PINX:EFTB EFT Holdings Inc Annual Report 10-K/A Filing - 3/31/2012
Effective Date 3/31/2012
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K/A
(Mark One)
For the fiscal year ended: March 31, 2011
For the transition period from ________ to ________
EFT HOLDINGS, INC. (Exact name of registrant as specified in its charter)
Commission File No. 0-53730
Registrant's Telephone Number: (626) 581-3335
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12 (g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¨ Yes x No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the price of $2.30 per share, which was the closing price of the common stock as reported on the OTC Bulletin Board under the symbol “EFTB” on September 30, 2010, was $58,841,372.
As of June 20, 2012, the registrant had 75,983,201 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE: None
Explanatory Note
On August 25, 2011, EFT Holdings, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (the “Initial Form 10-K”). This amendment to the Initial Form 10-K (the “Form 10-K/A”) amends disclosure related to the following areas.
Part II Item 6. – Selected Financial Data. Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Item 8. – Financial Statements and Supplemental Data. Item 9A. – Controls and Procedures.
Part III Item 12. – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Item 13. – Certain Relationships and Related Transactions, and Director Independence.
Part IV Item 15. – Exhibits, Financial Statement Schedules.
No other changes have been made to the Initial Form 10-K. The filing of this Form 10-K/A shall not be deemed as an admission that the original filing, when made, included any untrue statement of material fact or omitted to state a material fact necessary to make a statement not misleading. This Form 10-K/A does not reflect events occurring after the filing of the Initial Form 10-K on March 31, 2011, and no attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the Initial Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with the Initial Form 10-K and the Company’s filings with the Securities and Exchange Commission (the “SEC”) subsequent to the filing of the Initial Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain statements made in this annual report on Form 10-K are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding our plans and objectives for future operations. Forward-looking statements are based on current expectations and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.
EFT HOLDINGS, INC.
FORM 10-K/A For the Fiscal Year Ended March 31, 2011
PART II
The following selected historical consolidated financial data is qualified by reference to, and should be read in conjunction with the consolidated financial statements and the related notes, appearing elsewhere in this report, as well as Item 7 of this report.
Our net income (losses) for each fiscal quarter during the two years ended March 31, 2011 were:
See Note 2 of the Notes to the Consolidated Financial Statements contained in Item 8 for a reconciliation of these amounts to previously reported amounts and Item 7 for information on items affecting comparability.
We believe that our Business to Customer business, which represents 98.8% of our total net revenues in the fiscal year ended March 31, 2011, 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.
In addition, we expect future operations to be affected by the Excalibur transportation business, Digital’s distribution of EFT Phones and our prospective water bottling operations.
Results of Operations
Material changes in our Statement of Operations for the periods presented are discussed below:
Year Ended March 31, 2011
Year Ended March 31, 2010
Capital Resources and Liquidity
The following table shows our sources and (uses) of our cash for the three years ended March 31, 2011.
The cash and cash equivalents and securities available for sale are our primary sources of liquidity. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at the present level for at least twelve months.
Operating Activities:
During the year ended March 31, 2011, we recorded a loss of $19,756,880, yet generated $4,547,136 from our operating activities. The primary reason that we generated cash from our operating activities while suffering an operating loss was that impairment losses of approximately $7,000,000, associated with our investment in Excalibur, and impairment of $5,000,000 associated with our investment in CTX, were included in our operating loss. During this period, we also recorded approximately $11,300,000 of unearned revenue for cash that was received in the current period, but such revenue can only be recognized when goods are delivered to affiliates in future periods.
During the year ended March 31, 2010, we recorded a loss of $14,178,943, yet generated $4,912,068 from our operating activities. The primary reason that we generated cash from our operating activities while suffering an operating loss was that losses of approximately $15,000,000, associated with our investment in Excalibur and depreciation of $2,300,000, which did not require the use of cash, were included in our operating loss.
During the year ended March 31, 2009, we had net income of $810,763, yet our operating activities used $11,024,088 in cash. The primary reason that our operating activities used cash, despite having net income, was that during the year inventories and prepaid expenses increased, and we paid outstanding liabilities. All of the foregoing required the use of cash but were not expensed in our statement of operations. During this period, we also recorded revenue which was previously recorded as unearned, with the result that a portion of our revenues were attributable to cash that was received in prior periods.
