CTX Virtual Technologies, Inc. and Subsidiaries. Consolidated Financial Statements with Accountant s Compilation Report (Unaudited)

Transcription

1 CTX Virtual Technologies, Inc. and Subsidiaries Consolidated Financial Statements with Accountant s Compilation Report (Unaudited) As of and for the Six Months Ended Jun 30, 2011

2 Contents Accountants Compilation Report 3 Consolidated Financial Statements (unaudited) Consolidated Balance Sheet 4 Consolidated Statement of Operations 5 Consolidated Statement of Stockholders Equity 6 Consolidated Statement of Cash Flows 7 Notes to Consolidated Financial Statements 8-16

3 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of CTX Virtual Technologies, Inc. We have reviewed the accompanying balance sheets of CTX Virtual Technologies, Inc. and its subsidiaries ( CTX ), (Collectively referred to as the Company ) as of and the related Consolidated statements of income, shareholders equity, and cash flows for the six-months ended. These financial statements are the responsibility of the Company s management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of the interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews we are not aware of any material modifications that should be made to such Interim Financial Information for them to be in conformity with accounting principles generally accepted in the United States of America. 3

4 Consolidated Balance Sheet (unaudited) June 30, 2011 Assets Cash $ 184,644 Trade accounts receivable, net of allowance for doubtful accounts of $0 5,801,961 Inventories 191,968 Prepaid expenses and other current assets 719,043 Loan to unrelated parties 1,900,000 Amounts due from related parties 1,804,904 Deferred income taxes 1,273,193 Total current assets 11,875,713 Property and equipment, net 76,854 Total assets $ 11,952,567 Liabilities and Stockholders Equity Trade accounts payable $ 14,649 Accrued expenses and other payables 1,179,761 Income taxes payable 1,296,408 Amounts due to related parties 1,291,380 Convertible debt, net of unamortized debt issuance costs 285,167 Total current liabilities 4,067,365 Total liabilities 4,067,365 Commitments and Contingencies Stockholders equity Common stock - par value of $0.001; 500,000,000 shares authorized, 7,976,208 shares issued 7,971 and outstanding Class AA preferred stock - par value of $0.001; 40,000 shares authorized, 27,250 shares 27 issued and outstanding Class A preferred stock - par value of $0.001; 10,000,000 shares authorized, no shares issued - and outstanding Class B preferred stock - par value of $0.001; 10,000,000 shares authorized, 10,000,000 10,000 shares issued and outstanding Class C preferred stock - par value of $0.001; 10,000,000 shares authorized, no shares issued - and outstanding Additional paid-in capital 9,184,058 Retained earnings (1,437,821) Accumulated other comprehensive income 120,967 Total stockholders equity 7,885,202 Total liabilities and stockholders equity $ 11,952,567 See accompanying notes to unaudited consolidated financial statements. 4

5 Consolidated Statement of Operations (unaudited) Six Months Ended June 30, 2011 Net sales $ 17,200,956 Cost of sales 14,258,899 Gross profit 2,942,057 Selling, general, and administrative expenses 1,538,176 Income from operations 1,403,881 Non-operating expense (income): Interest expense 120,524 Others, net (3,765,634) Total non-operating expense, net (3,645,110) Net income before income taxes 5,048,991 Income taxes Net income $ 5,048,991 See accompanying notes to unaudited consolidated financial statements. 5

6 Consolidated Statement of Stockholders Equity (unaudited) Common Stock Class AA Preferred Stock Class A Preferred Stock Class B Preferred Stock Class C Preferred Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance at January 1, 2011 $ 7,971 $ 27 $ $ 10,000 $ $ 4,184,058 $ (6,486,812) $ 120,337- $ (2,164,419) Retirement of previous equity shares Recapitalization issuance of new shares ,000, ,000,000 Stock issuance costs Stock issuance costs current period amortization Foreign currency translation adjustment Net income for the period ,048,991-5,048,991 Balance at $ 7,971 $ 27 $ - $ 10,000 $ - $ 9,184,058 $ (1,437,821) $ 120,967 $ 7,885,202 See accompanying notes to unaudited consolidated financial statements 6

