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 June 30, 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: 001-34222
EFT BIOTECH HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada 20-1211204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 Castleton St., Suite 300
City of Industry, CA 91748
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (626) 581-3335
N/A
------------------------------------------
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 [X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Larger accelerated filer [ ] Accelerated filer [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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: August 9, 2010, there were
75,983,205 shares of common stock, par value $0.00001 per share, of the
Registrant issued and outstanding.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 4-23
Item 2. Management's Discussion and Analysis of 24-27
Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 28
About Market Risk
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sale of Equity Securities and 29
Use of Proceeds
Item 3. Defaults Upon Senior Securities 29
Item 4. (Removed and Reserved) 29
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
3
BIOTECH HOLDINGS, INC.
Consolidated Balance Sheets
June 30, 2010 March 31, 2010
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 38,469,531 $ 38,383,833
Inventories 2,614,430 2,971,713
Available for sale securities 1,235,591 791,388
Held-to-maturity securities, current
portion 507,885 -
Prepaid expenses 595,502 475,092
--------------- ------------
Total current assets 43,422,939 42,622,026
Restricted cash 193,992 193,992
Other receivables 108,167 96,914
Property and equipment, net 15,190,094 15,370,975
Held-to-maturity securities 4,250,265 4,763,165
Loans to related parties 2,034,100 2,034,100
Security deposit 656,091 658,575
Goodwill 5,000 5,000
--------------- ------------
Total assets $ 65,860,648 $ 65,744,747
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,037,415 $ 2,346,835
Other liabilities 7,762,112 7,101,106
Unearned revenues 2,147,295 2,673,680
Due to related parties 44,025 43,427
------------------- ---------------
Total current liabilities 11,990,847 12,165,048
Contingent liabilities 2,944,959 2,904,957
----------------- ---------------
Total liabilities 14,935,806 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 authorized, 75,983,205 and
75,983,205 shares issued and outstanding
at at June 30, 2010 and March 31, 2010 760 760
Additional paid in capital 52,854,891 52,854,891
Retained earnings (deficits) (3,173,674) (3,821,924)
Accumulated other comprehensive income
(loss) (419,501) (469,326)
-------------- -------------
49,262,476 48,564,401
Noncontrolling interest 1,662,366 2,110,341
-------------- -------------
Total stockholders' equity 50,924,842 50,674,742
--------------- ----------------
Total liabilities and stockholders'
equity $ 65,860,648 $ 65,744,747
============== ===============
The accompanying notes are an integral part of these financial statements
4
EFT BIOTECH HOLDINGS, INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended
--------------------------------
June 30, 2010 June 30, 2009
--------------------------------
Sales revenues, net $ 3,765,872 $ 3,989,316
Shipping charge 883,530 1,054,080
----------- -----------
4,649,402 5,043,396
Cost of goods sold 1,228,038 960,448
Shipping cost 315,574 301,900
Running cost of transportation 691,892 -
----------- -----------
2,235,504 1,262,348
Gross profit 2,413,898 3,781,048
Selling, general and administrative expenses 2,564,982 2,306,319
----------- -----------
Net operating income (loss) (151,084) 1,474,729
Other income (expense)
Interest income 172,111 164,932
Gain on disposal of available-for-sale
securities 5,092 -
Loss from equity method investment - 2,077,703)
Foreign exchange gain (loss) 132,428 886
Other income (expense) 15,250 29,232
----------- -----------
Total other income (expense) 324,881 (1,882,653)
----------- -----------
Net income (loss) before income taxes and
non-controlling interest 173,797 (407,924)
Income taxes - -
---------- -----------
Net Income (loss) 173,797 (407,924)
Noncontrolling interest 474,453 -
---------- -----------
Net income (loss) attributable to EFT
Biotech Holdings, Inc. $ 648,250 $ (407,924)
=========== ============
Net income per common share
Basic and diluted $ 0.01 $ (0.01)
=========== ============
Weighted average common shares outstanding
Basic and diluted 75,983,205 75,983,205
=========== ============
The accompanying notes are an integral part of these financial statements.