Investing activities:
Net cash used in investing activities for the year ended March 31, 2011 was $7,180,044, primarily attributable to our investment in CTX of $5,000,000, the purchase of $10,915,397 of available for sale securities and $470,297 of capital expenditure on construction in progress and leasehold improvements, partially offset by proceeds from corporate notes and securities available for sale of $8,705,650 and the redemption of corporate notes for $500,000.
Net cash used in investing activities for the year ended March 31, 2010 was $13,904,536, primarily attributable to the purchase of corporate notes for $4,800,184, the purchase of available for sale securities for $8,949,324 and capital expenditures of $1,353,248 on construction in progress and leasehold improvements, partially offset by $1,197,839 of loan repayments by related parties.
Net cash used in investing activities for the year ended March 31, 2009 was $18,158,923, primarily attributable to an equity investment in Excalibur of $15,985,269, loans to related parties of $1,897,000 and capital expenditures of $276,654 on equipment.
Financing activities:
We did not use or receive any cash from financing activities during the year ended March 31, 2011. Net cash used in financing activities for the year ended March 31, 2010 was $193,992, representing restricted cash frozen by the Taiwan Taipei district court as a result of a lawsuit filed against Excalibur for service fees and out-of-pocket expenses.
Net cash provided by financing activities for the year ended March 31, 2009 was $52,848,489, representing the proceeds from our private placement.
Material changes in our balance sheet items between March 31, 2011 and March 31, 2010 are discussed below:
Between January and August 2008, we sold 14,890,040 Units to non-U.S. residents at a price of $3.80 per Unit. The Units were sold pursuant to the exemption provided by Regulation S under the Securities Act of 1933.
Each Unit consisted of one share of our common stock and one warrant. Each warrant allowed 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, 2010. On September 2, 2010, the Company extended the expiration date of the warrants 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 30 days from the tenth 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 USA, for at least $11 per share.
We used $19,193,000 from the sale of the Units to purchase our 48.81% interest in Excalibur International Marine Corporation.
Yeuh-Chi Liu, a supplier of our spray bottles, borrowed $1,567,000 from us in July 2008. The loan is non-interest bearing and is payable upon demand. The loan was used by Yeuh-Chi Liu to acquire a 3.97% ownership of Excalibur International Marine Corporation and is secured by that interest. The Company provided a full allowance for impairment in the amount of $1,567,000 against the demand loan during the year. We have not yet enforced our interest in the collateral.
Since July 2008, we have made loans to Excalibur International Marine Corporation. The loans were primarily used by Excalibur to acquire its ship, the OceanLaLa, and to fund operating costs. As of March 31, 2011 we had the following outstanding loans to Excalibur. Because we consolidate Excalibur, these loans are not included in our consolidated financial statements.
From the proceeds from the sale of the Units, the Company bought $4.8 million of corporate bonds as investment securities during the year ended March 31, 2010. All corporate bonds were sold in November 2010.
The Company also lent $5,000,000 to CTX Virtual Technologies Inc., “CTX,” in July 2010. The loan to CTX was unsecured, bore interest at 8% per year and had a term of one year to July 26, 2011. At any time during the one-year term, the Company could, 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 (to be increased by 25% to 10,593,220 units if CTX common stock was not listed on either the American Stock Exchange, the OTC Bulletin Board or NASDAQ by February 28, 2011). On March 12, 2011, CTX elected to convert the full amount of $5,000,000 into 10,593,220 units and paid the Company in full all accrued and unpaid interest owing.
Since February 2010, the Company has started to buy securities available for sale to earn interest, and has invested $16 million in such securities at March 31, 2011.
The unused cash and cash equivalents of $26.8 million at March 31, 2011 will be used in the Company’s planned investment in a real estate project in Taiwan.
We have no unused lines of credit or other borrowing facilities and believe that our ongoing operations generate sufficient cash to meet their liquidity requirements.
Future Contractual Obligations
See Note 16 of the Notes to the Consolidated Financial Statements contained in Item 8 for our future contractual obligations under the employment agreements with certain of our executive officers and the consultancy agreement with a related party.
Other than as disclosed above and except for the payment obligation to purchase an office building located in Taipei Taiwan as disclosed in Item 2, we do not anticipate any capital requirements for the twelve months ending March 31, 2012.
Commitments for Capital Expenditures
Expect as otherwise disclosed herein, we do not have any commitments for any material capital expenditures. 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.
