of
available-for-sale securities 22,590 - 116,239 -
Dividend Income 9,586 - 21,355 -
Investment loss - 48.81% Excalibur - - - (1,080,969)
Loss from equity method investment - (464,566) - (1,976,154)
Foreign exchange gain (loss) (6,248) 751 (1,924) (3,402)
Other income 23,087 13,457 58,173 86,400
------------- ------------- ------------- -------------
Total other income (expense) 547,640 1,202,682 (2,248,154) (23,781)
------------- ------------- ------------- -------------
Net income (loss) before income
taxes and non-controlling interest (3,256,721) (7,956,327) 1,987,271 521,479
Income taxes (143,539) - (145,939) -
------------- ------------- ------------- -------------
Net Income (loss) (3,400,260) (8,102,266) 1,987,271 521,479
Noncontrolling interest 876,257 - 4,143,406 -
------------- ------------- ------------- -------------
Net income (loss) attributable to
EFT Biotech Holdings (2,524,003) $ 521,479 (3,958,860) $ 1,987,271
============= ============= ============= =============
Net income per common share
Basic and diluted (0.03) $ 0.01 (0.05) $ 0.03
============= ============= ============= =============
Weighted average common shares
outstanding
Basic and diluted 75,983,205 75,983,205 75,983,205 75,983,205
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
5
EFT BIOTECH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional Retained Other Total
Common Stock Paid-in Earnings Comprehensive Noncontrolling Stockholders'
-----------------
Shares Amount Capital (Deficits) Income (Loss) Interests Equity
------- ------ ------- ---------- ------------- -------------- -------------
BALANCE, MARCH 31, 2009 75,983,205 $ 760 $52,854,891 $ 4,023,992 $ (490,283) $ - $56,389,360
Acquisition of subsidiaries
with noncontrolling interest - - - - - 2,150,673 2,150,673
Comprehensive income:
Net loss - - - (7,845,916) - (8,124) (7,854,040)
Unrealized gain on securities
available for sale - - - - 245,623 - 245,623
Foreign currency translation
adjustment - - - - (224,666) (32,208) (256,874)
----------- ------- ----------- ----------- ----------- ------------ ------------
BALANCE, MARCH 31, 2010 75,983,205 $ 760 $52,854,891 $(3,821,924) $ (469,326) $ 2,110,341 $50,674,742
Comprehensive income:
Net income (loss) - - - (3,958,860) - (4,143,406) (8,102,266)
Unrealized gain on securities
available for sale - - - - 250,968 - 250,968
Foreign currency translation
adjustment - - - - 143,591 (15,822) 127,769
----------- ------- ----------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 2010 75,983,205 760 52,854,891 (7,780,784) (74,767) (2,048,887) 42,951,213
=========== ======= =========== =========== =========== ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
6
EFT BIOTECH HOLDINGS, INC.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
----------------- -----------------
December 31, 2010 December 31, 2009
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (8,102,266) $ 1,987,271
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 978,913 54,802
Bond premium amortization 9,625 -
Impairment loss of loan receivable 1,567,000 -
Impairment loss of equipment 5,364,091 -
Gain from securities available
for sale (116,239) -
Gain from held-to-maturity securities (243,855)
Loss from equity method investment - 3,057,123
Changes in operating assets and
liabilities:
Inventories 134,247 476,156
Prepaid expenses and other
receivable (317,799) 1,209,738
Accounts payable 469,461 (2,319,497)
Warranty liability 18,080 (9,079)
Other liabilities (345,896) 910,778
Unearned revenues 932,579 800,265
------------ ------------
Net cash provided by operating
activities 347,941 6,167,557
Cash flows from investing activities:
Additions to fixed assets (322,689) (826,272)
Convertible note receivable (5,000,000) -
Note receivables - related party (33,000) (1,360,000)
Proceeds from vendor for repayment of
loan 167,100 -
Purchase of corporate notes - (4,767,023)
Proceeds from redemption of corporate
notes 500,000 -
Proceeds from corporate notes 4,497,395 -
Purchase of securities available for
sale (5,773,906) -
Proceeds from available for sales
securities 3,775,009 -
------------ ------------
Net cash (used in) investing activities (2,190,091) (6,953,295)
Effect of exchange rate changes on cash (73,772) -
------------ ------------
Net decrease in cash (1,915,922) (785,738)
Cash, beginning of period 29,434,509 38,181,837
------------ ------------
Cash, end of period $27,518,587 $37,396,099
============ ============
Supplemental disclosures of cash flow
information:
Income taxes paid in cash $ (2,400) $ -
7
The accompanying notes are an integral part of these
consolidated financial statements.
EFT BIOTECH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - ORGANIZATION
EFT Biotech Holdings, Inc. ("EFT Holdings" or "the Company"), formerly HumWare
Media Corporation, GRG, Inc., Ghiglieri Corporation, Karat Productions, Inc.,
was incorporated in the State of Nevada on March 19, 1992.
On November 18, 2007, the Company issued 53,300,000 shares of its common stock
in connection with a share exchange with the stockholders of EFT BioTech, Inc.
("EFT BioTech"), a Nevada Corporation formed on September 18, 2007 (the
"Transaction"), pursuant to which EFT BioTech became a wholly-owned subsidiary
of the Company. The 53,300,000 common shares issued included 52,099,000 to
pre-capitalization shareholders and 1,201,000 to four directors and officers of
EFT BioTech, and represented approximately 87.34% of the Company's common stock
outstanding after the Transaction. Consequently, the stockholders of EFT
BioTech, Inc. owned a majority of the Company's common stock immediately
following the Transaction. As EFT Holdings was a non-operating public shell
corporation that acquired an operating company, this Transaction was treated as
a capital transaction where the acquiring corporation issued stock for the net
monetary assets of the shell corporation, accompanied by a recapitalization. The
accounting is similar in form to a reverse acquisition, except that goodwill or
other intangibles are not recorded. All references to EFT BioTech common stock
have been restated to reflect the equivalent numbers of EFT Holdings common
shares.
The Company, through its subsidiaries, uses the internet as its "storefront" and
business platform to sell and distribute American brand products consisting of
26 nutritional products, 21 personal care products, 1 automotive fuel additive,
1 home product and a portable drinking container.
On October 25, 2008, EFT Investment Co. Ltd ("EFT Investment"), a subsidiary of
the Company, acquired 48.81% of Excalibur International Marine Corporation's
("Excalibur") capital stock. Due to the substantial financial support EFT
Investment has provided Excalibur to fund its operations and other factors, EFT
Investment is deemed to have a controlling interest in Excalibur at January 15,
2010 as defined by Accounting Standards Codification ("ASC") Topic 810,
Consolidation, which required the Company to consolidate the financial
statements of Excalibur as its variable interest entity ("VIE"). Prior to that
date, Excalibur was accounted for as an equity method investment. Since
Excalibur has a year end of December 31, its September 30, 2010 financial
information is consolidated with the Company's December 31, 2010 financial
statements.
In February 2010 the Company assigned the worldwide distribution and servicing
rights to a product known as the "EFT-Phone" to Digital Development Partners in
exchange for 79,265,000 shares of Digital's common stock. The shares acquired
represent approximately 92% of Digital's outstanding common stock.