7 Consolidated Statement of Cash Flows (unaudited) Six Months Ended June 30, 2011 Net income $ 5,048,991 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization property and equipment 39,214 Amortization intangible assets 18,445 Interest expense convertible debt issuance cost amortization (4,406,780) Deferred income taxes 6,630 Changes in operating assets and liabilities: Trade accounts receivable 764,264 Inventories 1,520 Prepaid expenses and other current assets (3,744) Accounts payable (76 ) Accrued expenses (2,130,690) Income taxes payable 6,751 Net cash used in operating activities (1,361,975) Cash flows from investing activities: Purchases of property and equipment Purchases of intangible assets Payments for product development costs (65,145 ) Advances from related parties 281,380 Net cash used in investing activities 216,235 Cash flows from financing activities: Proceeds from issuance of convertible debt Proceeds from issuance of equity shares Issuance cost convertible debt Issuance cost equity shares Net cash provided by financing activities (439,240) Effect of foreign currency exchange translation 33,054 Net increase in cash and cash equivalents (406,186 ) Cash beginning of period 590,830 Cash end of period $ 184,644 See accompanying notes to unaudited consolidated financial statements. 7

8 1. GENERAL BACKGROUND AND DESCRIPTION OF BUSINESS Prior Business CTX Virtual Technologies, Inc. ( CTXV ) was originally incorporated as a Colorado corporation in January 1988 under the name Cap Rock Corporation, later changed its name to Striker Capital Corp. ( Striker Capital ) in April 2004 and reincorporated by merger as a Nevada corporation in May On or about June 30, 2006, Striker Capital acquired all of the outstanding shares of Pioneer Realty Group, Inc., a Delaware corporation ( Pioneer ), in exchange for the issuance of a controlling equity interest in Striker Capital to the former shareholders of Pioneer. As a result of the transaction, Mr. David Cohen, a member of our Board of Directors at the time, acquired control of Striker Capital and designated management and Board of Directors. In July 2006, Striker Capital changed its name to Petro Plus USA, Inc. and in August 2006 to Petroleum Consolidators of America, Inc. ( Petroleum Consolidators ). In August 2008, Petroleum Consolidators acquired all of the outstanding shares of Gas Retailers, Inc. in exchange for the issuance of shares of Petroleum Consolidators common stock to the former shareholders of that company. From 2006 to February 2010, Petroleum Consolidators was engaged in the acquisition and operation of gasoline stations ( Prior Business ). On or about February 17, 2010, the Petroleum Consolidators acquired all of the capital stock of CTX Virtual Technologies, Inc., a Delaware corporation ( CTXV ), in exchange for shares of preferred stock of Petroleum Consolidators (the Acquisition ) and certain shareholders of CTXV and others contemporaneously therewith acquired certain shares of preferred stock of Petroleum Consolidators from a stockholder of Petroleum Consolidators. At closing, CTXV designated a majority of the members of the board of directors and appointed certain officers of Petroleum Consolidators. The Acquisition resulted in a change in control of Petroleum Consolidators. On March 10, 2010, Mr. Clifford M. Rhee was appointed President and CEO of the Petroleum Consolidators. Effective with the open of business on March 25, 2010, Petroleum Consolidators effectuated a 1 for 125 reverse stock split of its shares of common stock, $.001 par value per share. In April 2010, Petroleum Consolidators completed a reincorporation merger pursuant to which Petroleum Consolidators changed domicile to Delaware and adopted CTX Virtual Technologies, Inc. name. The acquisition of CTXV will be accounted for as a reverse merger and recapitalization since the shareholder of CTXV became controlling owner of Petroleum Consolidators after the acquisition. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of CTXV and are recorded at the historical cost basis 8

