Annual Report (10-k)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Mark One

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File No. 0-27845

BIG TREE GROUP INC.

(Exact name of registrant as specified in its charter)

Colorado		84-1304106
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

South Part 1-101, Nanshe Area, Pengnan Industrial Park on North Yingbinbei Road in Waisha Town of Longhu District in Shantou, Guangdong, China	515023
(Address of principal executive offices)	(Zip Code)

(Registrant’s Telephone number, including area code) (86)-754-8323888

Securities registered under Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	Not applicable

Securities registered under Section 12(g) of the Act:

Common Stock, par value $0.00001 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ 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 þ 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 ¨ No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.4.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer	o	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter ended June 30, 2013 of $959,536 on June 28, 2013.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 12,529,700 shares of common stock are outstanding as of May 12, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None.

BIG TREE GROUP INC.

FORM 10-K

TABLE OF CONTENTS

		Page No.
Part I
Item 1.	Business.	1
Item 1A.	Risk Factors.	12
Item 1B.	Unresolved Staff Comments.	20
Item 2.	Properties.	20
Item 3.	Legal Proceedings.	20
Item 4.	Mine Safety Disclosures.	20

Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	20
Item 6.	Selected Financial Data.	21
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation.	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	31
Item 8.	Financial Statements and Supplementary Data.	31
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.	31
Item 9A.	Controls and Procedures.	31
Item 9B.	Other Information.	32

Part III
Item 10.	Directors, Executive Officers and Corporate Governance.	36
Item 11.	Executive Compensation.	37
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	39
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	40
Item 14.	Principal Accountant Fees and Services.	42

Part IV
Item 15.	Exhibits, Financial Statement Schedules.	43

EXPLANATORY NOTE

This Annual Report on Form 10-K of Big Tree Group, Inc. for the year ended December 31, 2013 reflects the restatement of our audited consolidated financial statements as of December 31, 2012 and for the year ended December 31, 2012. Based upon analysis of our current tax research and interpretations of China tax regulations, we have determined that our subsidiary, Big Tree International Co., Ltd., a Brunei company, may be considered a non-resident PRC company and may be subject to China income taxes and other payroll benefit taxes. Accordingly, we have decided to accrue China income taxes and payroll benefit taxes pursuant to China tax regulations. At December 31, 2012, we increased our current liabilities by $1,216,648, reduced net income by $768,443 or $0.08 per common share (basic and diluted) to reflect the accrual of income taxes, payroll benefit taxes and all related estimated penalties and interest, we reduced beginning retained earnings by $440,099 to reflect the accrual of such taxes and penalties for the 2011 period, and increased accumulated other comprehensive loss by $8,106. Currently, we are reviewing our corporate tax structure and plan on restructuring our tax structure to ensure that Big Tree International Co., Ltd. is not subject to such taxes in China.

Please see Note 16 - Restatement contained in the Notes to Consolidated Financial Statements appearing later in this Form 10-K which further describes the effect of this restatement. In addition, we have amended the following sections of this report:

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, "believe", “expect," “anticipate," “estimate," “intend," “plan," “targets," “likely," “aim," “will," “would," “could," and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

	•		The circumstances resulting in the restatement of our financial statements and the material weaknesses in our internal control over financial reporting and in our disclosure controls and procedures;
	•		Transactions with our related parties;
	•		Fluctuations in our revenues based upon our revenue recognition policy;
	•		Amounts due our CEO and his wife for the purchase of BT Shantou;
	•		Factors affecting consumer preferences and customer acceptance of new products;
	•		Competition in the toy industry;
	•		Loss of one or more key customers;
	•		Dependence on third-party contract manufacturers;
	•		Dependence on certain key personnel;
	•		Inability to manage our business expansion;
	•		Infringement by third parties on our intellectual property rights;
	•		Our inadvertent infringement of third-party intellectual property rights;
	•		PRC government fiscal policy that affect real estate development and consumer demand;
	•		Availability of skilled and unskilled labor and increasing labor costs;
	•		Lack of insurance coverage and the impact of any loss resulting from product liability or third party liability claims or casualty losses;
	•		Violation of Foreign Corrupt Practices Act or China anti-corruption laws;
	•		Economic, legal restrictions and business conditions in China;
	•		Limited public market for our common stock; and
	•		Potential conflicts of interest between our controlling shareholders and our shareholders.

You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in Item 1A. Risk Factors. Other sections of this report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

When used in this annual report, the terms:

• "Big Tree," "we," "our," and "us" or the “Company” refers to Big Tree Group, Inc. (formerly Transax International Limited), a Colorado corporation and its wholly-owned subsidiaries Big Tree International Co., Ltd., a Brunei company, ("BT Brunei") and Shantou Big Tree Toys Co., Ltd., a Chinese company (“BT Shantou”).

• "2013” refers to the year ended December 31, 2013,

• "2012” refers to the year ended December 31, 2012, and

• "2014” refers to the year ending December 31, 2014.

All share and per share information contained herein gives pro forma effect to the 1:700 reverse stock split of our common stock on December 11, 2012 and the effect of the conversion of the Series B and C convertible preferred shares which automatically converted into common shares on December 11, 2012.

iii

PART I

ITEM 1. BUSINESS

We are in the business of toys sourcing, distribution and contractual manufacturing targeting international and domestic distributors and customers in the toys industry. Our main business focus is to function as a “one stop shop” for the sourcing, distribution and specialty manufacturing of toys and related products. The Company conducts these operations through both its BT Brunei and BT Shantou subsidiaries. BT Shantou was founded in 2003 and BT Brunei was established in 2011. As part of our Chief Executive Officer, Mr. Wei Lin’s desire to expand the historic revenues of BT Shantou, he was seeking a way to permit the Company to grow its revenues through export sales by leveraging his extensive contacts developed since BT Shantou was founded in 2003. Following the Reorganization, which is described later in this section, BT Brunei is focused on export sales and BT Shantou transitioned its limited export customers to BT Brunei and concentrating its efforts on domestic sales.

We are located in Shantou City of Guangdong province, the geographical region well-known for toys manufacturing and exporting in China. We are not a manufacturer. We provide procurement services for international toy distributors and wholesalers, including identifying, evaluating, and engaging one or more local manufacturers, trading companies or distributors for the requested supply of toys, as well as original equipment manufacturing (“OEM”) services. The OEM services include engaging toy manufacturers directly or through other toy trading companies or distributors to either manufacture toys to specific specifications requested by our customers, or customize an existing toy product to meet our customers’ request, such as through changes in mechanical functionality, appearance, physical dimension, and materials. We source a wide variety of toys made of plastic, wood, metal, wool, and electronic materials, primarily targeting children from infants to teenagers. We enable our customers to view these toys either through our website or at our extensive toy showrooms located in Shantou, China. Customers can easily contact our online representatives for inquiry and place orders, or visit the toy showrooms and choose from the displayed toy samples provided by our manufacturing partners.