Recent Events
Restatement of Financial Statements for the Prior Periods
We have restated our consolidated financial statements for prior periods to address two issues. See Note 2 of the Notes to the Consolidated Financial Statements contained in Item 8 for these issues and the effects of the restatement.
Significant Accounting Policies/Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements contained in Item 8 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
Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in time deposits, and certificates of deposit. We maintain our accounts in various banks. Cash on deposit with several banks exceed the federally insured limit.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Inventory consists of nutritional, personal care, automotive additive, environmentally safe products, portable drinking containers and EFT-Phone. We have two warehouses, one in City of Industry, CA and the other in Kowloon, HK. On a quarterly basis, we review inventory levels in each country for estimated obsolescence or unmarketable items, as compared with future demand requirements and the shelf life of the various products. Based on this review, we record inventory write-downs when costs exceed expected net realizable value. Historically, our estimates of the obsolete or unmarketable items have been insignificant.
Revenue/Unearned Revenue
Our 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 at the time when passengers and cargo are conveyed to the destination port. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Commissions paid to our Affiliates are considered to be a reduction of the selling prices of our 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. We record the payments received from customers as a liability until the products are delivered. Sales are recorded when the products are delivered.
We have developed a reverse auction program, for the purpose of increasing revenues by attracting new members to join our 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 all Affiliates in June 2009. All the bidders acknowledge that they have read and understand the Terms and Conditions before they can participate in the program. The bidders must purchase bids in advance before entering the reverse auction program and these purchased bids are non-refundable. Every bid has a fixed price of $1 and we only recognize revenue when a bidder places a bid on an auction product. The reverse auction program generated $3,092,128 and $1,233,005, respectively, in sales revenue during the two years ended March 31, 2011.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. Our operations in China, Hong Kong and Taiwan use their local currencies as their functional currency. The financial statements of our subsidiaries are translated into U.S. Dollars (USD) in accordance with ASC Topic 830, Foreign Currency Translation. According to ASC Topic 830, all assets and liabilities are translated at the year-end 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.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carry-forwards. Management must make assumptions, judgments and estimates to determine the current provision for income taxes and the deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Management’s judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, management’s interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or management’s interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our financial statements. Management’s assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations. Actual operating results and the underlying amount and category of income in future years could render management’s current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from the estimates, thus materially impacting our financial position and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, EFT Holdings, Inc. has not maintained effective internal control over financial reporting as of March 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EFT Holdings, Inc. as of March 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the three years in the period ended March 31, 2011 of EFT Holdings, Inc. and our report dated August 17, 2011 expressed an unqualified opinion thereon, which was not affected by the adverse opinion on internal control over financial reporting.
/s/ Child, Van Wagoner & Bradshaw, PLLC Salt Lake City, Utah August 17, 2011
EFT HOLDINGS, INC. Consolidated Balance Sheets
The accompanying notes are an integral part of these audited consolidated financial statements.
EFT HOLDINGS, INC. Consolidated Statements of Operations
The accompanying notes are an integral part of these audited consolidated financial statements
EFT HOLDINGS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these audited consolidated financial statements.
EFT HOLDINGS, INC. Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these audited consolidated financial statements.
EFT HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - ORGANIZATION
EFT Holdings, Inc. (“EFT Holdings” or “the Company”), formerly EFT Biotech Holdings, Inc., 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 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 27 different nutritional products, some of which are oral sprays, 21 different personal care products, an environmentally protective automotive product, an environmentally friendly house cleaner and a flip top portable drinking container.
We only sell our products through our website and only to “Affiliates.” Except as through our reverse auction program, to become an Affiliate, a customer must be recommended by another Affiliate, make a minimum purchase of $300, and pay $30 for shipping and handling fees.
On July 25, 2008, the Company loaned $1,567,000 to Yeuh-Chi Liu, a vendor to the Company. The proceeds of the loan were used by Yeuh-Chi Liu to acquire a 3.97% interest in Excalibur International Marine Corporation (“Excalibur”), which was pledged as collateral for the loan. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. On October 25, 2008, EFT Investment Co. Ltd (“EFT Investment”), a subsidiary of the Company, acquired 48.81% of Excalibur’s capital stock. Due to this combined ownership and the substantial financial support EFT Investment has provided to Excalibur to fund its operations and other factors, EFT Investment is deemed to have a controlling interest in Excalibur as defined by Accounting Standards Codification (”ASC”) Topic 810, Consolidation, which required the Company to consolidate the financial statements of Excalibur.