9 GENERAL BACKGROUND AND DESCRIPTION OF BUSINESS - continued Prior Business CTX Virtual Technologies, Inc. ( CTXV ), we, or us, was originally incorporated as a Colorado corporation in January 1988 under the name Cap Rock Corporation, later changed its name to Striker Capital Corp. ( Striker Capital ) in April 2004 and reincorporated by merger as a Nevada corporation in May On or about June 30, 2006, Striker Capital acquired all of the outstanding shares of Pioneer Realty Group, Inc., a Delaware corporation ( Pioneer ), in exchange for the issuance of a controlling equity interest in Striker Capital to the former shareholders of Pioneer. As a result of the transaction, Mr. David Cohen, a member of our Board of Directors at the time, acquired control of Striker Capital and designated management and Board of Directors. In July 2006, Striker Capital changed its name to Petro Plus USA, Inc. and in August 2006 to Petroleum Consolidators of America, Inc. ( Petroleum Consolidators ). In August 2008, Petroleum Consolidators acquired all of the outstanding shares of Gas Retailers, Inc. in exchange for the issuance of shares of Petroleum Consolidators common stock to the former shareholders of that company. From 2006 to February 2010, Petroleum Consolidators was engaged in the acquisition and operation of gasoline stations ( Prior Business ). On or about February 17, 2010, the Petroleum Consolidators acquired all of the capital stock of CTX Virtual Technologies, Inc., a Delaware corporation ( CTXV ), in exchange for shares of preferred stock of Petroleum Consolidators (the Acquisition ) and certain shareholders of CTXV and others contemporaneously therewith acquired certain shares of preferred stock of Petroleum Consolidators from a stockholder of Petroleum Consolidators. At the closing, CTXV designated a majority of the members of the board of directors and appointed certain officers of Petroleum Consolidators. The Acquisition resulted in a change in control of Petroleum Consolidators. On March 10, 2010, Mr. Clifford Min Rhee was appointed President and CEO of the Petroleum Consolidators. Effective with the open of business on March 25, 2010, Petroleum Consolidators effectuated a 1 for 125 reverse stock split of its shares of common stock, $0.001 par value per share. In April 2010, Petroleum Consolidators completed a reincorporation merger pursuant to which Petroleum Consolidators changed domicile to Delaware and adopted CTX Virtual Technologies, Inc. name. At the closing of these transactions, Mr.Clifford Min Rhee held 9,000,000 Series B Preference Shares of CTXV, representing in the aggregate of 54% of CTXV outstanding common stock on a fully diluted basis and maintained 84% of the voting power attributable to CTXV outstanding securities. The original shareholders of Petroleum Consolidators held 10,000 Series AA Preference Shares of CTXV and 1,702,135 common shares. The acquisition of CTXV will be accounted for as a reverse merger and recapitalization since the shareholder of CTXV became controlling owner of Petroleum Consolidators after the acquisition. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of CTXV and are recorded at the historical cost basis. 9