In a move to expand our business in 2009, BT Shantou developed a proprietary construction toy consisting of plastic pieces that can plug-in together to make a wide variety of objects, which we refer to as our Big Tree Magic Puzzle (3D). We registered the patents for its utility model and appearance design in Hong Kong and mainland China during 2010 and 2011. The Big Tree Magic Puzzle (3D) is currently promoted and distributed in the Chinese domestic market through BT Shantou’s online store, through our showrooms and at two airport locations.

Our Corporate Structure

The chart below illustrates the current corporate structure of the Company:

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Industry

Based on information provided by China Customs Bureau, in the first three quarters of 2013, total toy exports from China was approximately $16.8 billion, which is 8.69% lower than the same time of last year. However, it is much better compare to the 16.86% decrease rate of the first half year of 2013. Guangdong Province accounted for approximately $10.4 billion or 62% of total toys exported from China. The China Toy & Juvenile Products Association expect toy exports will recover in the 2014 and 2015 with the gradually recovery of world economies.

According to the annual sales data provided by Toy Industry Association, global toys sales in 2012 were approximately $84.1 billion, an increase of $0.8 billion from 2011. Based on 2012 Chinese Toy Industry Research Report, in 2012, total export of Chinese toy enterprises were approximately $11.5 billion, increased by $ 0.6 billion compare to 2011, accounting for more than 40% of global exports. Customers for our toy sourcing business consist of distributors, trading companies, and wholesalers primarily located in mainland China, Hong Kong, Europe, Mexico, South America, Asia and the United States.

Toy Industry Association (TIA), the non-profit trade association for producers and importers of toys and youth entertainment products sold in North America, disclosed in its research that the global financial crisis had limited impact on total toys revenues globally, except in Britain due to the closure of a major retailers in that country. Consumers continue to look for “value” of their toys purchases; however, the demand for toys has not yet shifted to less expensive toys since most parents have opted to slash other family expenditures in order to satisfy their children's preferences.

Environmental concerns and toy safety have become key issues in customer’s purchases. Europe and United States both have updated their toys quality and safety standards, which have inevitably caused the increase of costs on production, quality control, and certification and have caused concerns to their major importers, especially to China as the major sourcing country for low-priced toys. Consequently, those standards and policy updates may potentially impact the world toy market, including pricing and availability for low-priced products.

Despite the uncertainty brought by these policy changes, the world’s toy market is estimated to continue expanding in the next few years with a substantial demand expected to occur in Asian countries, especially in China. According to China Social Investigation Firm (SSIC), China has 400 million infants and children below 14-year-old with one third residing in urban areas and two-thirds in rural areas. Currently, China's urban per capita annual consumption of children's toys is under $15, while rural per capita consumption of toys is less than $10. It is relatively low compared to United States where the per capita annual consumption of toys is around $280, and $288 in Japan, $361 in Britain, and even $51 in Brazil. The significant gap between market capacity and current sale scale in China has created an expansion potential of China’s toy market.

China is the world’s largest toy manufacturer and exporter with more than 20,000 toy companies that produce and distribute two-thirds of the global toys' demand. China's toy manufacturing is highly regionally concentrated with most output produced in the developed eastern coastal areas of China. For instance, the five provinces of Guangdong, Jiangsu, Zhejiang, Shandong and Fujian, as well as Shanghai, have collectively accounted for 95% of toy sales in China. Guangdong province, the most important Chinese toy production and export base, represents 70% of toy sales by China.

China toy industry is historically export-oriented. More than 70% of the toys produced in China are for exports. North America and Europe are top two export destinations of toys made in China. The export orientation has made the industry susceptible to the fluctuations and uncertainty of international trading conditions, currency exchange rates, and global financial crisis, especially in North America and Europe. In addition, due to the inflation and continuous appreciation of RMB currency in the past few years, the toy manufacturers are facing the challenge of soaring costs of raw materials and stagnant sale prices of final products at the expense of profit margin.

Chinese toy industry as a whole is undergoing the transition from current export-oriented, low tech, few branding and OEM-oriented manufacturing to the more sustainable development model featured with significant growth of domestic sales, high tech, better quality, and more offerings of proprietary brands and products. We believe that a more sustainable development model means the reliance on the ability of the industry in general to address this evolving marketplace by taking steps to improve product quality and safety through technology, innovation, and branding with a goal of attract international and domestic distributors to continue to buy from Chinese toy suppliers.

Product Descriptions

We source a wide variety of toys made of plastic, wood, metal, wool, and electronic materials, primarily targeting at children from infants to teenagers. These toys include, but are not limited to, infant appliances, games, balls, dolls, stuffed toys, transformers, racing track sets, play sets, water toys, and educational toys. The offered toys can be operated by battery, manual power, wire control, remote control, voice control, infrared ray control, and other applications.

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Our proprietary Big Tree Magic Puzzle (3D) caters to consumers ranging from minor children to adults. Big Tree Magic Puzzle (3D) are composed of 18 assembly parts made of ABS environmental-friendly plastic materials in multiple shapes including, but not limited to, squares, triangles, right-angled connectors, etc. ABS, or acrylonitrile butadiene styrene, is a recyclable polymer which is used in many consumer products in part as a result of its dimensional stability. The Big Tree Magic Puzzle (3D) adopts an innovative plug-in design that goes beyond the traditional planar and linear plug-in to achieve the transformations among the common and unconventional shapes such as diamond, sphere and dynamic warping, etc. Each assembly part offers 10 color choices that encourage children to learn colors and shapes in an interesting and attractive playing environment. We have developed over 10 series of Big Tree Magic Puzzle (3D) including about 200 product items. During the years ended December 31, 2013 and 2012, we recorded sales from the sale of Big Tree Magic Puzzle 3D of approximately $0.5 million and $0.8 million, respectively.