The EFT-Phone consists of a cell phone which uses the Microsoft Operating
System. The EFT-Phone has an application that will allow the Company's
Affiliates to access all of their back office sites, including their commission
accounts, through which the Affiliates will be able to deposit, withdraw and
transfer money to another account or to another Affiliate at no cost.
The worldwide distribution and servicing rights to the EFT-Phone include the
right to sell the EFT-Phone to the Company's affiliates and others. Servicing
includes the collection of service fees for all EFT-Phones worldwide, including
monthly fees, usage fees, as well as call forwarding, call waiting, text
messaging and video fees. Digital also acquired the rights to distribute all
EFT-Phone accessories.
The EFT-Phone is manufactured by an unrelated third party. Distribution of the
EFT-Phones began in July, 2010.
8
Note 2 - SUMMARY OF SIGNIstocktickerFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
These unaudited interim consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles ("GAAP") for
interim financial reporting and the rules and regulations of the Securities and
Exchange Commission that permit reduced disclosure for interim periods. In the
opinion of management, all adjustments of a normal recurring nature necessary
for a fair presentation of the financial position, results of operations and
cash flows for the periods presented have been made. The results of operations
for the interim periods presented are not necessarily indicative of the results
to be expected for the year ending dateMonth3Day31Year2011March 31, 2011.
These unaudited interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes for the
year ended March 31, 2010, included in the Company's 2010 Annual Report on Form
10-K.
Reclassification
Certain amounts have been reclassified to conform with the current period
presentation. Specifically, amounts previously classified as cash and cash
equivalents at March 31, 2010 have been reclassified as securities available for
sale. The amounts reclassified did not have an effect on the Company's results
of operations or shareholder's equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and Excalibur, which has been consolidated as a
Variable Interest Entity, and for which the Company is the primary beneficiary.
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 were translated at the nine
months ended December 31, 2010 current exchange rate, stockholders equity items
are translated at the historical rates and income statement items are translated
at the average exchange rate for the period. The resulting translation
adjustments are reported under other comprehensive income in accordance with ASC
Topic 220, Reporting Comprehensive Income as a Component of Stockholders'
Equity. Foreign exchange transaction gains and losses are reflected in the
statement of operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Contingencies
Certain conditions may exist as of the date the financial statements are issued
which may result in a loss to the Company but which will only be resolved when
one or more future events occur or fail to occur. The Company's management and
legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought.
9
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 debt instruments 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 publicly traded equity securities are classified as
available-for-sale and are reported at fair value (based on quoted prices and
market prices) using the specific identification method. Unrealized gains and
losses, net of taxes, are reported as a component of stockholders' equity.
Realized gains and losses on investments are included in investment and other
income, net when realized. Any impairment loss to reduce an investment's
carrying amount to its fair market value is recognized as an expense when a
decline in the fair market value of an individual security below its cost or
carrying value is determined to be other than temporary.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out
basis) or market. Inventory consists of nutritional, cosmetic, automotive
maintenance, environmentally safe products and EFT-phone. The Company has two
warehouses, one in City of Industry, CA and the other in Kowloon, Hong Kong. On
a quarterly basis, the Company's management reviews inventory levels in each
country for estimated obsolescence or unmarketable items, as compared to future
demand requirements and the shelf life of the various products. Based on this
review, the Company records inventory write-downs when costs exceed expected net
realizable value. Historically, the Company's estimates of obsolete or
unmarketable items have been insignificant.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to earnings as incurred;
additions, renewals and betterments are capitalized. When property and equipment
are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with estimated lives of:
Machinery and equipment 3-8 years
Computers and office equipment 3-5 years
Automobiles 5 years
Leasehold improvements 5 years
Transportation equipment 12 years
For the nine months ended December 31, 2010 and 2009, depreciation expenses were
$978,913, and $54,802, respectively.
10
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 amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. The Company has
recorded an impairment loss of $5.364 million on the transportation equipment of
Excalibur for the nine months ended December 31, 2010 since the net book value
of the equipment has exceeded its market value.
Fair Value of Financial Instruments
ASC Topic 825 requires the Company to disclose the estimated fair values of
financial instruments. The carrying amounts reported in the Company's
consolidated balance sheets for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair value due
to the short-term maturity of these instruments.
Fair Value Measurements
ASC Topic 820 defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value measurements. ASC Topic 820
does not require any new fair value measurements, but rather eliminates
inconsistencies in guidance found in various other accounting pronouncements.
The adoption of ASC Topic 820 did not have a material effect on the Company's
financial condition or operating results.
Refer to Note 3, "Fair Value Measurements" for additional information on the
adoption of ASC Topic 820.
Stock-Based Compensation
ASC Topic 718 requires companies to recognize in the statement of operations the
grant date fair value of stock options and other equity-based compensation
issued to employees.
Stocks issued to officers or employees
During the nine months ended December 31, 2010 and 2009, the Company did not
issue any stock options or warrants to its officers or employees nor were there
any outstanding warrants or options held by officers or employees as of December
31, 2010. Accordingly, pro forma disclosures are not required.
Stock issued for services
The Company accounts for equity instruments issued in exchange for the receipts
of goods or service from persons other than employees in accordance with ASC
Topic 718 and the conclusions reached by ASC Topic 505. Costs are measured at
the estimated fair market value of the consideration received or the estimated
fair value of the equity instruments issued, whichever is more reliably
measurable. The value of equity instruments issued for consideration other than
employee services is determined on the earliest of performance commitment or
completion of performance by the provider of goods or service as defined by ASC
Topic 505.
Revenue / Unearned Revenue
The Company's revenue recognition policy is in accordance with the requirements
of Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, ("SAB 104"),
ASC Topic 605, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products) and other applicable revenue
recognition guidance and interpretations. Sales revenue is recognized at the
date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured.
Transportation income is generated from transporting passengers and cargo and is
recognized when passengers and cargo are conveyed to the destination port.
Payments received before all relevant criteria for revenue recognition are
satisfied are recorded as unearned revenue. Cash consideration given by the
11
Company to its sales affiliates is considered to be a reduction of the selling
prices of the Company's products, thus, is recorded as a reduction of revenue.
Commissions paid to the Company's Affiliates are considered to be a reduction of
the selling prices of its products, and are recorded as a reduction of revenue.
Unearned Revenues consist of cash received in advance for goods to be delivered
at a future date. The Company records the payments received from customers as a
liability until the products are delivered. Sales are recorded when the products
are delivered.
In 2009, the Company developed a "reverse auction" program as a means of
attracting younger members who typically would not otherwise become an
Affiliate. The reverse auction is unlike an ordinary auction, also known as a
forward auction, where bidders bid the price up and the highest bidder wins that
product at the conclusion of bidding. In a reverse auction the objective is to
bid the price of a product down.
Cars, laptop computers, cameras, television sets and many other products are
offered through the reverse auction program at starting bid prices which are
typically set at 25% of the manufacturer's suggested retail price.
To participate in the reverse auction, one must initially purchase 300 bids at a
price of $1.00 per bid. The purchase of the 300 bids automatically qualifies the
purchaser as an Affiliate, and no purchase of the Company's products is
required. All bids are non-refundable once purchased.