10 GENERAL BACKGROUND AND DESCRIPTION OF BUSINESS (continued) Acquisitions Prior to acquisitions or formation of its wholly owned subsidiaries, CTXV was a shell company with no operations. The followings are the acquisitions by CTXV: Kaibida Acquisition On April 26,2010, CTXV acquired 100% equity interest of Kaibida International Limited, a Hong Kong company ( Kaibida ) incorporated on January 21, 2010, Prior to the acquisition, Mr. Lee Poo Ying and Mr. Clifford Min Rhee, each has 50% ownership of Kaibida and signed acting in cert agreement to control Kaibida as a group. The acquisition was accomplished by means of a share exchange in which CTXV issued 17,250 shares of Series AA Preferred Stock to the former Kaibida,Comstar and Yongyangshareholders. Of the shares of Series AA Preferred Stock issued in the exchange, Mr. Lee Poo Ying, General Manager and Vice President of Manufacturing of Kaibida, received 4,150 shares. The shares issued in the exchange represented in the aggregate of 8.2% of CTXV outstanding common stock on a fully diluted basis and 1.8% of the voting power attributable to our outstanding securities. The remaining 12,100 shares of Series AA Preferred Stock were issued to the other shareholders of Comstar,Yongyang and other personnel, which represented in the aggregate of 25.9% of CTXV outstanding common stock on a fully diluted basis and 5.7% of voting rights of CTXV. Mr. Clifford Min Rhee held 9,000,000 Series B preference shares before and after the acquisition, representing in the aggregate of 54% and 35.5% of CTXV outstanding common stock on a fully diluted basis before and after the acquisition, respectively, and maintained 78% of the voting power attributable to CTXV outstanding securities. Mr.Clifford Min Rhee have the ability to appoint all the board of directors as well as other powers as the controlling shareholder to control CTXV before and after the acquisition As the acquisition involved companies under common control, the acquisition was accounted for in accordance with ASC , Business Combinations Related Issues, and the assets and liabilities and historical operations that are reflected in the financial statements are those of CTXV and Kaibida and are recorded at the historical cost basis. Acquisition of Yong Yang and Comstar On April 15, 2010, per the acquisition agreement entered into between all parties, Kaibida acquired all of equity interest of Fuzhou Comstar Computer Network Engineering Limited ( Comstar ) and Beijing Shouxin Yongyang Technology Limited ( YongYang ). The two operating subsidiaries have been in business since 2007 or earlier. Mr. Lee Poo Ying and Mr. Clifford Min Rhee each owned 50% of the outstanding equity of Kaibida while Mr. Lee Poo Ying owned 61% of the outstanding equity of Comstar and Yong Yang prior to the acquisition. According to the acting in concert agreement, Mr. Lee Poo Ying and Mr. Clifford Min Rhee are considered as a control group, thus having the controlling interest of Kaibida, Comstar, and Yong Yang before and after Kaibida s acquisition of both companies. As the acquisition involved companies under common control, the acquisition was accounted for in accordance with ASC , Business Combinations Related Issues, and the assets and liabilities and the historical operations that are reflected in the financial statements are those of CTXV, Yong Yang, and Comstar and are recorded at their historical cost basis. 10

11 Guoqian Division A Acquisition On February 18, 2009, per combination agreement between Comstar and Shenzhen Guoqian Technology Limited(or Guoqian ), Comstar acquired the business of the division A of Guoqian (or Guoqian Division A ) without acquisition of any assets and liabilities such as equipments, facilities, inventories, accounts payable, receivables and cash. Guoqian will be paid the purchase consideration at the equivalent shares of the potential public company named Kaibida International Limited or CTX Virtual Technologies Inc. after Comstar is successful to merger with the potential public company by the shareholder of Comstar and the equivalent shares will be discussed to this agreement after the successful merger. Until the auditor s report date, the consideration is in the process of being paid by the shareholder of Comstar.. Pursuant to ASC 805 Business combination, since Comstar purchased business of the division A of Guoqian and the management of Comstar started to control the division A of Guoqian from the acquisition date, the profit and loss of Guoqian Division A belonged to Comstar after the acquisition date per the agreement entered into between both parties, the Company concluded that the acquisition should be treated as business acquisition and Comstar should consolidate the financial statements of Guoqian Division A from the acquisition date. Being no consideration was paid and no tangible and intangible net assets were acquired by Comstar or the Company, the Company did not record goodwill as a result of this acquisition. Celluon Technologies Holdings Acquisition In April 2010, CTXV incorporated and formed CTX Technologies, Inc. ( CTX ), a 100% owned subsidiary, for purpose of acquiring Celluon Technologies Holdings ( Celluon ), a Canadian company. In April 2010 after the formation of CTX, CTX acquired 100% equity interest of Celluon. Since Mr. CliffordMin Rhee, the majority shareholder of Celluon has the controlling interest of CTXV before and after the acquisition, there was no change in control. The acquisition involved companies under common control, the acquisition was accounted for in accordance with ASC , Business Combinations Related Issues, and the assets and liabilities and the historical operations that are reflected in the financial statements are those of CTXV and Celluon and are recorded at their historical cost basis. 11