5
EFT BIOTECH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2010
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 available for
sale securities - - - - 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) - - - 648,250 - (474,453) 173,797
Unrealized gain on available for
sale securities - - - - 19,603 - 19,603
Foreign currency translation
adjustment - - - - 30,222 26,478 56,700
---------- ------- ---------- --------- ------------ ---------- ----------
BALANCE, JUNE 30, 2010 $75,983,205 $ 760 $52,854,891 $(3,173,674) $ (419,501) $ 1,662,366 $50,924,842
=========== ======= =========== =========== ============ =========== ===========
The accompanying notes are an integral part of these financial statements.
6
EFT BIOTECH HOLDINGS, INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
--------------------------------
June 30, 2010 June 30, 2009
--------------------------------
Cash flows from operating activities:
Net income (loss) $ 173,797 $ (407,924)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 490,456 12,589
Bond premium amortization 5,015 -
Gain on available for sale securities (5,092) -
Loss from equity method investment - 2,077,703
Changes in operating assets and liabilities:
Inventories 357,283 251,572
Prepaid expenses and other receivable (226,962) 1,510,777
Accounts payable (226,709) (2,085,821)
Warranty liability (5,323) (4,275)
Other liabilities 662,666 1,076,644
Unearned revenues (526,385) 202,360
----------- ----------
Net cash provided by (used in) operating
activities 698,746 2,633,625
Cash flows from investing activities:
Additions to fixed assets (117,893) (39,477)
Note receivables - related party - (600,000)
Purchase of available for sale securities (419,508) -
----------- ----------
Net cash (used in) investing activities (537,401) (639,477)
Cash flows from financing activities:
Net cash provided by (used in) financing
activities - -
Effect of exchange rate changes on cash (75,647) -
----------- ----------
Net increase in cash 85,698 1,994,148
Cash, beginning of period 38,383,833 38,181,837
----------- ----------
Cash, end of period $ 38,469,531 $ 40,175,985
============ ============
Supplemental disclosures of cash flow
information:
Income taxes paid in cash $ - $ -
The accompanying notes are an integral part of these financial statements.
7
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 an aggregate of 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. own a majority of the Company's common stock
immediately following the Transaction, therefore, the Transaction is being
accounted for as a "reverse acquisition", and EFT BioTech is deemed to be the
accounting acquirer in the reverse acquisition. As EFT Holdings was a
non-operating public shell corporation that acquired an operating company, this
Transaction is 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.
At its formation on September 18, 2007, EFT BioTech acquired EFT Limited, a
British Virgin Islands company ("BVI") formed on August 22, 2007 pursuant to
which EFT Limited (BVI) became a wholly-owned subsidiary of EFT BioTech. On
October 20, 2008, EFT Investment Co., Ltd. ("EFT Investment") a Taiwan company,
was formed as a wholly-owned subsidiary of EFT Biotech Holdings., Inc. Since
both EFT BioTech and EFT Limited (BVI) were under common control, this
acquisition represents a reorganization of entities under common control.
EFT Limited (BVI) has four wholly-owned subsidiaries: EFT, Inc., a California
company formed on January 1, 2003, Top Capital International, Ltd. (BVI), a BVI
company formed on May 22, 2002, EFT (HK), Ltd., a Hong Kong ("HK") company
formed on November 1, 2006 and EFT International Ltd. (BVI), a BVI company
formed on April 20, 2005, which it acquired all on November 14, 2007. As EFT
Limited (BVI) and the four companies being acquired were under common control,
this acquisition also represents a reorganization of entities under common
control.
These reorganizations of entities under common control resulted in changes in
the legal organization of these predecessors to EFT BioTech but did not result
in changes in the reporting entity.
On October 20, 2008, EFT Investment Co., Ltd. ("EFT Investment"), a Taiwan
company, was formed as a wholly-owned subsidiary of EFT Biotech Holdings, Inc.
On October 25, 2008, EFT Investment Co. Ltd ("EFT Investment") acquired 48.81%
of Excalibur International Marine Corporation ("Excalibur")'s 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
controlling interest in Excalibur at January 15, 2010 as defined by Accounting
Standards Codification ("ASC") Topic 810, Consolidation, which requires EFT
Investment 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, it's
December 31, 2009 financial information is consolidated with the Company's March
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,
Inc. 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
8
account or to another Affiliate at no cost. The EFT-Phone will have educational
applications and PowerPoint presentation capabilities.