Once the reverse auction for a particular product begins, participants can,
through a designated website, enter a bid for the product. Each $1.00 bid lowers
the price of the product by $0.01. At the conclusion of the auction, the person
who entered the last bid is entitled to buy the product at the price reduced by
the auction process. The Company only recognizes revenue when a bidder places a
bid on an auction product.
Warranty
The Company generally does not provide customers with right of return except for
defects which occur within six months from the date of sale. Historically,
warranty costs have not been material. Factors that affect the Company's
warranty liability include the number of products currently under warranty,
historical and anticipated rates of warranty claims on those products, and cost
per claim to satisfy the warranty obligation. Other factors are less significant
due to the fact that the warranty period is only six months and replacement
products are already in stock or available at a pre-determined price. The
anticipated rate of warranty claims is the primary factor impacting the
estimated warranty obligation. Warranty claims are relatively predictable based
on the historical experience. Warranty reserves are included in other
liabilities and the provision for warranty accruals is included in cost of goods
sold in the Consolidated Statements of Operations. Management reviews the
adequacy of warranty reserves each reporting period based on historical
experience. The Company records warranty liabilities at the time of sale for the
estimated costs that may be incurred under its limited warranty. If actual
results differ from the estimates, the Company revises its estimated warranty
liability.
As of December 31, 2010, 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 differences between the tax bases of assets and liabilities and their
12
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Under ASC Topic 740, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement.
Earnings per Share
Basic net income per share is computed on the basis of the weighted average
number of common shares outstanding during the period.
Diluted net income per share is computed on the basis of the weighted average
number of common shares and common share equivalents outstanding. Dilutive
securities having an anti-dilutive effect on diluted net income per share are
excluded from the calculation.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
The following table shows the weighted-average number of potentially dilutive
shares excluded (since they were anti-dilutive) from the diluted net income per
share calculation for the three and nine months ended December 31, 2010 and
2009:
Three Months Ended Nine Months Ended
December 31, December 31,
2010 2009 2010 2009
---- ---- ---- ----
Weighted average
warrants outstanding 14,890,040 14,890,040 14,890,040 14,890,040
---------- ---------- ---------- ----------
Total 14,890,040 14,890,040 14,890,040 14,890,040
========== ========== ========== ==========
Three Months Ended Nine Months Ended
December 31, December 31,
2010 2009 2010 2009
---- ---- ---- ----
Historical Numerator:
Net income (loss)
attributable to EFT
Biotech Holdings, Inc. $(2,524,003) $ 521,479 $(3,958,860) $1,987,271
------------ ----------- ------------ ----------
Denominator:
Weighted-average shares
used for basic net
income per share 75,983,205 75,983,205 75,983,205 75,983,205
Basic net income (loss)
per share $ (0 .03) $ 0.01 $ (0.05) $ 0.03
=========== =========== ========== ==========
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners.
For the Company, comprehensive income for the periods presented is comprised of
net income, unrealized loss on marketable securities classified as
available-for-sale, and foreign currency translation adjustments.
13
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk are cash, accounts receivable and other receivables arising from its
normal business activities. The Company places its cash in what it believes to
be credit-worthy financial institutions, but several of its bank accounts exceed
the federally insured limit. The Company's accounts receivable are constantly at
a marginal to zero dollar ($0) level and its revenues are derived from orders
placed by consumers located anywhere in the world over the Company's designated
internet portal. The Company maintains a zero dollar ($0) allowance for doubtful
accounts and authorizes credits based upon its customers' historical credit
history. The Company routinely assesses the credits authorized to its customers
and, based upon factors surrounding the credit risk, establishes an allowance,
if required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is limited.
Segment Reporting
ASC Topic 280, "Disclosure about Segments of an Enterprise and Related
Information" requires use of the management approach model for segment
reporting. The management approach model is based on the way a company's
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company. Since management does not
disaggregate Company data, the Company has determined that only one segment
exists. Accordingly, no segment reporting is provided.
Recent accounting pronouncements
In December 2010, the FASB issued the amendment to ASC Topic 805, "Business
Combinations", which provides clarification that if a public entity presents
comparative financial statements, it should disclose revenue and earnings of the
combined entity as though the business combinations that occurred during the
current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments in this update also expand the
supplemental pro forma disclosure to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to
the business combination included in the reported pro forma revenue and
earnings. This topic will be effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The Company does not
believe that the adoption of ASC 805 will have a material effect on its
financial statements.
In December 2010, the FASB issued the amendment to ASC Topic 350
"Intangibles-Goodwill and Other" which modify Step 1 of the goodwill impairment
test for reporting units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists.
The amendment requires that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. This topic will be effective for periods beginning after
December 15, 2010, early adoption is not permitted. The Company does not believe
that the adoption of ASC 350 will have a material effect on its financial
statements.
Note 3 - FAIR VALUE MEASUREMENTS
ASC Topic 820 defines fair value, establishes a framework for measuring fair
value and enhances disclosure requirements for fair value measurements. This
statement 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.
14
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.
The Company does not have non-financial assets and non-financial liabilities
that are required to be measured at fair value on a recurring basis at March 31,
2010 and December 31, 2010.
Assets and liabilities measured at fair value are summarized below:
December 31, 2010
----------------------------------------------------------
Level 1
Quoted
Prices Level 2
in Active Significant Level 3
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs Total
------------- ------------- ------------- -----------
Securities
available
for sale $ 12,106,817 $ - $ - $12,106,817
------------- ------------- ------------- -----------
Total assets
measured at
fair value $ 12,106,817 $ - $ - $12,106,817
============= ============= ============= ===========
March 31, 2010
----------------------------------------------------------
Level 1
Quoted
Prices Level 2
in Active Significant Level 3
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs Total
------------- ------------- ------------- -----------
Securities
available
for sale $ 9,740,712 $ - $ - $ 9,740,712
------------- ------------- ------------- -----------
Total assets
measured at
fair value $ 9,740,712 $ - $ - $ 9,740,712
============= ============= ============= ===========
Note 4 - CONVERTIBLE NOTE RECEIVABLE
In July 2010 the Company lent $5,000,000 to CTX Virtual Technologies, Inc. The
loan to CTX is unsecured, bears interest at 8% per year and has a term of one
year from July 26, 2010 to July 26, 2011. At December 31, 2010, the Company has
recorded $72,222 in accrued interest related to this loan. At any time during
the 1-year term, the Company can at its option convert the loan into 8,474,576
units, with each unit consisting of one share of CTX's common stock and one
warrant. Each warrant allows the Company to purchase one additional share of
CTX's common stock at a price of $1.00 at any time on or before June 23, 2015.
At any time after January 26, 2011 and before July 26, 2011, CTX can, at its
option, cause the loan to be converted into the same 8,474,576 units. On July
26, 2011, the loan, if it is not in default, will automatically be converted
into 8,474,576 units.
15
Note 5 - LOAN TO RELATED PARTIES
The Board of Directors of the Company approved a non-interest bearing strategic
advancement/unsecured demand loan in the amount of $1,567,000 on July 25, 2009
to Yeuh-Chi Liu, a vendor, as well as a director and a shareholder of Excalibur.