Historically, Taiwan Vessel Law provided for certain Taiwan shareholding requirements for companies owning ships registered in Taiwan. For example, a limited liability company owning a ship registered in Taiwan (not operating international liners), like Excalibur, was required to have at least 2/3 of its capital stock owned by Taiwan citizens, violation of which was not subject to fines and/or other penalties. The Vessel Law was amended in December 2010, and after the amendment, no more than 50% of the capital stock of limited liability companies owning ships registered in Taiwan, like Excalibur, can be owned by non-Taiwan citizens. Therefore, the Company’s ownership in Excalibur is no longer required to be reduced to 33%, and the Company’s owning of 48.81% of the capital stock of Excalibur is in compliance with applicable law in Taiwan.
In February 2010 the Company assigned the worldwide distribution and servicing rights to a product known as the “EFT-Phone” to Digital Development Partners, a previously unrelated company, 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 is 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. 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-Phone began in July, 2010.
Note 2 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for prior periods, the effects of which are summarized below, to address two issues:
As described in Note 9, the Company acquired a 48.81% interest in Excalibur on October 25, 2008. The Company initially loaned funds to Excalibur in July 2008 and subsequently has continued to provide Excalibur with loan capital to fund its operations.
The Company initially accounted for its investment in Excalibur under the equity method. As previously disclosed, as a result of damage to Excalibur’s primary asset and a change in Excalibur’s management on January 15, 2010, the Company became responsible for a majority of Excalibur’s gains and losses and, with effect from that date, the Company began to include Excalibur on a consolidated basis as a variable interest entity in the Company’s consolidated financial statements.
As previously disclosed, on July 25, 2008, the Company loaned $1,567,000 to Yeuh-Chi Liu, a vendor to the Company. The proceeds of the loan were used by Yeuh-Chi Liu to acquire a 3.97% interest in Excalibur, which was pledged as collateral for the loan. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. The current status of the loan is discussed in Note 8.
In initially considering whether its investment in Excalibur should be accounted for under the equity method or whether the investment in, and loans to, Excalibur resulted in the Company being the primary beneficiary of a variable interest entity, the Company did not consider the effect of the loan made to Yeuh-Chi Liu. In accordance with ASC 810-10-25-43, in determining whether the Company was the primary beneficiary of Excalibur, the interest in Excalibur held by Yeuh-Chi Liu as a result of the loan made to her by the Company should be treated in the same manner as the Company’s own interests. As a result, the Company should have concluded that it effectively held control of Excalibur from the time it acquired its interest in Excalibur.
The Company has now restated its financial statements for periods prior to December 31, 2009 to consolidate Excalibur from the time it acquired its interest in Excalibur, rather than accounting for its investment in Excalibur under the equity method.
In reviewing the prior accounting for its interest in Excalibur, the Company also determined that certain errors were made in accounting for its interest in Excalibur and those errors have now been corrected. These errors related to –
The effect of each of the above adjustments is summarized below.
On February 18, 2010, the Company contributed its EFT Phone to Digital Development Partners, Inc., a previously unrelated company, in exchange for 79,265,000 common shares of Digital, representing 91.74% of Digital’s outstanding common stock. This exchange was part of a re-organization undertaken by Digital in which the existing assets and proposed businesses of Digital were spun-off to Digital’s existing shareholders (excluding the Company) in exchange for the surrender by those shareholders of 20,095,000 shares of Digital’s then-outstanding common stock. In accounting for the transaction with Digital, the Company treated the transaction as a business combination, although as a result of the spin-off of its proposed business and related assets to its existing shareholders, Digital had no continuing business at the time its re-organization and the transaction with the Company were completed.
In accounting for the transaction with Digital in its consolidated financial statements for the three months and the year ended March 31, 2010, the Company incorrectly included $104,153 of expenses incurred by Digital during the three months ended March 31, 2010, which expenses were incurred prior to the transaction with the Company or related to the businesses spun-off to Digital’s prior shareholders. After accounting for the non-controlling shareholders’ interest in such expenses and recording goodwill of $5,000 previously recorded by Digital, the Company recorded an offsetting net gain of $100,531 in its consolidated statement of operations for the three months ended March 31, 2010. The Company has now restated its consolidated financial statements for the three months and the year ended March 31, 2010 to eliminate the pre-transaction Digital expenses previously recorded and the non-controlling shareholders’ portion thereof, eliminate the pre-existing Digital goodwill recorded, and eliminate the offsetting net gain previously recognized related to the transaction. The net effect of these adjustments on the Company’s net loss for the year ended March 31, 2010 was not material.