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 will be manufactured by an unrelated third party. Distribution of
the EFT-Phones is expected to begin in July, 2010. The Company, through its
subsidiaries, is mainly engaged in the E-Business designed around the concept of
Business-to-customer using the World Wide Web as its "storefront" and business
platform to market, sell and distribute 50 American brand products consisting of
26 nutritional products, 21 personal care products, 1 automotive fuel additive,
1 home product and a portable drinking container. In addition, the Company,
through Excalibur, owns and operates a ship which transports passengers and
cargo between Taiwan and mainland China through the Taiwan Strait.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
These unaudited interim consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (the "GAAP") for
interim financial reporting and the rules and regulations of the Securities and
Exchange Commission that permit reduced disclosure for interim periods.
Therefore, certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted. 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 March 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and VIE for which a subsidiary of 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 and Taiwan 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 the Statement, all assets and liabilities were translated at the three months
ended June 30, 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 income statement.
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.
9
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.
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, then
the estimated liability would be 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,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be disclosed.
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.
Available for sale securities
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 in income 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 high tech nutritional, cosmetic,
automotive maintenance and environmentally safe products. The Company has two
warehouses, one in City of Industry, CA and the other in Kowloon, Hong Kong. On
a quarterly basis, the 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, our estimates of the 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 & equipment 3-8 years
Computers & office equipment 3-5 years
10
Automobile 5 years
Leasehold improvements 5 years
Transportation equipment 10 years
For the three months ended June 30, 2010 and 2009, depreciation expenses were
$490,456 and $12,589, respectively.
Long-Lived Assets
Effective January 1, 2002, the Company adopted ASC Topic 360, Accounting for the
Impairment or Disposal of Long-Lived Assets, ASC Topic 360 which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions of ASC
Topic 225, Reporting the Results of Operations for a Disposal of a Segment of a
Business. 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.
Fair Value of Financial Instruments
ASC Topic 825 requires that the Company discloses estimated fair values of
financial instruments. The carrying amounts reported in the statements of
financial position 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
Effective April 1, 2008, the Company adopted ASC Topic 820 which 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. The Company adopted ASC Topic 718 on April 1, 2006.
Stocks issued to officers or employees
During the three months ended June 30, 2010 and 2009, the Company has not issued
any stock options or warrants to employees nor are there any outstanding
warrants or options as of June 30, 2010, therefore pro forma disclosures are not
required.
Stock issued for service
The Company accounts for equity instruments issued in exchange for the receipts
of goods or service from other than employees in accordance with Accounting
Standards Codification or "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
11
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 Recognition
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) ASC Topic 605 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 at the time when passengers and cargo are conveyed to
the destination port. Payments received before all of the relevant criteria for
revenue recognition are satisfied are recorded as unearned revenue. Cash
consideration given by the 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.
The Company has developed its own reverse auction program, for the purpose of
increasing revenues by attracting new members to join EFT's affiliate program.
In a reverse auction the objective is to bid the price of a product down within
a predetermined time frame unlike an ordinary auction (also known as a forward
auction) where bidders bid the price up and the highest bidder wins the right to
buy the product at the conclusion of bidding. The reverse auction program was
beta-tested and introduced to the Company's Affiliates in June 2009. All bidders
acknowledge that they have read and understand the Terms and Conditions with the
Company before they can participate in the reverse auction program. Every bid
has a fixed price of $1 and the Company only recognizes revenue when bidder has
placed a bid on an auction product. The bidders must purchase bids in advance
before entering the reverse auction program and these purchased bids are
non-refundable according to the Terms and Conditions of the reverse auction
program. For the three months ended June 30, 2010 and 2009, the reverse auction
program generated $416,332 and $354,749 sales revenue, respectively.
Warranty
The Company generally does not provide customers with right of return except for
defective products which is within six month warranty period from date of sales.