Patents and Trademarks

We have registered the design of our proprietary Big Tree Magic Puzzle (3D) with and were granted an eight year patent by the Intellectual Property Department of the Hong Kong Special Administrative Region in 2010. We have also obtained the patents for utility model and design from the State Intellectual Property Office of the People’s Republic of China during 2010 and 2011. Based on our patent registrations, and applicable Hong Kong and PRC laws, we have the exclusive right on the proprietary Big Tree Magic Puzzle (3D) in Hong Kong and mainland China, and can prevent other competitors from making, using, selling, or distributing the patented invention without our permission during the term. The registration information of the patents is listed in the table below:

Patent	Title of Invention	Granting Agency	Term	Patent No.	Region
Short-term Patent	Assembled Toy Plug-in Blocks	Patents Registry of Intellectual Property Department	Eight years starting on December 18, 2009	HK1133784	Hong Kong
Registration of Design	Toy bricks	Design Registry Intellectual Property Department	Five years starting on December 16, 2009	0902157.3	Hong Kong
Utility Model	Assembled Toy Plug-in bricks	SIPO	Ten years starting on January 12, 2011	ZL. 2009 2 0292981.6	PRC
Registration of Design I	Toy bricks	SIPO	Ten years starting on August 18, 2010	ZL 2010 3 0103327.4	PRC
Registration of Design II	Toy bricks	SIPO	Ten years starting on August 18, 2010	ZL 2009 3 0680023.1	PRC

In addition, we sell some of our products under two brand names and registered trademarks listed in the table below. Our trademarks have been registered with the Trademark Office of the State Administration for Industry and Commerce of the People’s Republic of China (the “SAIC”). Based on our trademark registration and applicable PRC laws, we have the exclusive right to use a trademark for products and services for which the trademark has been registered with the SAIC. A trademark registration is valid for 10 years commencing from the approval date.

Brand Name	Trademark	Class/Products	Validity Term	SAIC Registration No.
Big Tree Carnival	大树嘉年华 Big Tree Carnival	28/game stations, magician gears, toys, chesses, sport balls, fitness apparatus, exercise instruments, swimming pools for entertainment purpose, roller skates, adornments (except for lights and candies) for Christmas tree	From September 14, 2010 to September 13, 2020		7012858
Big Tree		28/game stations, magician gears, toys, chesses, sport balls, fitness apparatus, exercise instruments, swimming pools for entertainment purpose, roller skates, adornments (except for lights and candies) for Christmas tree	From December 14, 2010 to December 13, 2020		6987896

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Certifications

For our sourcing business, we require all of our manufacturer partners to provide Export Toy Quality Licenses as mandated by the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (the “AQSIQ”) and Certification and Accreditation Administration of the People’s Republic of China (the “CNCA”). In cases where international distributors demand additional product testing, facility auditing, and/or quality certifications, we would evaluate and identify the qualified local manufacturers to source goods in compliance with the desired standards set by the distributors. To facilitate these services, we evaluate the specific distributor requirements and source local OEMs or other third parties who should have the requisite experience or qualifications to provide the additional services utilizing a generally available database. We then facilitate the engagement of the appropriate local OEM or third party to provide these additional services. If requested as part of the order from the distributor, we may also further coordinate with the local OEM, including providing product samples to the designated third party testing center for product testing and/or quality certifications. In the instance of facility auditing, we may coordinate with the parties to ensure that the auditing process is completed in a timely manner. The costs of these additional services are generally borne by us and are included in our costs of sales.

Our quality control technicians work in close coordination with our sales and marketing staff to provide services for our customers. China's toy industry has been regulated since early 2007 by the expansion of the nation's compulsory certification system to include toy products. Regulations require manufacturers to apply for China Compulsory Certification (CCC) from the nation's Certification and Accreditation Administration (CNCA). Toys are subject to inspection and certification review and no toy products without CCC are permitted to leave a factory. We seek to strictly comply with quality control regulations for preproduction, mass production, and final inspection utilizing the AQL (Acceptable Quality Level) Major 2.0/Minor 4.0 adopted by the standard ISO 8124 series set by International Standards Organization as well as ANSI/ASQ Z1.4 released by American Society for Quality. In addition, the quality control standards for products distributed are in compliance with GB 6675-2003 Chinese National Safety Technical Code for Toys released by National Technical Committee of Standardization for Toys. On the timely manner, we issue quality control report and keep the pictures for process control and loading. The service package covers production supervision, quality control, shipment, and after-sale services.

Products exported outside of China generally are required to comply with various quality control standards and in some instances certifications fixed by the destination country. For example, the products supplied to European countries, including Great Britain, are required to comply with the quality control standards determined by the European standard EN71 series tha t are composed of 11 parts to specify safety requirements for toys which were established by the European Committee for Standardization. The products distributed to the European countries are required to bear the CE (ConformitйEuropйenne or "European Conf ormity") mark which is a mandatory conformity mark for products placed on the market in the European Economic Area (EEA). With the CE marking on a product the manufacturer self-certifies that the product conforms to the essential requirements of the applicable EC directives. Toys imported into Mexico are required to conform to NOB 015/10-SCF/SSA-1994 and related rules which regulate toy safety, including limits on the use of paints and dyes, labeling and testing methods. Lastly, products exported to the United States are required to comply with quality control regulations specified by ASTM F963 Standard Consumer Safety Specification on Toy Safety set by American Society for Testing and Materials (ASTM) and Consumer Product Safety Improvement Act of 2008. The products which may be distributed to the United States are required to comply with the certifications and approvals set by ASTM F963 standards and the Consumer Product Safety Improvement Act of 2008. As part of our services we internally confirm the compliance with the applicable quality control and certification standards of the destination countries, and further confirmation of conformity to these standards is provided by CNCA at the time of the shipment from China.

Our proprietary Big Tree Magic Puzzle (3D) is manufactured under GB6675-2003 National Safety Technical Code for Toys targeting children under 14, a Chinese national product standard set by Standardization Administration of China (the “SAC”) which define and establish toy safety understanding and implement technical specifications for the toy manufacturing industry. On January 13, 2010, we received China Compulsory Product Certification for Big Tree Magic Puzzle 3D from the Certification Center of Light Industry Council, an independent certification institution in China. The certification is valid until December 1, 2014.

Customers

Our customers for our toy sourcing business consist of distributors, trading companies, and wholesalers primarily located in mainland China, Hong Kong, Europe, South America, Asia and the United States. In 2013, sales to South America accounted for approximately 36.5% of our total revenue and sales to Europe accounted for approximately 36.2% of our total revenues primarily to the countries of Mexico, Great Britain and Turkey. Sales to the United States is still relatively low, represent about 3.3% of our total revenue.

Our Big Tree Magic Puzzle (3D) is currently marketed directly to consumers in China through our showrooms, our airport locations, and through our online store at Taobao Mall (www.Tmall.com), the largest B2C online retailing platform in China. Sales from Taobao Mall represented less than 0.1% of our total revenue during 2013. Subject to the availability of sufficient capital, management intends to expand the number of sales locations by opening or acquiring additional outlets in China in 2013. We also expect to use our existing distribution channels to increase sales of this proprietary product.