The $1,567,000 loan is collateralized with 3.97% ownership of Excalibur and the
Company provides full allowance of impairment in the amount of $1,567,000
against the demand loan. Since the Company does not expect that this loan will
be repaid and the loan was written off as of December 31, 2010.
The Company approved an advancement in the amount of $33,000 on December 22,
2010 to the Company's officer, VP-marketing, as well as a director and a
shareholder of the Company. The advancement was disbursed to the Company's third
party vendor for the last delivery of EFT phones.
Note 6 - RESTRICTED CASH
On August 20, 2009, Taiwan Taipei district court froze Excalibur's cash of
$193,992 as a result of a lawsuit filed by Marinteknik Shipbuilder(s) PTE LTD (a
Singapore company) against Excalibur in the Taiwan Taichung District Court. The
lawsuit claims Excalibur owes service fees and out-of-pocket expenses of
$249,731 to Marinteknik Shipbulider (s) PTE Ltd.
Note 7 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, March 31,
2010 2010
-------------- -----------
Construction in Progress $970,726 $ 804,410
Transportation equipment 12,133,122 17,065,379
Leasehold Improvements 427,388 418,582
Automobiles 238,667 154,724
Computer Equipment 159,830 144,696
Furniture and Fixtures 83,430 68,461
Machinery and Equipment 77,660 49,903
-------------- -----------
14,090,823 18,706,155
Less: Accumulated depreciation (4,430,832) (3,335,180)
-------------- -----------
$ 9,659,991 $15,370,975
============== ===========
At December 31, 2010, expenditures of $970,726 had been incurred for
construction of a new water filter plant for bottled water in Tian Quan, China.
The Company will begin depreciating the water filter plant when it is placed in
service.
Note 8 - INVESTMENT
On October 25, 2008, the Company through its wholly-owned subsidiary, EFT
Investment, acquired a 48.81% equity interest in Excalibur for $19,193,000. The
Company subsequently provided Excalibur capital to fund its operations. The
equity method was used for this investment for the three and nine months ended
December 31, 2009.
As a result of a change in Excalibur's management, the Company was deemed to
have a controlling interest in Excalibur and Excalibur became a Variable
Interest Entity ("VIE") of the Company on January 15, 2010. In accordance with
ASC, Topic 810-10-15-14, the Company measured and recognized its interest in
Excalibur on December 31, 2009, the closest fair value acquisition date.
16
Since Excalibur is considered the Company's VIE, at December 31, 2010,
Excalibur's September 30, 2010 balance sheet was consolidated with the Company's
December 31, 2010 balance sheet and all inter-company accounts and transactions
were eliminated in consolidation.
The following table summarizes the income statement of Excalibur for the three
and nine months ended December 31, 2009:
Three Months Nine Months
Ended Ended
December 31, 2009 December 31, 2009
----------------- -----------------
Exchange rate 33 33
Revenue $ 179,394 $ 245,396
Gross profit $ (744,371) $ (4,379,419)
Loss from continuing operations $ (4,134,023) $ (951,785)
Net Loss $ (4,134,023) $ (951,785)
48.81% investment earnings $ (2,017,817) $ (464,566)
The following table provides the summary of balance sheet information for
Excalibur as of December 31, 2009 and March 31, 2009:
Excalibur International Marine Corp
December 31, 2009 March 31, 2009
----------------------- ----------------------
NT$ USD NT$ USD
--- --- --- ---
Total assets 1,248,321,460 37,827,923 1,289,432,107 39,073,700
Total liabilities 299,730,138 9,082,731 204,417,971 6,194,484
Net assets 948,591,322 28,745,192 1,085,014,136 32,879,216
EFT 48.81% ownership 463,007,424 14,030,529 529,595,400 16,048,345
Ending balance of
investment account 14,072,191 17,129,314
Difference/Premium 41,662 (1,080,969)
*NTD: New Taiwan Dollar
The difference of $41,662 was mainly due to the exchange rate fluctuations
between the periods.
The premium of $1,080,969 was primarily the excess the Company paid to purchase
the 48.81% ownership in Excalibur as of March 31, 2009.
On August 8, 2010 Excalibur's ship, the OceanLaLa was damaged when sailing in
the Taiwan Strait. As a result of the damage suffered, the OceanLaLa has been
taken out of service indefinitely. Excalibur is in discussions with its
insurance carrier concerning the amount of damage, if any, which may be covered
by insurance.
As a result of the damage, management estimated that the net book value of the
equipment has exceeded its market value and hence, an impairment loss of $5.364
million has been provided during the nine months ended December 31, 2010.
Note 9 - HELD-TO-MATURITY SECURITIES
The following table summarizes realized gains related to the Company's
investments in corporate notes designated as held to maturity as of December 31,
2010:
Corporate notes: Net Carrying Sales Gross
Value Proceeds realized gain
==========================================
Long-term held-to-maturity
securities:
Due after one year through five
years $1,478,480 $ 1,573,015 $ 94,535
------------------------------------------
17
Due after five years through ten 1,068,875 1,151,275 82,400
years
Due after ten years 1,706,185 1,773,105 66,920
------------------------------------------
Total $4,253,540 $ 4,497,395 $ 243,855
==========================================
The Company realized a gain of approximately $243,855 on the sale of all of our
investments in corporate notes during the nine months ended December 31, 2010.
These notes were sold in order to preserve the Company's principal since most of
the notes were downgraded by investment rating agencies. The Company did not
purchase in any corporate notes during the nine months ended December 31, 2010.
The following table summarizes unrealized gains and losses related to the
Company's investments in corporate notes designated as held to maturity as of
March 31, 2010:
Corporate notes: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
Short-term held-to-maturity
securities:
Due in one year or less $ 507,885 $ 4,505 $ - $ 512,390
-------------------------------------------
Total $ 507,885 $ 4,505 $ - $ 512,390
===========================================
Long-term held-to-maturity
securities:
Due after one year through five
years $ 1,482,874 $ 27,491 $ - $1,510,365
Due after five years through ten
years 1,065,519 - (15,924) 1,049,595
Due after ten years 1,706,887 13,771 - 1,720,658
-------------------------------------------
Total $ 4,255,280 $ 41,262 $(15,924) $4,280,618
===========================================
Note 10 - OTHER LIABILITIES
Other liabilities consist of the following:
December 31, March 31,
2010 2010
------------ ----------
Commission payable $5,610,585 $6,380,408
Payroll liabilities 700,415 645,900
Warranty liabilities 50,329 43,346
Accrued expenses 162,360 -
Income taxes payable 143,539 -
Others 109,096 31,452
------------ ----------
$6,776,324 $7,101,106
============ ==========
Note 11 - CONTINGENT LIABILITIES
The Company's subsidiary, Excalibur, purchased the vessel "OceanLaLa" from a BVI
company "Ezone Capital Co. Ltd." in 2008. The purchase price was NTD 708,000,000
($21,961,660). The vessel has been delivered to Excalibur and registered as
owned by Excalibur at the end of 2008. The last payment of NTD 92,600,000
($2,969,075) is still under dispute as Excalibur believes that certain special
equipment relating to the OceanLaLa, including special tooling, was not
delivered at the time of sale and that Ezone's director was not acting in good
faith and involved in self dealing.