Historically, the company warranty provisions have not been material. The
specific warranty terms and conditions vary depending upon the product sold, but
generally include replacement over a period of nine months. 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. The anticipated rate of
warranty claims is the primary factor impacting the estimated warranty
obligation. Warranty claims are relatively predictable based on our 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 and
management's estimate of the costs to remediate the claims and adjusts the
provisions accordingly.
Currently, the Company estimates its warranty expense as follows:
Products sold for
----------------------------------------
0-2 months 2% of cost
3-4 months 1.5% of cost
5-6 months 1% of cost
The Company records warranty liabilities at the time of sale for the estimated
costs that may be incurred under its limited warranty. The specific warranty
terms and conditions vary depending upon the product sold, but generally include
replacement over a period of nine months. 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. The anticipated rate of warranty
claims is the primary factor impacting the estimated warranty obligation. The
other factors are less significant due to the fact that the warranty period is
only six months and replacement is generally already in stock or available at a
pre-determined price.
12
Warranty claims are relatively predictable based on historical experience
of failure rates. If actual results differ from the estimates, the Company
revises its estimated warranty liability.
Shipping Costs
The Company's shipping costs are included in cost of sales in the accompanying
Consolidated Statements of Operations for all periods presented.
Income Taxes
The Company utilizes 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
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.
The Company adopted the provisions of ASC Topic 740, which addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under ASC Topic 740, we
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. ASC Topic 740 also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
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 from the diluted net income per share calculation for the three
months ended June 30, 2010 and 2009:
Three Months Ended June 30,
2010 2009
Weighted average warrants outstanding 14,890,040 14,890,040
---------- ----------
Total 14,890,040 14,890,040
========== ==========
Three months Ended June 30,
2010 2009
Historical Numerator
Net Income (loss) attributable to
EFT Biotech Holdings, Inc. $ 648,250 $ (407,924)
========= ============
13
Denominator:
Weighted-average shares used
for basic net income per share 75,983,205 75,983,205
Basic net income (loss) per share $ 0.01 $ (0.01)
========== ===========
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.
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 is constantly at
a marginal to zero dollar ($0) level and its revenues are derived from orders
place 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 April 2010, the FASB issued the amendment to ASC Topic 718, "Compensation -
Stock Compensation", which provides clarification that an employee share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity's equity securities trade should not
be considered to contain a condition that is not a market, performance, or
service condition. As a result, an entity would not classify such an award as a
liability if it otherwise qualifies as equity. This topic will be effective for
periods beginning on or after December 15, 2010. The Company has not elected to
early adopt this topic and is evaluating the impact that this topic will have on
the Company's financial statements.
In April 2010, the FASB issued the amendment to ASC Topic 310, "Receivables".
Amended ASC Topic 310 addresses that modification of loans if within a pool
under the existing ASC do not result in the removal of those loans from the pool
even if the modification of those loans would otherwise be considered a troubled
debt restructuring. Effective for modifications of loans accounted for within
pools under Subtopic 310-30 occurring in the first interim or annual period
ending on or after July 15, 2010 with early adoption permitted. This topic is to
be applied prospectively. The Company has not elected to early adopt this topic
and is evaluating the impact that this topic will have on the Company's
financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity
(Topic 505): Accounting for Distributions to Shareholders with Components of
Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This
amendment to Topic 505 clarifies the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a limit on
the amount of cash that will be distributed is not a stock dividend for purposes
of applying Topics 505 and 260. Effective for interim and annual periods ending
on or after
14
December 15, 2009, and would be applied on a retrospective basis.The Company
does not expect the provisions of ASU 2010-01 to have a material effect on the
financial position, results of operations or cash flows of the Company.
Note 3 - FAIR VALUE MEASUREMENTS
On April 1, 2008, the Company adopted the effective portions of ASC Topic 820.
In February 2008 the FASB issued ASC Topic 820, which provides a one year
deferral of the effective date of ASC Topic 820 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually).
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 to sell 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-- Include 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 currently does not have non-financial assets and non-financial
liabilities that are required to be measured at fair value on a recurring basis.