Effects of Restatement
The effects of the restatement of the Company’s prior period financial statements for the above matters are summarized below. In addition, as disclosed below, the Company has restated its prior period financial statements to provide segment information not previously provided and to include information on non-recurring fair value measurements.
Consolidated Balance Sheets Comparison for the Year Ended March 31, 2010 and 2009
Consolidated Statements of Operations Comparison for the Year Ended March 31, 2010 and 2009
Consolidated Statements of Operations Three Months Ended June 30, September 30 and December 31, 2009
Consolidated Statements of Cash Flows Comparison for the Year Ended March 31, 2010 and 2009
Selected Financial Data
Our net income (loss) for each fiscal quarter during the year ended March 31, 2010 were:
Segment Information
The Company’s business is classified by management into two reportable business segments: transportation and online. The online business reportable segment is an aggregation of the Company’s online operating segments, which are organized to sell the Company’s products to affiliates through its websites. The online business reportable segment derives revenue from the sales of nutritional products, personal care products and EFT-phones. The transportation business reportable segment derives revenue from transport passengers and cargo between Taiwan and Mainland China through the Taiwan Strait.
Although substantially all of the Company’s revenue is generated from Mainland China, the Company is organizationally structured along business segments. The accounting policies of each of the Company’s operating segments are the same as those described in Note 3, “Summary of Significant Accounting Policies.”
The following tables provide business segment information as of and for the year ended March 31, 2010 and 2009.
Fair Value Measurements
As discussed in Note 9, the Company’s investment in the transportation equipment of Excalibur has been valued at fair value, on a non-recurring basis, using Level 3 – unobservable inputs, to reflect management’s estimate that the net book value of the transportation equipment owned by Excalibur exceeded its market value. Accordingly, on a non-recurring basis, using Level 3 – unobservable inputs, the Company recorded an impairment loss of $6.1 million during the year ended March 31, 2010. As of March 31, 2010, the Company also recorded an impairment loss of $8.9 million to write off the goodwill associated with the Company’s investment in Excalibur.
As part of the Company's periodic review of the value of its transportation assets, the Company recorded an impairment loss of $1.2 million and $4.2 million during the periods ended December 31 and September 30, 2010, respectively, to reflect management’s estimate that the net book value of the transportation equipment owned by Excalibur exceeded its market value.
Note 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassification
Certain amounts have been reclassified to conform with the current period presentation. Specifically, certain 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 stockholder’s equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Foreign Currency
The Company’s reporting currency is the U.S. dollar. The Company’s operations in Hong Kong, Taiwan and China use their local currencies as their functional currency. The financial statements of the subsidiaries are translated into U.S. Dollars (USD) in accordance with ASC Topic 830, Foreign Currency Translation. According to ASC 830, all assets and liabilities are translated at the year-end 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.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed in the footnotes to the financial statements.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less. The Company maintains its accounts in banks and financial institutions in amounts that, at times, may exceed the federally insured limit. Management believes the Company is not exposed to any significant credit risk on those accounts.
Securities Available for Sale
The Company’s investments in corporate notes 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, personal care, automotive additive, environmentally safe products, portable drinking containers 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 with future demand requirements and the shelf life of the various products. Based on this review, the Company records inventory write-downs when costs exceed expected net realizable value. 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:
For the three years ended March 31, 2011, depreciation expenses were $1,255,415, $2,284,127 and $409,582 respectively.
Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC Topic 360. ASC Topic 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset’s carrying amount. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. The Company has recorded an impairment loss of $5.4 million on the transportation equipment of Excalibur for the year ended March 31, 2011 because 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 4, “Fair Value Measurements” for additional information on 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.
Stock Issued to Officers or Employees
During the three years ended March 31, 2011, 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 March 31, 2011.