12 GENERAL BACKGROUND AND DESCRIPTION OF BUSINESS (continued) Current Business CTX Virtual Technologies, Inc. manufactures and sells mobile communication and electronic devices and provides technology consulting services. Through its wholly-owned subsidiary, Kaibida International Limited, a Hong Kong company ( Kaibida ), the Company designs and manufactures cellular telephones including converged mobile devices, often referred to as Smartphones or PDAs, for network operators and original equipment manufacturers. Kaibida also designs and manufactures printed circuit boards and other Surface Mounted Technology components used in cellular telephones and Smartphones. Celluon Technology Holdings, Inc. is engaged in providing IT consulting and sales to various medical and healthcare industry. The company is currently engaged in sale of certain software and finished products to the hospitals and other healthcare related companies. In 2009, Celluon technology acquired the license to develop EMR (Electronic Medical Record) initiative which was adopted as part of the Canadian Government s healthcare reform act. Set forth below is a diagram showing the corporate structure of the Company and its active subsidiaries as of December 31, 2010: CTX Virtual Technologies, Inc. (Delaware; Trading Symbol CTXV.PK ) 100% Kaibida International Limited (Hong Kong) 100% CTX Technologies, Inc. (Delaware) 100% 100% Comstar (China) Guoqian Division A (China) 100% Yong Yang (China) 100% Canada Inc. d/b/a Celluon Technology Holdings (Canada) 12

13 GENERAL BACKGROUND AND DESCRIPTION OF BUSINESS (continued) Recapitalization As of, the Company recapitalized by retiring old shares and issuing new shares as follows: Convertible Debt Issuance The Company issued convertible note for the proceeds of $5million on July 26, 2010 to EFT Biotech Holdings, Inc., a company based in California with various business interests in distribution of diverse products in China through sales membership network. The principal amount of the note is convertible into an aggregate of approximately 8,474,576 Units, representing a conversion rate of $.59 per unit. Each unit consisting of one share of common stock and one warrant to purchase one share of common stock. The note bears interest at 8% per annum and matures on July 26, 2011, at which time it will convert automatically into common stock. The note is also convertible at any time after issuance at the holder's option and at any time beginning six months after issuance at the Company's option. Conversion of the note, either automatically at maturity or earlier at the Company's option, is subject to there being no default in the payment of interest or otherwise under the note. On April 29, 2011, the entire principal amount of the note was converted to 8,474,576 of common stock in CTX Virtual Technologies, Inc. Stock Issuances The Company authorized common stock of 500,000,000 shares with $0.001 par value per share, and some amount of shares of preferred stock, $0.001 par value per share as follows: o o o o 50,000 shares are designated Series AA Preferred Stock, Each share of Series AA Preferred Stock has a par value of $0.001 and a stated value of $1, per share. The Series AA Preferred Stock shall not bear any dividends. As of December 31, 2010, 27,250 shares were issued and outstanding. 5,000,000 shares are designated Series A Preferred Stock, Each share of Series A Preferred Stock has a par value of $ As of December 31, 2010, no share was issued and outstanding. 10,000,000 shares are designated Series B Preferred Stock. Each share of Series B Preferred Stock has a par value of $0.001 and has 10 voting rights of a common stock. The Series B Preferred Stock shall not bear any dividends. As of December 31, 2010, 10,000,000 shares were issued and outstanding. 67,841 shares are designated Series C Preferred Stock. Each share of Series C Preferred Stock has a par value of $ As of December 31, 2010, no share were issued and outstanding. Stock Warrant Issuance On July, 2010, the Company issued approximately 4.05 million units ("Units") for the proceeds of $2.387 million to accredited investors at a price of $.59 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock. The warrants are exercisable for five years at a price of $1.00 per share. The warrants are subject to redemption by the Company at $0.05 per warrant if the common stock achieves a volume weighted average price of at least 150% of the exercise price for 10 consecutive days and certain other conditions are satisfied. By the end of December 31, 2010, the condition of the redemption of the warrants had not been reached, no warrant was redeemed. 13