Assets and liabilities measured at fair value are summarized below:
June 30, 2010
---------------------------------------------------------------
Level 1
Quoted
Prices Level 2
in Active Significant Level 3
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs Total
------------- ------------- ------------- -----------
Available for
sale
securities $ 1,235,591 $ - $ - $ 1,235,591
------------------ -------------- ------------- -----------
Total assets
measured at
fair value $ 1,235,591 $ - $ - $ 1,235,591
================== ============== ============= ===========
15
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
------------- ------------- ------------- -----------
Available for
sale
securities $ 791,388 $ - $ - $ 791,388
------------------ -------------- ------------- -----------
Total assets $ 791,388
measured at
fair value $ 791,388 $ - $ - $ 791,388
================== ============== ============= ===========
Note 4 - LOAN TO RELATED PARTIES
The Board of Directors of the Company approved a non-interest bearing unsecured
demand loan in the amount of $1,567,000 on July 25, 2009 to Yeuh-Chi Liu, a
vendor, a member of the board of directors and a shareholder of Excalibur. The
$1,567,000 loan is collateralized with 3.97% ownership of Excalibur.
On Feburary 7, 2010, one of the Company's wholly-owned subsidiaries, EFT
International Ltd. (BVI) ("EFT Int'l") loaned $467,100 to Turn-Key Technology
Co., Ltd. The loan is due on demand and bears an interest rate of 2.5% per
annum.
Note 5 - 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.
Note 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30, March 31,
2010 2010
---------------- -----------------
Construction in Progress $ 922,632 $ 804,410
Transportation equipment 17,270,427 17,065,379
Lease Improvement 419,949 418,582
Automobile 167,181 154,724
Computer Equipment 152,545 144,696
Furniture & Fixture 78,693 68,461
Machinery and Equipment 50,013 49,903
----------------- -----------------
19,061,440 18,706,155
Less: Accumulated depreciation (3,871,346) (3,335,180)
-------------- -----------------
$ 15,190,094 $ 15,370,975
============ ==============
At June 30, 2010, expenditures of $922,632 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.
16
Note 7 - HELD-TO-MATURITY SECURITIES
The carrying value of held-to-maturity securities consisted of the following as
of June 30, 2010:
Corporate notes: Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
Short-term held-to-maturity
securities:
Due in one year or less $ 507,885 - $ (4,340) $ 503,545
Total 507,885 - (4,340) 503,545
========== ===== ========= =========
Long-term held-to-maturity
securities:
Due after one year through five $ 1,481,215 $ 54,295 - $1,535,510
years
Due after five years through ten
years 1,062,086 31,469 - 1,093,555
Due after ten years 1,706,964 50,010 - 1,756,974
Total $ 4,250,265 135,775 - 4,386,039
========== ========= ====== ==========
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
equity method was used for this investment for the three months ended June 30,
2009.
Due to the substantial financial support the Company subsequently provided
Excalibur in funding its operations and as a result of a change in Excalibur's
Board of Directors, the Company was deemed to have 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.
At June 30, 2010, Excalibur's March 31, 2010 balance sheet was consolidated with
the Company's June 30, 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
months ended March 31, 2009:
Three Months
Ended March 31,2009
Exchange rate 33
Revenue $ 3,404
Gross profit $ (2,130,832)
Loss from continuing operations $ (2,127,428)
Net Loss $ (2,127,428)
48.81% investment earnings $ (1,038,398)
The following table provides the summary of balance sheet information for
Excalibur as of June 30, 2009 and March 31, 2009:
17
Excalibur International Marine Corp
June 30, 2009 March 31, 2009
----------------------- -----------------------
NT$ USD NT$ USD
---------- ----------- ---------- ----------
Total assets 1,276,028.936 38,667,544 1,289,432,107 39,073,700
Total liabilities 261,219,920 7,915,755 204,417,971 6,194,484
Net assets 1,014,809,016 30,751,789 1,085,014,136 32,879,216
EFT 48.81% ownership 495,328,281 15,009,948 529,595,400 16,048,345
Ending balance of
investment account 15,051,611 17,129,314
Difference/Premium 41,663 (1,080,969)
*NTD: New Taiwan Dollar
The difference of $41,663 was mainly due to the exchange rate fluctuations
between the periods.