Stock Issued for Services
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from persons other than employees in accordance with ASC Topic 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of performance commitment or completion of performance by the provider of goods or 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. Commissions paid to the Company’s Affiliates are considered to be a reduction of the selling prices of its products, and are recorded as a reduction of revenue. The Company policy is to pay out commission to Affiliates upon receipt of sales orders even before revenue can be recognized.
Unearned Revenues consist of cash received in advance for goods to be delivered at a future date. The Company records the payments received from Affiliates 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 for the price a bidder pays to purchase relevant bids when the bidder places such bids on an auction product.
For the two years ended March 31, 2011, the reverse auction program generated revenues of $3,092,128 and $1,233,005 respectively.
Warranty
The Company generally does not provide customers with right of return, but does provide a warranty, entitling the purchaser to a replacement of defective products within six months from the date of sale. 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 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 March 31, 2011, the Company’s estimated warranty expense was as follows:
Shipping Costs
The Company’s shipping costs are included in cost of sales for all periods presented.
Marketing Expenses
On January 1, 2009, EFT International Limited, a wholly-owned subsidiary of EFT Holdings, Inc., entered into a contract with ZR Public Relation Consultant Ltd. (the Consultant), which provides public relations consulting services in Asia. In consideration of the services rendered by the Consultant, EFT International Limited pays 5% of total commission payout for each fiscal year. For the three years ended March 31, 2011, consultant expense for EFT International Limited was $1,524,866, $ 1,279,307 and $1,771,944 respectively.
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 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 years ended March 31, 2011:
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 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.
The Company’s business is classified by management into two reportable business segments: transportation and online. These reportable segments are two distinct businesses, each with a different customer base, marketing strategy and management structure. The online business reportable segment is an aggregation of the Company’s online operating segments, which are organized to sell the Company’s products to affiliates through its websites. The online business reportable segment derives revenue from the sales of nutritional products, personal care products and EFT-phones. The transportation business reportable segment derives revenue from transport passengers and cargo between Taiwan and Mainland China through the Taiwan Strait. Substantially all of the Company’s revenue is generated from Mainland China.
Recent accounting pronouncements
The following Accounting Standards Codification Updates have recently been issued, or will become effective, after the end of the period covered by these financial statements:
To the extent appropriate, the guidance in the above Accounting Standards Codification Updates is already reflected in our consolidated financial statements and management does not anticipate that these accounting pronouncements will have any material effect on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, an amendment to ASC Topic 220, “Comprehensive Income”, which provides the entity has the option to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This topic will be effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011 for public entities, early adoption is permitted but the Company does not believe that the adoption of the amendments to ASC 220 will have a material effect on its financial statements.
In May 2011, the FASB issued ASU 2011-04, an amendment to ASC Topic 820 “Fair Value Measurement”, which the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify FASB’s intent about the application of existing fair value measurement requirement, including (1) specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities; (2) requirements specific to measuring the fair value of instrument classified in a reporting entity’s shareholders equity, such as equity interest issued as consideration in a business combination; and (3) clarifying that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.
Other amendments change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements, including (1) permitting an exception to the requirements in Topic 820 for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to those risks; (2) clarifying that the application of premiums and discount in a fair value measurement is related to the unit of account for the asset or liability being measured at fair value; and (3) requiring additional disclosures about fair value measurements. This topic will be effective for periods beginning after December 15, 2011, early adoption is not permitted. The Company does not believe that the adoption of the amendments to ASC 820 will have a material effect on its financial statements.
In December 2010, the FASB issued ASU 2010-29, an 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 the amendments to ASC 805 will have a material effect on its financial statements.
In December 2010, the FASB issued ASU 2010-28, an 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 the amendments to ASC 350 will have a material effect on its financial statements.
Note 4 - FAIR VALUE MEASUREMENTS
ASC Topic 820 defines fair value, establishes a framework for measuring fair value and enhances disclosure requirements for fair value measurements. This topic does not require any new fair value measurements. ASC Topic 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
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 on a recurring basis. The securities available for sale are classified within Level 1 since they are valued using quoted market prices.
As discussed in Note 10, the Company’s investment in CTX Virtual Technologies has been valued at fair value, on a non-recurring basis, using Level 3 – unobservable inputs, to reflect the Company’s assessment of its inability to recover its investment in the foreseeable future. Accordingly, on a non-recurring basis, using Level 3 – unobservable inputs, the Company provided an impairment loss of $5.0 million during the year ended March 31, 2011.