Gu Zong-Nan (former vice general manager of Excalibur) filed a lawsuit against
Excalibur in the Taiwan Shihlin District Court claiming unpaid salary. The court
found that there was a valid agreement between the parties that provided the
salary owed by Excalibur did not need to be paid until Excalibur made a profit
from its business operations. Although Excalibur has not been profitable since
its inception, a contingent liability of NTD 1,050,000 ($32,528) was recorded.
18
Note 12 - STOCKHOLDERS' EQUITY
Common stock
As of December 31, 2010 the Company had 4,975,000,000 shares of common stock
authorized and 75,983,205 shares issued and outstanding.
The Company did not issue any shares of common stock during the nine months
ended December 31, 2010.
Warrants
Between January and August 2008 the Company sold 14,890,040 Units to non-U.S.
residents at a price of $3.80 per Unit. Each Unit consisted of one share of the
Company's common stock and one warrant. Each warrant allows the holder to
purchase one share of the Company's common stock at a price of $3.80 per share
at any time prior to November 30, 2011.
The Company has the right, but not the obligation to redeem the outstanding
warrants, on a pro rata basis, at a purchase price of $0.00001 per warrant
within thirty (30) days from the tenth (10th) consecutive trading day that the
closing sales price, or the average of the closing bid and asked price of the
Company's common stock trades on the OTC or any public securities market within
the U.S., at least $11.00 per share.
As the only settlement option for the warrants is physical settlement, in which
the party designated in the contract as the buyer delivers the full stated
amount of cash to the seller, and the seller delivers the full stated number of
shares to the buyer, the Company accounted for the warrants as permanent equity
and recorded the value of the warrants in additional paid in capital.
Note 13 - INCOME TAXES
The Company was incorporated in the United States ("US") and has operations in
four tax jurisdictions - the United States, the Hong Kong Special Administrative
Region ("HK SAR"), Taiwan, and the BVI.
The Company generated substantially all of its net income from its BVI
operations for the nine months ended December 31, 2010 and 2009. According to
BVI tax law this income is not subject to any taxes. The Company's HK SAR
subsidiaries had no taxable income in the respective periods. The deferred tax
assets for the Company's US operations and HK SAR subsidiaries were immaterial
as at December 31, 2010 and 2009.
The Company's Taiwan VIE, Excalibur, is subject to a 17% standard enterprise
income tax based on its taxable net profit. Excalibur has incurred net
accumulated operating losses for income tax purposes and believes that it is
more likely than not that these net accumulated operating losses will not be
utilized in the future. Therefore, it has provided full valuation allowance for
the deferred tax assets arising from the losses as of December 31, 2010 and
2009.
Income tax expenses consisted of the following:
Nine Months Ended December
31,
-----------------------------
2010 2009
-------------- -------------
Current:
Domestic $ 2,400 $ -
Foreign - -
Provision for prior years 143,539 -
Deferred - -
-------------- -------------
Income tax expenses $ 145,939 $ -
============== =============
19
A reconciliation of income taxes, with the amount computed by applying the
statutory federal income tax rate (37% for the nine months ended December 31,
2010 and 2009) to income before income taxes for the nine months ended December
31, 2010 and 2009, is as follows:
Nine months Ended December 31,
------------------------------
2010 2009
------------------------------
Income tax at U.S. statutory rate $ (1,464,779) $ 742,283
State tax 145,939 -
Indefinitely invested earnings of foreign
subsidiaries 1,435,363 (749,275)
Nondeductible expenses 29,416 6,992
------------------------------
145,939 -
==============================
Uncertain Tax Positions
As a result of the implementation of ASC Topic 740, the Company recognized no
material adjustments to liabilities or stockholders' equity. Interest associated
with unrecognized tax benefits are classified as income tax and penalties are
classified in selling, general and administrative expenses in the statements of
operations. The adoption of ASC Topic 740 did not have a material impact on the
Company's financial statements.
For the nine months ended December 31, 2010 and 2009, the Company did not have
any unrecognized tax benefits and related interest and penalties expenses.
Currently, the Company is not subject to examination by major tax jurisdictions.
Note 14 - WARRANTY LIABILITY
The Company records warranty liabilities at the time of sale for the estimated
costs that may be incurred under its limited warranty. Changes in warranty
liability for standard warranties which are included in current liabilities on
the Company's Consolidated Balance Sheets are presented in the following tables:
December 31, 2010 March 31, 2010
----------------- --------------
Warranty liability as at beginning
of period, Current $ 43,346 $ 51,684
Service obligations honored -
Cost accrued/(Reversal) of costs 18,080 (8,338)
Service obligations honored (11,097) -
----------------- --------------
Warranty liability as at end of
period, Current $ 50,329 $ 43,346
================= ==============
Note 15 - RELATED PARTY TRANSACTIONS
December 31, 2010 March 31, 2010
------------------ -----------------
Amount due to related parties: $ 44,872 $ 43,427
Names and relationship of related parties:
Names Relationship with Company
----- -------------------------
Steve Hsiao Shareholder of Excalibur
We use the "EFT" name, a trademark owned and licensed to us by EFT Assets
Limited. We are required to pay an annual royalty to EFT assets equal to a
percentage of our gross sales for the previous fiscal year. The percentage is 5%
for the first $30 million in gross sales, 4% for the $10 million in gross sales
in excess of $30 million, 3% for the $10 million in gross sales in excess of $40
million; 2% for the $10 million in gross sales in excess of $50 million; and 1%
for the $10 million in gross sales in excess of $60 million. EFT Assets Limited
is owned by a number of persons, including Wendy Qin. Ms. Qin is the Chief
Executive Officer of one of our subsidiaries and is the sister of Jack Jie Qin,
our President. During the nine months ended December 31, 2010 and 2009 we paid
EFT Asset Limited $1,522,251 and $1,800,000 in royalties.
20
Note 16 - COMMITMENTS
Executive Offices
The Company leases 3,367 square feet of space in California for its executive
offices. The lease expires in February 2013. The base rent is: $9,090 for year
one, $9,454 for year two and $9,832 for year three.
Operating Lease
The Company rents office space for its satellite training center in Hong Kong.
The lease provides for free rent in the first two years and monthly lease
payments approximating $50,000 starting the beginning of the third year and
expires on June 30, 2012. Expensing the 5-year total rent evenly over the life
of the lease, the future minimum lease payments under the operating lease are as
follows:
Year Ending March 31,
---------------------
2011 $ 90,000
2012 360,000
2013 90,000
The Company rents storage space for its satellite training center in Hong Kong.
The lease provides for monthly lease payments approximating $900 USD starting on
January 4, 2011 and expiring on January 3, 2013. Future minimum lease payments
under the month to month operating leases as of December 31, 2010 approximate
the following:
Year Ending March 31,
---------------------
2011 $ 2,700
2012 10,800
2013 8,100
The Company rents office space for its division at Thailand Center. The lease
provides for monthly lease payments approximating $800 USD starting on April 1,
2010 and expiring on March 29, 2011. Future minimum lease payments under the
operating leases as of December 31, 2010 approximate the following:
Year Ending March 31,
---------------------
2011 $ 2,386
Rent expenses for the nine months ended December 31, 2010 and 2009 were
approximately $549,808 and $397,722 respectively.