The premium of $1,080,969 was mainly the excess we paid to purchase of the
48.81% of ownership in Excalibur as of March 31, 2009. During the first quarter
ended June 30, 2009 and with continued loss and general worsen market condition,
management has determined to write-off the premium paid and recorded as part of
the investment loss during the three months ended June 30, 2009.
Note 9 - OTHER LIABILITIES
Other liabilities consist of the following:
June 30, 2010 March 31, 2010
Commission payable $6,871,040 $6,380,408
Payroll liabilities 740,487 645,900
Warranty liabilities 38,023 43,346
Accrued expenses 46,804 -
Other 65,758 31,452
----------- -----------
$7,762,112 $7,101,106
=========== ==========
Note 10 - 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
($2,911,940) is still under dispute as Excalibur believes that certain equipment
relating to the OceanLaLa was not delivered at the time of sale.
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 ($33,019) was recorded.
Note 11 - STOCKHOLDERS' EQUITY
Common stock
As of June 30, 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 for the three months ended
June 30, 2010.
18
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 is exercisable to purchase
one share of common stock for a price of $3.80 until the second anniversary of
the date of issuance.
The Company has the right, 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 it in additional paid in capital.
Note 12 - INCOME TAXES
The Company was incorporated in the United States of America ("US") and has
operations in four tax jurisdictions - the United States of America, 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 three months ended June 30, 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
at June 30, 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 June 30, 2010 and 2009.
The income tax expenses consist of the following:
Three Months Ended June 30,
------------------------------
2010 2009
-------------- --------------
Current:
Domestic $ - $ -
Foreign - -
Deferred - -
------------ -----------
Income tax expenses $ - -
============ ===========
A reconciliation of income taxes, with the amount computed by applying the
statutory federal income tax rate (37% for the three months ended June 30, 2010
and 2009) to income before income taxes for the three months ended June 30, 2010
and 2009, is as follows:
Three months Ended June 30,
-----------------------------
2010 2009
-------- -------
Income tax at U.S. statutory rate $ 239,853 $ 294,416
State tax - -
Indefinitely invested earnings of foreign (250,236) (298,302)
subsidiaries
Nondeductible expenses 10,383 3,886
--------- --------
$ - $ -
========= ========
Effective tax rate 0% 0%
19
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 three months ended June 30, 2010 and 2009, the Company had no
unrecognized tax benefits and related interest and penalties expenses.
Currently, the Company is not subject to examination by major tax jurisdictions.
Note 13 - 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:
June 30, March 31,
2010 2010
-------------- ---------------
Warranty liability as at beginning of period $ 43,346 $ 51,684
Reversal of costs (5,323) (8,338)
Service obligations honored - -
--------- ----------
Warranty liability as at end of period $ 38,023 $ 43,346
=========== ==========
Current portion $ 38,023 $ 43,346
Non-current portion - -
--------- ----------
$ 38,023 $ 43,346
=========== ==========
Note 14 - RELATED PARTY TRANSACTIONS
June 30, March 31,
2010 2010
---------- ----------
Amount due to related parties:
$ 44,025 $ 43,427
Names and relationship of related parties:
Names Relationship with Company
--------------------------
Lu TsoChun Shareholder of Excalibur
Steve Hsiao Shareholder of Excalibur
Gu Zong-Nan Shareholder of Excalibur
Note 15 - 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 lease 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 $ 270,000
2012 360,000
The Company rents storage space for its satellite training center in Hong Kong.
The lease provides for monthly lease payments approximating $750 USD starting on
October 22, 2009 and expiring on December 31, 2010. Future minimum lease
payments under the month to month operating leases as of June 30, 2010
approximate the following:
20
Year Ending March 31,
2011 $ 4,500
The Company rents office space for its satellite training center in Vietnam
Saigon. The lease provides for monthly lease payments approximating $1,400 USD
starting on August 8, 2009 and expiring on August 8, 2011. Future minimum lease
payments under the operating leases as of June 30, 2010 approximate the
following:
Year Ending March 31,
2011 $ 12,600
2012 2,800
The Company rents office space for its satellite training center in Thailand.