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Sales and Marketing

In 2013, we marketed toy products primarily through our two toy showroom in Shantou, China. One of the showrooms is 21,258 square foot while the other is 96,875 square foot. We leased a the 96,875 square foot products showroom from Shantou Youbang International Supervise Center, Co., Ltd. (“Shantou Youbang”), a company owned by Ms. Guihong Zheng, Mr. Wei Lin’s wife, for an annual rent of RMB 1,440,000 (approximately $232,614 as of December 31, 2013). In 2013, we opened this toy showroom which will be used to provide our customers and potential customers the opportunity to see all the toys we offer with a one-stop shop experience. Currently, we are still utilizing the 21,258 showroom, which is located in our corporate office. Additionally, customers can either browse the lines of toys online and contact our online representatives for inquiry and place orders, or visit the toy showrooms and choose from the displayed toy samples provided by our manufacturing partners.

We have obtained vendor permits from Shantou Airport Company of Guangdong Airport Management Corporation (GAMC) since 2011 to run two mini showrooms with 570 and 600 square feet (approximately 53 and 56 square meters), respectively located in the terminals for domestic flights and international flights in Jieyang Chaoshan International Airport that was officially opened on December 15, 2011. The term of the vendor permits and associated leases for these two showrooms is from December 18, 2011 to February 17, 2015. For the two showrooms collectively, we are obliged to pay monthly fee of RMB 15,929 (approximately $2,573 as of December 31, 2013) to Shantou Airport Company, including vendor permit fee of RMB8,299 (approximately $1,341 as of December 31, 2013) rent of RMB 6,540 (approximately $1,056 at December 31, 2013), and administration fee of RMB1,090 (approximately $176 as of December 31, 2013). The terminal showrooms do not generate sales but serve as a marketing tool to present our Big Tree brand and introduces general toys and Big Tree Magic Puzzle (3D) to public at the airport. We have four full-time employees working in these two showrooms.

Since August 2011, Taobao (China) Software Co., Ltd. and Zhejiang Taobao Network Co, Limited, the affiliates of Alibaba Group, the leading e-commerce company in China started to provide B2C service to us, and we opened an online retailer account at Taobao Mall (www.tmall.com), the largest B2C online retailing platform in China. Our online retailer account operating under the name of Big Tree Toys Flagship Store (the “Taobao store”) is dedicated to the marketing and sale of our Big Tree Magic Puzzle (3D). Sales generated from the Taobao store are minimal for the years ended December 31, 2013 and 2012.

Suppliers

We source our customer orders from local qualified manufacturers and trading companies. We also monitor the quality control process at the manufacturers’ facilities and inspect final products prior to delivery. The products we sell are dropped shipped directly to our customers by the supplier or are shipped to our warehouse where we inspect the final products and pack the customer orders into containers for shipping. For 2013, our top two suppliers represented 70.9% of our total purchases, representing 42.4% and 28.5%, respectively of our purchases. In 2013, one of our suppliers, Universal Toys Trading (Hong Kong) Limited (the “Universal Toys”), a toy distributor and a related party, whose sole shareholder is the brother in law of our Chairman and CEO, accounted for 0.5% of our total purchases. During 2012, Universal Toys accounted for approximately 5.2% of our total purchases.

On June 1, 2010, BT Shantou entered into a 10-year contract manufacturing agreement with Shantou Xinzhongyang Toy Industrial Co. Ltd. (“Xinzhongyang”), a company owned by our Chairman and CEO and his wife, to produce the Big Tree Magic Puzzle (3D). Pursuant to the agreement, BT Shantou is responsible for product development and providing the designs and technical support to Xinzhongyang for production. BT Shantou has contracted to place a monthly order on the fifth day of each month, and Xinzhongyang is required to confirm the order within three business days upon the receipt of the order and begin delivery of the products at Xinzhongyang’s facility on the 15th day after the receipt of the order. For 2013, purchases from Xinzhongyang totaled $443,000, representing less than 2.0% of our total purchases.

Quality Control Process

Our quality control process includes identifying and evaluating qualified manufacturers for specific orders. We ensure that each manufacturer meets the qualifications and required industry standards set by the PRC government and, if applicable, the standards fixed by the laws of the destination countries if the products are being exported, all as described earlier in this section under "Certifications.” We also monitor the quality control during the purchase of raw materials and production process at the manufacturers’ facilities. We examine the quality and quantity of the final product upon delivery to our warehouse prior to shipping, including reviewing for compliance with GB 6675-2003 Chinese National Safety Technical Code for Toys released by National Technical Committee of Standardization for Toys. Based upon these standards, we have developed a checklist which our technicians follow when reviewing the toys, the scope of which can vary depending upon the type of toy. In addition to inspection of the composition and component materials, procedures can include heavy metal inspection, tensile testing and impact testing. For toys being exported, our quality control procedures also include reviewing for compliance with the various quality control standards and in some instances certifications fixed by the destination country. We conduct testing on customized toys and new “off the shelf” toys which have recently been introduced by a manufacturer, together with representative testing by order of “off the shelf” toys which have been previously been on the market and are manufactured by a known company.

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Because most of our suppliers are located in the vicinity of the City of Shantou, where we reside, in instances where we direct the supplier to deliver the order to the shipping point, our technicians visit the suppliers’ distribution or manufacturing facilities prior to delivery of the order to the shipping point to conduct quality control inspection and, if necessary, bring samples back to our quality control testing room for further inspection, which is completed before the order is shipped. The orders are then packed into containers and shipped to our customers.

Growth Strategy

In addition to the focus on export sales through BT Brunei, our growth strategies include the following:

Build satellite sales offices and branches in major target countries and regions. One goal of our growth strategy is to open a satellite office in the United States to expand our customer base in North and South America. We expect to also use this office as a hub for sourcing potential products outside of China to expand our distribution offerings. Additionally, we expect to open sales offices in several major cities of China to further grow our customer base.

Acquire major regional distributors . A long term growth strategy is the development of additional propriety products to complement the Big Tree Magic Puzzle (3D) and to offer our propriety products at sales locations or through distributors with sales locations or stores in high traffic areas such as shopping malls where customers can try our products and see just how fun, unique and educational they are for children. We are not, however, presently a party to any agreement or understanding related to any potential acquisition.

Acquisition of entities under common control. We believe that as our business grows there are certain strategic related party entities that could enhance the value of our company and improve our long-term growth. These related party entities include Yunjia Fashion Clothing Co., Ltd. ("Yunjia") and Xinzhongyang, companies that are owned and controlled by our CEO and wife. We believe that the possible combination of Yunjia which would help us in controlling our overhead expenses. Second, in the event sales of our Big Tree Magic Puzzle (3D) begin to build to a sustainable level, of which there are no assurances, we believe the combination of our contract manufacturer, Xinzhongyang, could enable us to have greater control over our production process and provide an avenue for further business expansion through the provision of contract manufacturing services to third parties.