Note 17 - LITIGATION
In October 2008, the Company acquired, through a wholly-owned subsidiary, 48.81%
of the capital stock of Excalibur International Marine Corporation, a Taiwan
corporation, for $19,193,000. Excalibur owns a high speed ship which, until
August 2010, transported passengers and cargo between Taiwan and mainland China
through the Taiwan Strait. Excalibur's ship, the OceanLaLa, was capable of
carrying up to 370 passengers and 630 tons of cargo.
Excalibur purchased the OceanLaLa from Ezone Capital Co. Ltd., prior to its
acquisition by the Company. The last payment of NTD 92,600,000 ($2,969,075) was
21
withheld by Excalibur since Excalibur believed that special tooling was not
delivered at the time of sale and that Ezone's director was not acting in good
faith and was involved in self dealing.
Excalibur filed a lawsuit against Jiao Ren-Ho (former chairman of Excalibur) in
the Taiwan Shihlin District Prosecutors office in February 2010. Excalibur
alleges, among other things, that Jiao Ren-Ho committed the offences of capital
forging, fraud, breach of trust, and document fabrication.
Excalibur filed a lawsuit against Chang Hui-Ying, Excalibur's former accountant
in the Taiwan Shihlin District Prosecutors office in March 2010. The claims of
Excalibur against Chang Hui-Ying are based upon the audit of Excalibur's
financial statements by Chang Hui-Ying. Excalibur alleges, among other things,
that Chang Hui-Ying committed the offences of capital forging, fraud, breach of
trust, and document fabrication.
Excalibur filed a lawsuit against Hsiao Zhong-Xing (former general manager of
Excalibur) and Lu Zhuo-Jun (former vice general manager of Excalibur)
(collectively "Defendants") in the Taiwan Shihlin District Prosecutors office.
Excalibur alleges, among other things, that Defendants committed the offences of
capital forging, fraud, breach of trust, and document fabrication.
Gu Zong-Nan (former vice general manager of Excalibur) filed a lawsuit against
Excalibur in the Taiwan Shihlin District Court claiming unpaid salary and
severance payments. In April 2010, the Taiwan Shihlin District Court denied the
claims as the court found that (i) there was a valid agreement between the
parties that provided the salary owed by Excalibur would not be paid until
Excalibur makes profit from its operations and (ii) Gu Zong-Nan held a
managerial position in Excalibur and as a result is not entitled to any
severance payment according to the Labor Standard Law of Taiwan. Excalibur has
suffered net losses since inception, however, a contingent liability for the
unpaid salary remains.
Marinteknik Shipbuilder(s) PTE LTD. (a Singapore company) filed a lawsuit
against Excalibur in the Taiwan Taichung District Court for unpaid service fees
and out-of-pocket expenses of NTD8,050,832. On August 20, 2009, the Taiwan
Taipei district court froze Excalibur's cash of $193,992 in response to the
suit. The final resolution of this case is pending. However, a contingent
liability for the restricted cash has remained.
Jiao Ren-Ho (former chairman of Excalibur) filed a lawsuit against Excalibur in
the Taiwan Shihlin District Court claiming Excalibur's special meeting of
shareholders held on January 12, 2010, and the actions taken at the meeting,
including the removal of Mr. Jiao as an officer and the chairman of Excalibur,
were unlawful. Monetary damages were not claimed in the suit. On October 12,
2010, the Shihlin District Court rendered its judgment in favor of Excalibur,
ruling that Excalibur's special meeting of shareholders held on January 12, 2010
and the actions taken at the meeting, including the removal of Mr. Jiao as an
officer and the chairman of Excalibur were lawful. Subsequently, Mr. Jiao has
filed an application to the Court of Appeal in Shihlin District Court to review
the lower court's decision.
On August 2, 2010 the Company commenced a legal proceeding against Marinteknik
Shipbuilders Pte Ltd., and three other persons in the High Court of the Republic
of Singapore alleging fraud, misrepresentation, and deceit on the part of the
defendants with respect to Excalibur's purchase of the OceanLaLa. The Company
claims that the wrongful actions of the defendants resulted in damages of
$19,000,000 to the Company.
August 18, 2010 Excalibur received a statement of claim (equivalent to a
complaint in US) from Ezone Capital Co., Ltd., demanding approximately 2,000,000
Euros for the unpaid balance of the purchase price of the OceanLala. Excalibur
has denied the claims of Ezone on the basis that the OceanLaLa was defective,
unseaworthy, and not fit for its intended purpose. Excalibur has also filed a
counterclaim against Ezone seeking a full refund of all amounts paid for the
OceanLaLa, as well as reimbursement for amounts spent on maintenance and
repairs.
Note 18 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through
the date the financial statements which are included as part of this report have
been issued and has determined that no subsequent events have occurred which
need to be disclosed.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Report contains statements that we believe are, or may be considered to be,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than statements of
historical fact included in this Report regarding the prospects of our industry
or our prospects, plans, financial position or business strategy, may constitute
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking words such as "may," "will,"
"expect," "intend," "estimate," "foresee," "project," "anticipate," "believe,"
"plans," "forecasts," "continue" or "could" or the negatives of these terms or
variations of them or similar terms. Furthermore, such forward-looking
statements may be included in various filings that we make with the SEC or press
releases or oral statements made by or with the approval of one of our
authorized executive officers. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot assure
you that these expectations will prove to be correct. These forward-looking
statements are subject to certain known and unknown risks and uncertainties, as
well as assumptions that could cause actual results to differ materially from
those reflected in these forward-looking statements. Readers are cautioned not
to place undue reliance on any forward-looking statements contained herein,
which reflect management's opinions only as of the date hereof. Except as
required by law, we undertake no obligation to revise or publicly release the
results of any revision to any forward-looking statements. You are advised,
however, to consult any additional disclosures we make in our reports to the
SEC. All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained in this Report.
We sell 26 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 which contains a filter to remove impurities from the water.
Our products are biodegradable and are not regulated by foreign, federal, state
or local environmental laws.
Our nutritional products are non-pharmaceutical nutritional products. They
are ingestible through oral liquids, oral sprays, tablets and 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.
Our nutritional products are all natural, made from pure ingredients, and
are designed to address specific goals of the user such as strengthening the
immune system, assisting in weight loss, helping to overcome a sore throat and
fighting off colds. Each product has been formulated to address specific need,
symptom and condition. We make no claims as to the products curing any medical
condition, or preventing any medical ailment.
Our personal care products include lip gloss, perfume, mascara, eyeliner
and sunscreen.
We only sell our products to Affiliates through our website. As of January
16, 2011, we had approximately 1,129,995 registered affiliates, most of which
were located in China and Hong Kong. As of December 31, 2010, we did not have
any sales activities in the United States. None of our Affiliates account for a
significant portion of our business. We pay our Affiliates a commission on the
products they order from us. The commission is approximately 70% of the total
dollar amount of the order. Commissions are considered a reduction of the sales
price of our products and are reflected in our financial statements as a
reduction in revenue.
On October 25, 2008, we acquired, through a wholly-owned subsidiary, 48.81%
of the capital stock of Excalibur International Marine Corporation, a Taiwan
corporation, for $19,193,000. Excalibur owns a high speed ship which, until
August 2010, transported passengers and cargo between Taiwan and mainland China
through the Taiwan Strait. Excalibur's ship, the OceanLaLa, was capable of
carrying up to 370 passengers and 630 tons of cargo.