14 The Company used the Black-Scholes option pricing model to determine the fair value of the warrants on the issuing date (assumptions used expected life of 5 years, expected volatility of 192%, risk free interest rate of 5%, and expected dividend yield of 0%), the fair value of the warrant at the grant date is around nil per share.the expected volatilities are based on the historical volatility of the Company s stock. The observations were made in a 52-week period. The expected terms of stock warrants are based on the remaining contractual life of stock warrants outstanding as these stock warrants vested immediately. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEIS Principles of Consolidation and Presentation The consolidated financial statements include the accounts of the CTXV and its wholly-owned subsidiaries (collectively the Company ). In the preparation of consolidated financial statements of the Company, all intercompany balances and transactions have been eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ( GAAP ) 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. Management reviews its estimates based on currently available information. Actual results could materially differ from those estimates and such differences could be material to the financial position and results of operations. Segment Information ASC 280 requires companies to report information about operating segment in interim and annual financial statements. It also requires disclosures about products and services geographic and major customers. The Company has determined that it does not have any separately reportable operating segments. Foreign currency translation The Company s financial statements are presented in the U.S. dollar ($), which is the Company s reporting currency, while the Chinese subsidiaries functional currency is Chinese Renminbi (RMB). Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange ruling at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of income. In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into RMB using the rate of exchange prevailing at the applicable balance sheet date and the statements of income and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in shareholders equity as part of accumulated other comprehensive income. 14

15 June 30, 2010 Average Rate for the year Exchange Rate at Renminbi (RMB) United States dollar ($) Cash and Cash Equivalents The Company considers all highly-liquid investments with maturity of three months or less to be cash equivalents. The Company maintains its cash accounts at creditworthy financial institutions and closely monitors the movements of its cash positions. 15

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEIS (continued) Accounts Receivable Accounts receivable are carried at original invoice amount less the allowance for doubtful accounts based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Inventories Inventories consist of electronic components and finished goods and are valued at the lower of cost, determined on a moving average basis which approximates cost, and estimated net realizable value. The Company assesses the inventory carrying value and reduces it, if necessary, to its net realizable value based on customer orders on hand and internal demand forecasts using management s best estimates given information currently available. The Company s customer demand is highly unpredictable and can fluctuate significantly caused by factors beyond its control. The Company may maintain an allowance for inventories for potentially excess and obsolete inventories and inventories that are carried at costs that are higher than their estimated net realizable values. Property and Equipment Property and equipment is recorded at cost. Major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Gains and losses from disposition of property and equipment are included in income and expense when realized. Depreciation and amortization are provided using the straight-line method or declining method over the following estimated useful lives: Furniture and fixtures Equipment and computers Useful Lives 5-8 years 4-5 years Leasehold improvements are amortized over the lesser of the useful lives of the improvements or the related lease term. 16

17 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEIS (continued) Revenue Recognition The Company recognizes in accordance with ASC 605, Revenue Recognition, when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured, and delivery of products has occurred or services have been rendered. Accordingly, the Company recognizes revenues at the time when the economic benefits and risk associated with the transaction are transferred to the customers. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Shipping and Handling Costs Most of shipping and handling costs are paid by the customers directly to the shipping companies. The Company does not collect and incur shipping and handling costs. As a result, the Company did not incur shipping and handling costs for the six months ended. Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured, and delivery of products has occurred or services have been rendered. Accordingly, the Company recognizes revenues at the time when the economic benefits and risk associated with the transaction are transferred to the customers. Allowance for doubtful accounts is estimated based on estimates of losses related to customer receivable balances. Advertising and Promotion Costs Costs associated with advertising and promotions are expensed as incurred. Advertising and promotion costs amounted to $52,647 for the six months ended. Capitalized Product Development Capitalized product development includes payroll, employee benefits, other headcount-related expenses, and outside product development consulting services associated with product development. Once technological feasibility is reached, which is generally shortly before the products are released to manufacturing, such costs are capitalized and amortized over the estimated lives of the products. Long-lived Assets In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying value of assets may not be recoverable based upon its review of the following events or changes in circumstances: the asset s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal 17

18 ownership or title to the assets; significant changes in the Company s strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset is less than its carrying amount. As of, the Company is not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired. 18

19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEIS (continued) Income Taxes The Company follows ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities or 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. Based on the assessment, management believes that the Company is more likely than not to fully realize its deferred tax assets in U.S. As such, no valuation allowance has been established related to the Company s US operations. For the Company s operations in Korea through its subsidiaries, the Company recorded a full valuation allowance on the deferred tax assets based on management s assessment that it is more likely than not that the Company will not be able to fully utilize the deferred tax assets. The Company adopted ASC on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must 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 are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC As of, the Company has no material unrecognized tax benefits. Impairment of Long-lived Assets In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying value of assets may not be recoverable based upon its review of the following events or changes in circumstances: the asset s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in the Company s strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset is less than its carrying amount. As of, the Company is not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired. 19