We are in the early stages of development of the plan to implement this growth strategy, including the timeline, milestones and costs. Depending upon the continued growth of our revenues from our existing business, of which there are no assurances, our ability to undertake many of these components to our growth strategy is subject to the availability of sufficient working capital. Other than a short-term loan as described elsewhere in this report and working capital advances from related parties, we do not have any external sources of working capital at the present time and there are no assurances we will be able to raise additional working capital. Accordingly, our ability to execute on this growth strategy may be limited if we are unable to continue to increase our revenues or raise working capital as may be necessary. In addition, even if we should proceed with any of these growth strategies, there are no assurances that they will be effective.

Competition

The Chinese toy industry is highly competitive and regionally concentrated. There are numerous toy manufacturers, trading companies, and distributors scattered throughout the PRC. We face intense competition from existing competitors and new market entrants. Competition is based primarily on the ability to design and develop new toys, to procure licenses for popular characters and trademarks and to successfully market products. Many of our competitors offer similar products or alternatives to our products, .as well as significantly longer operating histories, more widespread brand recognition and greater financial resources that we do.

We believe that we have transformed our company from being a small privately owned trading enterprise that competed on pricing into a sophisticated sourcing and distribution company, providing “one-stop-shop” services for distributors and wholesalers globally. We also believe that its development of a proprietary product could further sets our company apart from some of its other competitions. In an effort to effectively compete, we intend to build our reputation and brand recognition and compete primarily based on product quality, brand recognition, reputation, extensive sourcing distribution capability. The barriers to entry into the Chinese toy industry, however, are low and we expect that competition will continue to increase. There are no assurances that our efforts will be successful or that we will ever effectively compete within our market segment.

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Government Regulation

General Regulatory Environment

We operate our business in the PRC under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the State Administration for Industry and Commerce, or SAIC, the Ministry of Commerce, or MOFCOM, the State Administration of Foreign Exchange, or SAFE, and their respective authorized local counterparts.

Toy Safety Regulations

Our products are subject to various laws, including China's National Safety Technical Code for Toys - GB 6657-2003 and Safety of Electric Toys – GB19865-2005. These laws establish mandatory safety standards for the mechanical and physical safety, toxicity and flammability of toys and electronic toys. In addition, our suppliers are required to obtain Export Toy Quality Licenses as mandated by the AQSIQ and CNCA. Any failure to comply with these requirements could result in product liability claims, loss of sales, diversion of resources, damage to our reputation, increased warranty costs and removal of our products from the market. Similar laws exist in some states and cities and in various international markets. We maintain a quality control program designed to ensure compliance with all applicable laws.

We believe our operations in the PRC comply with the current toy safety and export laws. We are not subject to any admonition, penalty, investigations or inquiries imposed by government regulators, nor is it subject to any claims or legal proceedings to which it was named as a defendant for violation of any toy safety or export laws.

Regulation of Foreign Exchange

The PRC government imposes restrictions on the convertibility of the RMB and on the collection and use of foreign currency by PRC entities. Under current regulations, the RMB is convertible for current account transactions, which include dividend distributions, and the import and export of goods and services. Conversion of RMB into foreign currency and foreign currency into RMB for capital account transactions, such as direct investment, portfolio investment and loans, however, is still generally subject to the prior approval of or registration with SAFE.

Under current PRC regulations, foreign-invested enterprises such as our PRC subsidiaries are required to apply to SAFE for a Foreign Exchange Registration Certificate for Foreign-Invested Enterprise. With such a certificate (which is subject to review and renewal by SAFE on an annual basis), a foreign-invested enterprise may open foreign exchange bank accounts at banks authorized to conduct foreign exchange business by SAFE and may buy, sell and remit foreign exchange through such banks, subject to documentation and approval requirements. Foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account transactions and current account transactions. In addition, there are restrictions on the amount of foreign currency that foreign-invested enterprises may retain in such accounts.

Regulation of foreign exchange in certain onshore and offshore transaction

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75, which became effective as of November 1, 2005. According to SAFE Circular 75, prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete certain overseas investment foreign exchange registration procedures with the relevant local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (i) the injection of equity interests or assets of an onshore enterprise to the offshore company or (ii) the completion of any overseas fund-raising by such offshore company. An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (i) an increase or decrease in its capital, (ii) a transfer or swap of shares, (iii) a merger or division, (iv) a long-term equity or debt investment or (v) the creation of any security interests.

SAFE Circular 75 applies retroactively. As a result, PRC residents who established or acquired control of offshore companies that made onshore investments in the PRC in the past were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under SAFE Circular 75, failure to comply with the registration procedures may result in restrictions on the relevant onshore entity, including restrictions on the payment of dividends and other distributions to its offshore parent or affiliate and restrictions on the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under the PRC foreign exchange administration regulations.

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As a U.S. company, we are considered a foreign entity in the PRC. If we purchase the assets or equity interests of a PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration procedures described in SAFE Circular 75. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us.

In addition, on August 8, 2006, six PRC regulatory authorities, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process.

Regulations on dividend distribution

The principal regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures include:

	•		Wholly Foreign-Owned Enterprise Law (1986), as amended;
	•		Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
	•		Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and
	•		Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended.

Under these regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.

Regulation of overseas listings

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission (“CSRC"), promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended by the MOFCOM on June 22, 2009. This regulation, among other things, has certain provisions that require offshore special purpose vehicles, or SPVs, formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC prior to listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.

There remains some uncertainty as to how this regulation will be interpreted or implemented in the context of an overseas offering. If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval is required in connection with our acquisition of BT Brunei, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, restrict or prohibit payment or remittance of dividends by our PRC subsidiaries to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock.

SAFE regulations on employee share options

On March 28, 2007, SAFE promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Holding Plan or Share Option Plan of Overseas Listed Company, or the Share Option Rule. The purpose of the Share Option Rule is to regulate foreign exchange administration of PRC domestic individuals who participate in employee shareholder plans and share option plans of overseas listed companies. According to the Share Option Rule, if a PRC domestic individual participates in any employee shareholder plan or share option plan of an overseas listed company, a PRC domestic agent or the PRC subsidiary of such overseas listed company is required to, among others things, file, on behalf of such individual, an application with SAFE to obtain approval for an annual quota with respect to the purchase of foreign exchange in connection with shareholder or share option exercises as PRC domestic individuals may not directly use overseas funds to purchase shares or exercise share options. Concurrently with the filing of such application with SAFE, the PRC subsidiary shall obtain approval from SAFE to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the share purchase or option exercise, any returned principal or profits from sales of shares, any dividends issued on the shares and any other income or expenditures approved by SAFE.