The lease provides for monthly lease payments approximating $3,500 USD starting
on April 20, 2010 and expiring on March 29, 2011. Future minimum lease payments
under the operating leases as of June 30, 2010 approximate the following:
Year Ending March 31,
2011 $ 31,500
The Company rents office space for its division at Thailand Center. The lease
provides for monthly lease payments approximating $564 USD starting on April 1,
2010 and expiring on March 29, 2011. Future minimum lease payments under the
operating leases as of June 30, 2010 approximate the following:
Year Ending March 31,
2011 $ 5,076
The Company rents office space for its auction product purchase center in China.
The lease provides for monthly lease payments approximating $732 USD starting on
June 1, 2009 and expiring on December 31, 2010. Future minimum lease payments
under the operating leases as of June 30, 2010 approximate the following:
Year Ending March 31,
2011 $ 4,392
The Company rents another office space for its auction product purchase center
in China. The lease provides for monthly lease payments approximating $264 USD
starting on July 15, 2009 and expiring on July 14, 2010. Future minimum lease
payments under the operating leases as of June 30, 2010 approximate the
following:
Year Ending March 31,
2011 $ 132
21
Rent expenses for the three months ended June 30, 2010 and 2009 were
approximately $177,245 and $183,914 respectively.
Note 16 - LITIGATION
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 (NTD
1,050,000) and severance payments (NTD 260,038). 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 NTD 8,050,832. 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 remains.
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. The resolution of
this case is pending.
Note 17 - SUBSEQUENT EVENTS
On July 26, 2010 EFT Biotech Holdings, Inc. lent $5,000,000 to CTX Viral
Technologies, Inc. The loan to CTX is unsecured, bears interest at 8% per year
and can at any time, at EFT's 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 EFT 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 23, 2011 CTX can, at its option, cause the loan to be
converted into the same 8,474,576 units. On July 23, 2011, the loan, if it is
not in default, will automatically be converted into 8,474,576 units.
As further consideration for the loan, CTX has agreed to:
o manufacture the EFT cellular phone according to EFT's specifications, for
a price equal to CTX's factory door price plus 15%,
o make available to EFT 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 EFT to incorporate any new designs or technical features
into the EFT cellular phone.
o make available to EFT, at its cost, CTX's existing service centers which
can be used to service the EFT phone.
o make available to EFT, at CTX's standard commission rates, CTX's marketing
and distribution network.
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 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 August
5, 2010, we had approximately 1,081,307 registered affiliates, most of which
were located in China and Hong Kong. As of June 30, 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 60% 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 and operates a high speed
ship which transports passengers and cargo between Taiwan and mainland China
through the Taiwan Straight. Excalibur's ship, the OceanLaLa, can carry up to
370 passengers and 630 tons of cargo.
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.
23
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 will be manufactured by an unrelated third party
manufacturer. Digital expects to begin distributing EFT-Phones in July, 2010.
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
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.
24
Results of Operations
Material changes in our Statement of Operations for the three months ended June
30, 2010 are discussed below:
Item Increase Reason
(I) or
Decrease
(D)
Sales revenue, net D Sales are recorded net of the
commissions we pay the Affiliates who
are responsible for the sales.
Shortage of some popular products
leads to delay of shipment while
commissions for such sales have been
paid out.
Shipping charges D Decrease in sales.
Running cost of I We do not incur running cost for the
transportation three months ended June 30, 2009 as
Excalibur's financial statements were
started to consolidate with our
financial statement from the year ended
March 31, 2010.
Gross Profit as a % of total D Gross profit, as a % of total revenue
revenue was 52% as of June 30, 2010 as
compared to 75% as of June 30, 2009.
The main reasons for decrease in
gross profit were decrease in sales
and realizing running cost of
Excalibur without corresponding
transportation income
Selling, general and I Increased in consultancy fee, and
administrative expenses included payroll expenses of
Excalibur.
Loss on equity method of D The equity method was used for our
Excalibur investment in Excalibur for the three
months ended June 30, 2009. Our 48.81%
share of loss from this equity method
investment was $2,077,703 for the three
months ended June 30, 2009. While for
the three months ended June 30, 2010,
100% of Excalibur's loss of
approximately $920,000 was consolidated
with EFT's financial statements, with
the corresponding share by the
noncontrolling shareholders reported
under "noncontrolling interest" . All
inter-company accounts and transactions
were eliminated in consolidation.