20 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEIS (continued) Concentrations of Credit Risk and Risk Factors Accounts Receivable Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers dispersed across diverse markets and generally short payment terms. Credit is extended based on an evaluation of the customer s financial condition and collateral generally is not required. The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer s ability to meet its financial obligations subsequent to the original sale, the Company will record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Net Revenues Substantially all of the Company s revenues are derived from sales of the group in PRC. Any significant decline in market acceptance of the Company s products or in the financial condition of our existing customers could impair our ability to operate effectively. Comprehensive Income Comprehensive income includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income on its statements of stockholders equity. Recent Accounting Pronouncements In June 2011, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Comprehensive Income (Topic 220), which gives an entity the option to present the total of 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. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For public entities, ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is not expected to have a material impact on the Company s consolidated financial position or results of operations. In May 2011, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Fair Value Measurement (Topic 820), which provided clarifications for Topic 820 and also included instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurement has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs, and is effective during interim and annual periods beginning after December 15, 2011 for public entities. Early application by public entities is not permitted, and the adoption of ASU is not expected to have a material impact on the Company s consolidated financial position and results of operations. 20

21 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEIS (continued) In December 2010, the FASB amended the guidance related to application of the goodwill impairment model when a reporting unit has a carrying amount that is zero or a negative value. The guidance clarifies that when this is the case, a goodwill impairment test should be performed if qualitative factors indicate that it is more likely than not that goodwill impairment exists. The adoption of the guidance did not have a significant impact on our consolidated financial statements. In April 2010 the FASB reached a consensus on the Milestone Method of Revenue Recognition which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The updated guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. The adoption of the guidance did not have a significant impact on our consolidated financial statements. In January 2010, the FASB amended the guidance related to fair value disclosures. This amended guidance requires disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of Additionally, this guidance requires presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of The adoption of this guidance did not have a material impact on our financial position or results of operations. In October 2009, the FASB updated the guidance related to Multiple Element Arrangements. This guidance relates to the final consensus reached by FASB on a new revenue recognition guidance regarding revenue arrangements with multiple deliverables. The new accounting guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. The new accounting guidance is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption is permitted. The adoption of the guidance did not have a significant impact on our consolidated financial statements. The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information. 21

22 3. AMOUNTS DUE FROM RELATED PARTIES The Company had amounts due from related parties which consisted of no interest or repayment period primarily from principal shareholders of the Company. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: Furniture and fixtures $ 109,005 Equipment and computers 273,248 Leasehold improvements 43,752 Total property and equipment 426,005 Less - accumulated depreciation and amortization (349,151) Total property and equipment, net $ 76,854 Depreciation and amortization expense associated with property and equipment was $39,214 for the six months ended. 5. INTANGIBLE ASSETS Amortization expense associated with property and equipment was $18,445 for the six months ended June 30, AMOUNTS DUE TO RELATED PARTIES The Company had amounts due to related parties which consisted of no interest or repayment period as follows: Principal shareholders of CTX Technologies $ 171, Canada, Inc. (controlled by principal shareholder) 1,119,951 Total $ 1,291,380 22

23 7. CONVERTIBLE DEBT The Company issued convertible debt on July 30, 2010 to EFT Biotech Holdings, Inc., a company based in California with various business interests in distribution of diverse products in China through sales membership network. The convertible debt carries 8% annual interest and anytime after January 26, 2011, CTXV may elect to convert into common stock at $0.59/share for a total of 8,474,576 new shares. On April 29, 2011, The Company elected to convert the debt into equity in accordance with the agreement between the parties. As a result, the Company recognized $4,406,780 income for the changes of fair value of convertible debt for the period ending. 8. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its administrative facilities under a non-cancelable operating lease that expires on October 31, 2012 in the amount of CAD$3,499 per month. Rent expense related to the operating lease was USD $134,053 for the six months ended. 23