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The PRC subsidiary is also required to obtain approval from SAFE to open an overseas special foreign exchange account at an overseas bank to hold overseas funds used in connection with any share purchase or option exercise. All proceeds obtained by PRC domestic individuals from sales of shares shall be remitted back to China after relevant overseas expenses are deducted. The foreign exchange proceeds from these sales can be converted into RMB or transferred to such individual’s foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the PRC domestic bank. If the share option is exercised in a cashless exercise, the PRC domestic individuals are required to remit the proceeds to the special foreign exchange account.

We do not currently have any share option plans. Although further clarification is required as to how the Share Option Rule will be interpreted or implemented, we believe that if we were to adopt such a plan, we and our PRC employees who have been granted share options will be subject to the Share Option Rule when our company becomes an overseas listed company. If we or our PRC employees fail to comply with the Share Option Rule, we and/or our PRC employees may face sanctions imposed by foreign exchange authority or any other PRC government authorities.

In addition, the State Administration of Taxation has recently issued circulars concerning employee share options. Under these circulars, our employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents relating to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or other PRC government authorities.

Employees

As of May 12, 2014, we had approximately 142 full time employees in the PRC and 3 full time employees in Hong Kong.

Our History

We were incorporated in the State of Colorado in 1987 originally under the name Vega-Atlantic Corporation. We were a development stage company initially engaged in the business of exploration of gold and precious metals within the United States. During 2001 we acquired interests in certain co-operative joint ventures to develop mineral properties in the PRC. Due, however, to our inability to raise sufficient capital to meet funding commitments, we sold or disposed of certain of our interests in the joint ventures during 2001.

In August 2003 we acquired 100% of the outstanding of Transax International Limited in exchange for shares of our common stock in a transaction treated as a reverse merger which resulted in a change of control of our company. Transax International Limited, through its wholly owned subsidiary TDS Telecommunication Data Systems Ltda. , was an international provider of information network solutions specifically designed for the healthcare providers and health insurance companies. The MedLinkSolutionTM enabled the real time automation of routine patient eligibility, verification, authorizations, claims processing and payment functions. Thereafter, we changed our name to Transax International Limited.

On March 26, 2008, we executed a stock purchase and option agreement with Engetech, Inc., a Turks & Caicos corporation controlled and owned 20% by Americo de Castro, director and President of MedlinkConectividade, and 80% by Flavio Gonzalez Duarte or assignees. In accordance with the terms and provisions of the agreement, we sold to the buyer 45% of the total issued and outstanding stock of our wholly-owned subsidiary, Transax International Limited, which owned 100% of the total issued and outstanding shares of: (i) MedlinkConectividade, and (ii) Medlink Technologies, Inc., (“Medlink”) a Mauritius corporation. However, the buyer defaulted on payments and on November 24, 2010, pursuant to an agreement, the buyer returned the 45 shares which represents 45% of Transax International Limited held in escrow and forfeited its initial deposit of $937,700 in full and complete satisfaction of any amounts due to us.

On April 4, 2011, pursuant to a Quota Purchase and Sale Agreement amongst Transax International Limited, QC Holding I Participacoes S.A., a corporation organized under the laws of Brazil (“QC Holding”), and MedlinkConectividade, we sold 100% of our interest in MedlinkConectividade. As such all related operations have been retroactively presented as discontinued operations for all periods presented and related operating assets and liabilities have been classified as assets from discontinued operations and liabilities from discontinued operations, respectively for all periods presented.

In accordance with the terms and provisions of the agreement: (i) QC Holding acquired the equity interest of MedlinkConectividade resulting in the sale of our operating subsidiary. As consideration for the purchase and sale of 100% of our interest in MedlinkConectividade, QC paid to us approximately $298,000; (ii) QC Holding agreed to assume all debt and other contingent liabilities of MedlinkConectividade, which as of December 31, 2010 was approximately $7,800,000 including $5,300,000 in past taxes and social security contributions due to the Brazil Government; and (iii) QC contributed to MedlinkConectividade approximately $1,402,000 which will be used to repay us approximately $1,402,000 in loans and interest due to our subsidiary, Transax Limited, which owned 100% of MedlinkConectividade. In accordance with the further terms and provisions of the Agreement, we retained our relevant technology assets consisting of software code and the Postilion network processor software to carry on business outside of Brazil.

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From April 4, 2011 until December 30, 2011, we had nominal assets, no revenues and limited operations consisting of financial reporting, general administration, and seeking new business opportunities with a merger candidate.

On December 30, 2011, immediately prior to consummation of the share exchange agreement discussed below, we entered into debt exchange agreements with the holders of $848,878 in our outstanding debt whereby we exchanged 820,006 shares of our Series B Convertible Preferred Stock for this debt. The following table sets forth the name of the debt holder, amount of debt exchanged and number of Series B Convertible Preferred Stock issued. Stephen Walters, Carlingford Investments Limited and CFO Oncall, Inc. were related parties.

Name of Holder of Debt	Amount of Debt Exchanged		No. of Shares of Series B Convertible Preferred Stock Issued
Stephen Walters	$	122,164		118,010
Carlingford Investments Limited		151,310		146,165
CFO Oncall, Inc.		37,092		35,831
China Direct Investments, Inc.*		538,312		520,000
Total	$	848,878		820,006

* China Direct Investments, Inc. purchased this debt acquired from Stephen Walters for $75,000 pursuant to a Bill of Sale and Assignment dated December 30, 2011.

The Reverse Merger

In December 2011, we completed a reverse merger pursuant to which we acquired BT Brunei. By way of background, in February 2011, the shareholders of BT Shantou, Mr. Wei Lin and Ms. Guihong Zheng, developed a plan to expand and obtain the benefits of a U.S. public company (the “Reorganization"). A key element of the Reorganization was to enter into a transaction with a public shell company in the United States by which the public shell company would acquire operations based in the PRC, all in compliance with PRC law. Lins (HK) International Trading Limited ("BT Hong Kong") formed BT Brunei to acquire BT Shantou. The second step in the Reorganization was for the BT Shantou shareholders to transfer their ownership interest in BT Shantou to BT Brunei. The third step was for BT Brunei and BT Hong Kong to enter into and complete a transaction with a U.S. public reporting company whereby that company would acquire BT Brunei.