On August 8, 2010 the OceanLaLa was damaged when sailing in the Taiwan
Strait. As a result of the damage suffered, the OceanLaLa has been taken out of
service temporarily. Excalibur is in discussions with its insurance carrier
concerning the amount of damage, if any, which may be covered by its insurance
policy.
23
In February 2010 we assigned the worldwide distribution and servicing
rights to a product known as the "EFT-Phone" to Digital Development Partners,
Inc. in exchange for 79,265,000 shares of Digital's common stock. The shares we
acquired represent approximately 92% of Digital's outstanding common stock.
The EFT-Phone consists of a cell phone which uses the Microsoft Operating
System. The EFT-Phone has an application that will allow our Affiliates to
access all of their back office sites, including their commission accounts,
through which the Affiliates will be able to deposit, withdraw and transfer
money to another account or to another Affiliate at no cost. The EFT-Phone will
have educational applications and PowerPoint presentation capability for
recruiting and training new Affiliates anywhere in the world.
The worldwide distribution and servicing rights to the EFT-Phone include
the right to sell the EFT-Phone to our affiliates and others. Servicing includes
the collection of service fees for all EFT-Phones worldwide, including monthly
fees, usage fees, as well as call forwarding, call waiting, text messaging and
video fees. Digital also acquired the rights to distribute all EFT-Phone
accessories.
The EFT-Phone is manufactured by an unrelated third party manufacturer.
Digital began distributing EFT-Phones in July, 2010.
In July 2010 we loaned $5,000,000 to CTX Virtual Technologies, Inc. The
loan to CTX is unsecured, bears interest at 8% per year and can at any time, at
our option, be converted into 8,474,576 units, with each unit consisting of one
share of CTX's common stock and one warrant. Each warrant allows us to purchase
one additional share of CTX's common stock at a price of $1.00 at any time on or
before June 23, 2015.
At any time after January 26, 2011 CTX can, at its option, cause the loan
to be converted into the same 8,474,576 units.
As further consideration for the loan, CTX has agreed to:
o manufacture the EFT Phone according to our specifications,
o make available to us any new designs or technical features
developed by CTX, at no cost, so long as the same are not exclusive
to another party
o cooperate with us to incorporate any new designs or technical
features into the EFT Phone.
o make available to us, at our cost, CTX's existing service centers
which can be used to service the EFT Phone.
o make available to us, at CTX's standard commission rates,
CTX's marketing and distribution network.
We believe that our business is robust and that consumers have become more
confident in ordering products, like ours, over the internet. However, the
nutritional supplement and cosmetic e-business markets have and continue to
become increasingly competitive and are rapidly evolving. Barriers to entry are
minimal and current and new competitors can launch new websites at a relatively
low cost. Many competitors in this area have greater financial, technical and
marketing resources than we do. Continued advancement in technology and
increasing access to that technology is paving the way for growth in direct
marketing. We also face competition for consumers from retailers, duty-free
retailers, specialty stores, department stores and specialty and general
merchandise catalogs, many of which have greater financial and marketing
resources than we have. Notwithstanding the foregoing, we believe that we are
well-positioned within the Asian consumer market with our current plan of
supplying American merchandise brands to consumers and that our exposure to both
the Asian and American cultures gives us a competitive advantage. There can be
no assurance that we will maintain our competitive edge or that we will continue
to provide only American made merchandise.
Our products are sensitive to business and personal discretionary spending
levels and tend to decline or grow more slowly during economic downturns,
including downturns in any of our major markets. The current worldwide recession
is expected to adversely affect our sales and liquidity for the foreseeable
future. Although we have mitigated decreases in sales by lowering our levels of
inventory to preserve cash on hand, we do not know when the recession will
24
subside and when consumer spending will increase from its current depressed
levels. Even if consumer spending increases, we are not sure when consumer
spending will increase for our products which will affect our liquidity.
The global economy is currently undergoing a period of unprecedented
volatility, and the future economic environment may continue to be less
favorable than that of recent years. This has led, and could further lead, to
reduced consumer spending, and which may include spending on nutritional and
beauty products and other discretionary items, such as our products. In
addition, reduced consumer spending may force us and our competitors to lower
prices. These conditions may adversely affect our revenues and profits.
Results of Operations
Material changes in our Statement of Operations for the three months ended
December 31, 2010 compared to the three months ended December, 2009 are
discussed below:
Increase
(I) or
Decrease
Item (D) Reason
---- -------- ------
Shipping charges D Decrease in sales.
Shipping cost I The logistic company we use to ship
our products increased their freight
charges significantly due to the
decline in the value of the US dollar
vs. the RMB.
Operating costs - Excalibur I Excalibur's operating costs for the
three months ended December 31, 2009
were accounted for under the equity
method as opposed to being consolidated
in the current results period.
Gross Profit as a % of total D Gross profit, as a % of total revenue
revenue was 35%, during the current period as
compared to 68% during the prior
period. The main reasons for the
decrease in gross profit were decrease
in sales, while having a significant
increase in shipping cost and the
consolidation of the operating costs of
Excalibur during the current period
with minimal corresponding
transportation income.
Selling, general and I Increase in (a) higher legal and
administrative expenses computer consulting fees; (b) higher
payroll expenses related to the
expansion of several of our sales
offices; and (c) the inclusion of the
general and administrative expenses of
Excalibur, which were consolidated with
our expenses during the current period.
Impairment loss of equipment I The net book value
of the transportation equipment further
exceeded its market value during the
three months ended December 31, 2010.
Impairment loss of loan I We determined during the period that
receivable the third party, to whom we made the
loan, would be unable to repay the
loan.
Interest income D Held-to-maturities securities were
sold in November.
25
Gain on disposal of I We sold all our corporate notes in
held-to-maturities securities November as the issuers of some
securities experienced significant
deteriorations in their
creditworthiness.
Loss on equity method of D The equity method was used for our
Excalibur investment in Excalibur for the three
months ended December 31, 2009. Our
48.81% share of loss from this equity
method investment was $464,566 for the
three months ended December 31, 2009.
For the three months ended December 31,
2010, 100% of Excalibur's loss of
approximately $1,709,290 was
consolidated with our financial
statements, with the corresponding
share of the noncontrolling
shareholders reported under
"noncontrolling interest".
Income tax expenses I Provision for tax liabilities due to
subpart F income received in prior
year.
Material changes in our Statement of Operations for the nine months ended
December 31, 2010 compared to the nine months ended December 31, 2009 are
discussed below:
Increase
(I) or
Decrease
Item (D) Reason
---- -------- ------
Sales revenue, net D Sales are recorded net of the
commissions paid to Affiliates who
are responsible for the sales.
Shortage of some popular products and
changes in the packaging for several
of our products resulted in delay of
shipment while commissions for these
sales were nevertheless paid.
Shipping charges D Decrease in sales.
Shipping cost I The logistic company we use to ship
our products increased their freight
charges significantly due to the
decline in the value of the US dollar
vs. the RMB.
Operating costs - Excalibur I Excalibur's operating costs for the
nine months ended December 31, 2009
were accounted for under the equity
method as opposed to being consolidated
in the current period.