Foreign exchange loss I Changes in foreign exchange rates.
Capital Resources and Liquidity
The following table shows the movements of our cash for the periods presented.
Three Months Ended June 30,
-------------------------------
2010 2009
Net cash provided by operating
activities $ 698,746 $ 2,633,625
Net cash (used in) investing
activities (537,401) (639,477)
Effect of exchange rate changes on cash (75,647) -
--------- -----------
Net increase in cash $ 85,698 $ 1,994,148
========= ===========
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As of June 30, 2010, we had cash and cash equivalents of $38,469,531. We believe
our existing cash and cash equivalents will be sufficient to maintain our
operations at present level for at least the next twelve months.
For the three months ended June 30, 2010, net cash provided by operating
activities was $698,746. This was primarily due to net income of $173,797,
adjusted by non-cash related expenses that included depreciation and
amortization of $490,456, and adjusted by a non-cash related gain on available
for sale securities of $5,092, and a net increase in working capital items of
$34,570. The net increase in working capital items was mainly due to a decrease
in inventory of $357,283 resulting from decrease in sales, and a increase in
other liabilities of $662,666 due to Affiliates withdrawing lesser amount of
commission payable to them. The net increase in working capital items was
partially offset by the increase in prepaid expenses and other receivable
resulting from more prepaid expenses paid to vendor as deposits, consequently,
lead to a reduction in accounts payables. Decrease in unearned revenues was due
to decrease in deliveries-in-transit.
For the three months ended June 30, 2009, net cash provided by operating
activities was $2,633,625. This was primarily due to net loss of $407,924,
adjusted by non-cash related expenses that included depreciation of $12,589, and
adjusted by a non-cash related loss from equity method investment of $2,077,703,
then increased by a net increase in working capital items of $951,257. The net
increase in working capital items was mainly due to a decrease in inventory of
$251,572 resulting from decrease in sales, and an increase in other liabilities
of $1,076,644 due to Affiliates withdrawing lesser amount of commission payable
to them, and a decrease in prepaid expenses and other receivable of $1,510,777.
The net increase in working capital items was partially offset by reduction in
accounts payables resulting from repayment of trademark expenses for last fiscal
year. Increase in unearned revenues was due to increase in
deliveries-in-transit.
Net cash used in investing activities for the three months ended June 30, 2010
was $537,401, primarily due to the purchase of available for sale securities of
$419,508 on mutual funds and $117,893 of capital expenditure on construction in
progress and some furniture.
Net cash used in investing activities for the three months ended June 30, 2009
was $639,477, primarily due to the loan to Excalibur to fund operation cost.
Future Contractual Obligations
Total 2011 2012 2013 2014 Thereafter
----- ---- ---- ---- ---- ----------
Lease payments $691,000 $328,200 $362,800 - - -
Other than as disclosed above, we do not anticipate any capital requirements for
the three months ending June 30, 2010.
We do not have any commitments or arrangements from any person to provide us
with any additional capital.
Except as disclosed in Item 1.A or this Item 7, we do not know of any trends or
demands that affected, or are reasonably likely to affect, our capital resources
or liquidity.
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.
26
Critical Accounting Policies and Estimates
During the three months ended June 30, 2010 we did not change any of our
critical accounting policies or estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For our three months ended June 30, 2010 all of our sales were made
outside of the United States. All of our sales are denominated in United States
dollar. In addition, from time to time we make intercompany loans with our
foreign subsidiaries that are denominated in 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 June 30, 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 were no changes in our internal control
over financial reporting during the quarter ended June 30, 2010 that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Subsequent to June 30, 2010, and in an effort to
strengthen our internal control over financial reporting, we hired an Internal
Control Manager and a Vice President of Finance.
27
PART II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to nor are we threatened with or have any knowledge of any
claims or legal actions that would have a material adverse impact on our
financial position, operations or potential performance.
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 filed with the SEC on June 25, 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 5. Other Information.
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.
3.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 for Jack Jie Qin.
28
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: August 9, 2010
By: /s/ Jack Jie Qin
-----------------------------------
Jack Jie Qin, Principal Executive and
Financial Officer
29