To accomplish the first step in the Reorganization plan, BT Hong Kong was formed by Mr. Dore Scott Perler under the laws of Hong Kong on March 18, 2011. On April 13, 2011 BT Hong Kong formed BT Brunei under the laws of the State of Brunei Darussalam. The choice of the State of Brunei Darussalam was based in part upon its tax structure under which domestic corporations are not subject to income taxes which management believed would facilitate the expansion of export sales by permitting the Company to be more price competitive. As part of the second step, on July 5, 2011, BT Brunei acquired 100% of the equity interest in BT Shantou from Mr. Lin and Ms. Zheng, at the price of RMB 5,000,000 (approximately US $774,881), which represents the original amount of registered capital invested by Mr. Lin and Ms. Zheng. On September 6, 2011, the Bureau of Foreign Trade and Economic Cooperation of Shantou approved the acquisition. On October 13, 2011, BT Shantou received its business license as a WFOE that recognized BT Brunei as its sole shareholder. BT Shantou then became a wholly-owned subsidiary of BT Brunei. As part of the second step of the Reorganization plan, the former shareholders of BT Shantou, Mr. Lin and Ms. Zheng, entered into the Option Agreement with BT Hong Kong described below that allows them to purchase for a nominal amount, their shares of the U.S. public reporting company held by BT Hong Kong. Thereafter BT Shantou could undertake the third and final step of the Reorganization to enter into and complete a transaction with a U.S. public reporting company whereby that company would acquire BT Brunei.

The Reorganization and acquisition of BT Shantou was structured to comply with the new regulations relating to Mergers and Acquisitions of domestic enterprises by foreign investors published by Chinese Ministry of Commerce in 2006 (the New M&A Rules"). Under the New M&A Rules, the acquisition of PRC companies by foreign companies that are controlled by PRC citizens who are affiliated, such as with BT Shantou, is strictly regulated and requires approval from the Ministry of Commerce, which approval is burdensome to obtain. Such restrictions, however, do not apply to foreign entities which are controlled by foreign persons. These restrictions apply only at a “snapshot in time” that occurs at the time PRC companies are acquired by a foreign entity. In our case, this was effective on July 5, 2011 when BT Brunei acquired 100% of the equity interests of BT Shantou from the BT Shantou shareholders. At that time BT Brunei was owned 100% by BT Hong Kong, and BT Hong Kong was owned 100% by Dore Perler, a U.S. citizen, also as a trustee for Mr. Wei Lin. BT Brunei’s acquisition of BT Shantou was a cross-border transaction governed by and permitted under the New M&A Rules.

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Since the New M&A Rules would have prohibited the BT Shantou shareholders who were PRC citizens from immediately receiving a controlling interest in our company in a share exchange as consideration for the sale of their interest in BT Shantou, the BT Shantou shareholders and BT Hong Kong instead agreed that they would enter into an Option Agreement to grant those BT Shantou shareholders the right to acquire all of BT Hong Kong’s interest in the Company. However, there is no prohibition under PRC laws for those former BT Shantou shareholders to acquire an interest in the Company after the acquisition of BT Brunei and its wholly-owned subsidiary, BT Shantou, were consummated.

The Option Agreement granted Mr. Lin and Ms. Zheng the ability to obtain legal ownership of our shares of Series C Convertible Preferred Stock issued to BT Hong Kong in the Share Exchange Agreement which is described below for a nominal amount per share provided that (i) BT Brunei entered into a Share Exchange Agreement with BT Hong Kong, and (ii) the Company meets certain performance targets for the period from January 1, 2012 through December 31, 2013. In February 2013, these performance targets were orally waived among the parties involved, the initial allocation of the shares was revised and the Option Agreement was exercised. See Part II, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Option Agreement appearing later in this report.

On December 30, 2011, we entered into a Share Exchange Agreement with BT Brunei and its shareholder BT Hong Kong. Under the Share Exchange Agreement, we exchanged 6,500,000 shares of our Series C Convertible Preferred Stock for 100% of the issued and outstanding shares of BT Brunei from its sole shareholder BT Hong Kong. On December 11, 2012, the date on which we filed Articles of Amendment to our Articles of Incorporation with the Secretary of State of Colorado upon completion of the Reverse Stock Split, without any further action of the holders of the Series C Convertible Preferred Stock, each share of the Series C Convertible Preferred Stock was converted into one share of our common stock, and represented approximately 65% of our issued and outstanding shares of common stock. In connection with the closing of the Share Exchange Agreement, our former officers and directors resigned and our current officers and directors were appointed. The transaction was accounted for as a reverse merger and recapitalization of BT Brunei whereby BT Brunei is considered the acquirer for accounting purposes and the 6,500,000 shares of our Series C Convertible Preferred Stock were accounted for as paid in capital of the Company. As a result of the consummation of the Share Exchange, BT Brunei and BT Shantou are now our wholly-owned subsidiaries. Accordingly, the historical financial statements are those of BT Brunei and BT Shantou upon consummation of the December 30, 2011 Share Exchange transaction. Management of BT Brunei and BT Shantou has assumed operational, management and governance control immediately following the reverse merger transaction. On December 11, 2012, upon completion of the Reverse Stock Split, without any further action of the holders of these Series C Convertible Preferred Stock, each share of the Series C Preferred Stock converted into one share of our common stock.

As compensation for pre-merger services under the December 30, 2011 consulting agreement we entered into with China Direct Investments, Inc. and its affiliate Capital One Resource Co., Ltd. (collectively, “China Direct”), we issued China Direct 2,542,743 shares of our Series B Convertible Preferred Stock. On December 11, 2012, upon completion of the Reverse Stock Split, without any further action of the holders of these Series B Convertible Preferred Stock, each share of the Series B Preferred Stock converted into one share of our common stock. The services China Direct provided to us included an evaluation of several different business opportunities, including the acquisition of BT Brunei and BT Shantou. The Series B Convertible Preferred Stock issued to China Direct was accounted for as an expense of our company prior to the merger and recapitalization with BT Brunei and the resulting effect in net equity was eliminated upon completion of the reverse merger and recapitalization with BT Brunei.

On December 30, 2011, the goal of the Reorganization was realized when the Company completed the Share Exchange Agreement with BT Hong Kong and BT Brunei. As a result of this transaction, the Company is a holding company which, through its direct ownership of BT Brunei and BT Shantou, now has operations based in the PRC. Following this transaction, BT Brunei remained obligated to pay any remaining amounts of the acquisition price for BT Shantou of RMB 5,000,000 (approximately US $774,881) due to Mr. Lin and Ms. Zheng, which was approximately $0 and $288,455 at December 31, 2012 and 2011, respectively.

Effective December 11, 2012, we changed our name to Big Tree Group, Inc.

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ITEM 1A. RISK FACTORS

Risk Factors Relating to Our Business

The restatement of our consolidated financial statements may affect shareholder confidence, may consume a significant amount of our time and resources and may have a material adverse effect on our business and stock price.

We have issued two restatements on our 2011 audited consolidated financial statements and are restating our unaudited consolidated financial statements for the first three quarters of 2012 to correct certain errors in those consolidated financial statements. Additionally, we have restated our audited consolidated financial statements as of December 31, 2012 and for the year ended December 31, 2012 to reflect the accrual of income taxes and payroll benefit taxes.