Gross Profit as a % of total D Gross profit, as a % of total revenue
revenue was 48% as of December 31, 2010 as
compared to 72% as of December 31,
2009. The main reasons for the decrease
in gross profit were a decrease in
sales, while having significant
increase in shipping costs and the
consolidation of the operating costs of
Excalibur during the current period
with minimal corresponding
transportation income.
Selling, general and I Increase in (a) professional fees
administrative expenses related to higher audit fee, SOX
compliance and fees associated with the
addition of a general manager for Tian
Quan water plant; (b) higher rental
26
expenses associated with the new
corporate office in the US; (c) higher
payroll expenses related to the
expansion of several of our sales
offices; and (d) the inclusion of the
general and administrative expenses of
Excalibur with our expenses during the
current period.
Depreciation I Excalibur's depreciation expenses for
the nine months ended December 31,
2009 were accounted for under the
equity method as opposed to being
consolidated in the current period.
Impairment loss of equipment I The net book value
of the transportation equipment
exceeded its market value after damage.
Impairment loss of loan I We determined during the period that
receivable the third party, to whom we made the
loan, would not be able to repay the
loan.
Gain on disposal of I Held-to-maturities securities were
held-to-maturities securities sold in November.
Loss on equity method of D The equity method was used for our
Excalibur investment in Excalibur for the nine
months ended December 31, 2009. Our
48.81% share of loss from this equity
method investment was $1,976,154 for
the nine months ended December 31,
2009. For the nine months ended
December 31, 2010, 100% of Excalibur's
loss of approximately $8,072,002 was
consolidated with our financial
statements, with the corresponding
share of the noncontrolling
shareholders reported under
"noncontrolling interest".
Income tax expenses I Provision for tax liabilities due to
subpart F income received in prior
year.
Capital Resources and Liquidity
The following table shows our sources and (uses) of our cash for the nine months
ended December 31, 2010.
Nine Months Ended December 31,
------------------------------------------
2010 2009
---------------------- ------------------
Net cash provided by operating
activities $ 347,941 $ 6,167,557
Net cash (used in) investing
activities (2,190,091) (6,953,295)
Effect of exchange rate changes on
cash (73,772) -
---------------------- ------------------
Net decrease in cash $ (1,915,922) $ (785,738)
====================== ==================
We believe our existing cash and cash equivalents will be sufficient to maintain
our operations at the present level for at least the next twelve months.
For the nine months ended December 31, 2010, net cash provided by operating
activities was $347,941. This was primarily due to net loss of $8,102,266,
adjusted by non-cash related expenses that included depreciation and
amortization of $978,913, realized gain on available for sale securities of
$116,239, realized gain on held-to-maturity securities of $243,855, impairment
27
loss of $1,567,000 on loan receivable, impairment loss of $5,364,091 on
equipment, and a net increase in working capital items of $890,672.
For the nine months ended December 31, 2009, net cash provided by operating
activities was $6,167,557. This was primarily due to net income for the period
of $1,987,271, adjusted by a non-cash related expenses which included a loss of
$3,057,123 accounting for our interest in Excalibur under the equity method.
Material changes in our balance sheet items between December 31, 2010 and March
31, 2010 are discussed below:
--------------------------------------------------------------------------------
Increase
(I) or
Decrease
Item (D) Reason
---- -------- ------
Cash and Cash Equivalents D We used some of our excess cash to
invest in marketable securities
during the nine months ended December
31, 2010. During the quarter ended
September 30, 2010, we also
reclassified $8,949,324 as securities
available for sale that were reported
as cash and cash equivalent on March
31, 2010.
Securities Available for sale I We used some of our excess cash to
invest in marketable securities during
the nine months ended December 31,
2010.
Convertible Note Receivable I We used $5 million of our excess cash
to invest in convertible note
receivables bearing 8% interest
during the nine months ended December
31, 2010. See Note 4 to the
financial statements included as part
of this report.
Property and Equipment D On August 8, 2010 the OceanLaLa, the
ship owned by Excalibur
International, was damaged when
sailing in the Taiwan Strait. As a
result of the damage, we estimated
that the net book value of the ship
exceeded its market value and as a
result, an impairment loss of $5.4
million has been provided in the
current period of this report.
Held-to-maturity securities D We sold all our corporate notes in
November as the issuers of some
securities experienced significant
deteriorations in their
creditworthiness.
See note 5 to the financial statements included as part of this report
information concerning a loan we made to an unrelated third party. Future
Contractual Obligations
Total 2011 2012 2013 2014 Thereafter
----- ---- ---- ---- ---- ----------
Lease payments $822,688 $122,356 $484,248 $216,084 - -
We do not have any commitments or arrangements from any person to provide us
with any additional capital.
Except as disclosed in this Item 2, we do not know of any trends or demands that
affected, or are reasonably likely to affect, our capital resources or
liquidity.
28
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on our financial condition.
Significant Accounting Policies/Recent Accounting Pronouncements
See Note 2 to the financial statements included as part of this report for a
description of our significant accounting policies and recent accounting
pronouncements which have, or potentially may have, a material impact on our
financial statements.
Critical Accounting Policies and Estimates
During the nine months ended December 31, 2010 we did not change any of our
critical accounting policies or estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For our nine months ended December 31, 2010 all of our sales were made outside
of the United States. Most of our sales are denominated in the United States
dollar. In addition, from time to time we make intercompany loans with our
foreign subsidiaries that are denominated in the United States dollar.
We are exposed to foreign currency risks that arise from normal business
operations. These risks include the translation of our local currency balances
and those of our foreign subsidiaries, as well as loans and transactions
denominated in foreign currencies. It is our policy not to enter into derivative
financial instruments for speculative purposes. We do not hedge our exposure to
foreign currency fluctuations. A 10% adverse change in the underlying foreign
currency exchange rates would not be significant to our financial condition or
results of operations.
Item 4. Controls and Procedures.
(a) We maintain a system of controls and procedures designed to ensure that
information required to be disclosed in reports filed or submitted under the
Securities Exchange Act of 1934, as amended ("1934 Act"), is recorded,
processed, summarized and reported, within time periods specified in the SEC's
rules and forms and to ensure that information required to be disclosed in the
reports that we file or submit under the 1934 Act, is accumulated and
communicated to our management, including our Principal Executive Officer and
Principal Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. As of December 31, 2010, our Principal Executive and
Financial Officer carried out an evaluation on the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, our Principal Executive and Financial Officer concluded that our
disclosure controls and procedures were effective.
(b) Changes in Internal Controls. There was no change in our internal control
over financial reporting during the quarter ended December 31, 2010 that is
reasonably likely to materially affect our internal control over financial
reporting.
29
PART II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 17 to the financial statements included as part of this report.
Item 1A. Risk Factors.
There have not been any material changes from the risk factors as previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31,
2010.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Reserved
None
Item 6. Exhibits
Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Jack Jie Qin.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Jack Jie Qin.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 for Jack Jie Qin.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFT BIOTECH HOLDINGS, INC.
Date: February 9, 2011
By: /s/ Jack Jie Qin
-----------------------------------
Jack Jie Qin, Principal Executive and
Financial Officer
31