As discussed in Note 9, the Company’s investment in the transportation equipment of Excalibur has been valued at fair value, on a non-recurring basis, using Level 3 – unobservable inputs, to reflect management’s estimate that the net book value of the transportation equipment owned by Excalibur exceeded its market value. Accordingly, on a non-recurring basis, using Level 3 – unobservable inputs, the Company recorded impairment losses of $5.4 million during the year ended March 31, 2011, and an impairment loss of $6.1 million during the year ended March 31, 2010. As of March 31, 2010, the Company also recorded an impairment loss of $8.9 million to write off the goodwill associated with the Company’s investment in Excalibur.
Assets measured at fair value are summarized below:
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 Shipbuilders (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 6 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
At March 31, 2011, expenditures of $980,656 had been incurred for construction of a water filter plant for bottled water in Baiquan, China. The Company will begin depreciating the water filter plant when it is placed in service.
Note 7 – 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 March 31, 2011:
The Company realized a gain of $243,855 on the sale of all of its investments in corporate notes during the year ended March 31, 2011. These notes were sold in order to preserve the Company’s principal, as most of the notes were downgraded by investment rating agencies.
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:
Note 8 - LOANS TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS
The Board of Directors of the Company approved a non-interest bearing demand loan in the amount of $1,567,000 on July 25, 2008 to Yeuh-Chi Liu, a vendor to the Company. The $1,567,000 loan was used by Yeuh-Chi Liu to purchase a 3.97% ownership interest in Excalibur (see Note 9) and is collateralized by that interest. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. The Company does not expect that this loan will be repaid and the loan was written off as of December 31, 2010. The Company has not yet enforced its interest in the collateral.
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 sister of Jack Jie Qin, our President. During the years ended March 31, 2011, 2010 and 2009 we paid EFT Assets Limited $2,001,681, $2,059,445 and $2,313,137 in royalties.
In March 2010, one of the Company’s subsidiaries, EFT International Ltd., entered into a consultancy agreement with JFL Capital Limited, a company in which Wendy Qin serves as a director and is one of the principal shareholders . Under this agreement, EFT International Ltd. engaged JFL Capital Limited to provide EFT International Ltd. consultancy service on administration, financial matters, corporate planning and business development commencing from April 1, 2010. The agreement may be terminated by either party on three months’ written notice. For the year ended March 31, 2011, EFT International Ltd. paid JFL Capital Limited $315,000. As from April 1, 2011, the annual fee will be increased at the rate of $15,000 each year.
The Company rents a 6,500 square foot office space for its satellite training center in Hong Kong. This office is located at Langham Office Tower, 8 Argyle Street, Suite 3706, Kowloon, Hong Kong SAR. This space is leased commencing on March 31, 2007 and expiring on March 31, 2012. The leased space is owned by a number of persons, including Wendy Qin, the sister of Jack Jie Qin, our President. Pursuant to the lease, there is no rent for the first two years. Commencing on the third year of the lease, the monthly rent is $50,000. During the years ended March 31, 2011, 2010 and 2009 we paid the lessor $377,892, $379,355 and $362,271 in rental.
Note 9 – EXCALIBUR
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 initially loaned funds to Excalibur in July 2008 and subsequently has continued to provide Excalibur with loan capital to fund its operations.
As disclosed in Note 8, on July 25, 2008, the Company loaned $1,567,000 to Yeuh-Chi Liu, a vendor to the Company. The proceeds of the loan were used to acquire a 3.97% interest in Excalibur, which was pledged as collateral for the loan. Yeuh-Chi Liu has served as a member of the board of directors of Excalibur since then. In accordance with ASC 810-10-25-43, the interest in Excalibur held by Yeuh-Chi Liu as a result of the loan made to her by the Company should be treated in the same manner as the Company’s own interest. As a result, the Company has concluded that it effectively held control of Excalibur and has consolidated Excalibur beginning at the time the Company acquired its ownership interest.
The Company consolidates Excalibur based on a three-month lag with the Company’s reporting periods. All inter-company accounts and transactions were eliminated in consolidation. The following table provides a summary of balance sheet information for Excalibur as of December 31, 2010 and 2009, which is consolidated in the Company’s financial statements as of March 31, 2011 and 2010:
*NTD: New Taiwan Dollar
The following is the shareholder list of Excalibur as of March 31, 2011:
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