We cannot be certain that the measures we have taken since we completed the restatement process will ensure that restatements will not occur in the future. The restatements may affect investor confidence in the accuracy of our financial reporting and disclosures, may raise reputational issues for our business and may result in a decline in share price and shareholder lawsuits related to the restatements.

We cannot assure investors that we will be able to fully address the material weaknesses in our internal controls that led to our restatements, or that remediation efforts will prevent future material weaknesses.

We reported material weaknesses in our internal control over financial reporting at December 31, 2013. We have identified control deficiencies in our financial reporting process that identified material weaknesses, leading to the restatements of our previously issued 2012 and 2011 annual and 2012 quarterly financial statements. There can be no assurance that we will be able to fully remediate our existing deficiencies. Further, there can be no assurance that we will not suffer from other material weaknesses in the future. If we fail to remediate these material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, it could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements, limit our ability to raise capital and have a negative effect on the trading price of our common stock.

The recording of our revenue is dependent on certain criteria being met and the criteria determines if we report revenue either on a gross basis as a principal or net basis as an agent depending upon the nature of the sales transaction. If we change the relationship with our customers or vendors and do not meet any of the criteria, pursuant to our revenue recognition policy, we may need to record revenues on a net basis (sales less cost of sales) and revenue recorded may decrease significantly.

Revenue is accounted for in accordance with the ASC 605-45, reporting revenue either on a gross basis as a principal or net basis as an agent depending upon the nature of the sales transaction. Revenue is recognized on a gross basis when the Company determines the sale meets the conditions of ASC 605-45, “ Reporting Revenue Gross as a Principal versus Net as an Agent .” When the Company does not meet the criteria for gross revenue recognition under ASC 605-45, the Company reports the revenue on a net basis.

Certain revenues from our sales are based on a net reporting because they do not meet the criteria for gross reporting method pursuant to ASC 605-45-45. This means that all cost of purchases from those sales will be netted with the sales revenues generated by the sale of those toys. All other revenues from sales are based on gross reporting pursuant to criteria outlined in ASC 605-45-45, as follows:

•	we are the primary obligor to provide the product or services desired by our customers;

•	we have discretion in supplier selection.

•	we have latitude in establishing price;

•	we have credit risk – see Note 13 for customer concentrations and credit risk; and

•	we have inventory risk before customer order and upon customer return;

If we change the relationship with our customers or vendors and do not meet any of the criteria, pursuant to our revenue recognition policy, we may need to record revenues on a net basis (sales less cost of sales) and our total revenues recorded may decrease significantly. Our revenues increased 17.2% in 2013 from 2012. We may continue to experience significant fluctuations in total revenues in future periods depending upon the nature of those sales.

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From time to time we engage in related party transactions. There are no assurances that these transactions are fair to our company.

We enter into a number of transactions with related parties which include purchases from or sales to a related party, advances to and from related parties, lease of facilities, business consulting services, among other transactions. The conduct of our business and operations are dependent upon these related party transactions, which are described in greater detail later in this report under Item 13. Certain Relationships and Related Parties, and Director Independence. We are subject to risks as a result of our significant reliance on these related parties including the risk that the business terms are not as fair to us and that our management is subject to conflicts of interest which may not be resolved in our favor. We cannot assure you that in every instance the terms of the transactions with related parties are on terms as fair as we might receive from or extend to third parties. Investors in our company are wholly dependent upon the judgment of our management in connection with these related party transactions and there are no assurances that the conflicts of interest between our company and these related parties will be resolved in our favor.

It is possible that working capital advances by us to related parties could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. However, we have not made a determination as of the date hereof if the advances resulted in a violation of that provision. We expect that the working capital advance made by us to related parties will be repaid. If, however, the amount is not repaid and/or it was determined that these advances violated the prohibitions of Section 402 from making loans to executive officers or directors, the Company could be subject to investigation and/or litigation that could involve significant time and costs and may not be resolved favorably. We are unable to predict the extent of the ultimate liability with respect to these transactions. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on our financial condition and operating results.

Our inability to extend our existing products as consumer preferences evolve, and to develop, introduce and gain customer acceptance of new products and product, may materially and adversely impact our business, financial condition and results of operations.

Our business and operating results depend largely upon the appeal of our products. Our continued success in the toy industry will depend on our ability to extend our existing core products and product lines as consumer preferences evolve, and to develop, introduce and gain customer acceptance of new products. Several trends in recent years have presented challenges for the toy industry, including:

	•		The phenomenon of children outgrowing toys at younger ages, particularly in favor of interactive and high technology products;
	•		Increasing use of technology;
	•		Shorter life cycles for individual products; and
	•		Higher consumer expectations for product quality, functionality and value.

We cannot assure you that:

	•		our current products will continue to be popular with consumers;
	•		the product lines or products that we introduce will achieve any significant degree of market acceptance; or
	•		the life cycles of our products will be sufficient to permit us to recover design, manufacturing, marketing and other costs associated with those products.

Our failure to achieve any or all of the foregoing benchmarks may cause the infrastructure of our operations to fail, thereby adversely affecting our business, financial condition and results of operations.

The toy industry is highly competitive and our inability to compete effectively may materially and adversely impact our business, financial condition and results of operations.

The toy industry is highly competitive. Globally, certain of our competitors have financial and strategic advantages over us, including:

	•		greater financial resources;
	•		larger sales, marketing and product development departments;
	•		stronger name recognition;
	•		longer operating histories; and
	•		greater economies of scale.

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In addition, the toy industry has no significant barriers to entry. Competition is based primarily on the ability to design and develop new toys, to procure licenses for popular characters and trademarks and to successfully market products. Many of our competitors offer similar products or alternatives to our products. We cannot assure you that we will be able to expand our sales of products or that we will be able to continue to compete effectively against current and future competitors.

As all of the toys we sell are manufactured in China, our revenues in future periods could be adversely impacted by consumer concerns regarding the safety of toys made in the PRC.

There have been product quality and safety issues for producers of toys that manufacture their goods in China including related to the use of excessive levels of lead paint. Based upon our internal research we believe that environmental concerns and toy safety are becoming key issues in customers' purchases following the large recall of Chinese manufactured toys in 2008. Europe and United States both have updated their toys quality and safety standards through the passage of the Toy Safety Directive of the European Union effective in 2011 and the Consumer Product Safety Improvement Act in 2008. While toys manufactured in China which we will seek to export to Europe and the United States will be subject to compliance with the rules and regulations of the import countries, it is possible that consumers in those countries will be less likely to purchase toys manufactured in China as result of legacy environmental and safety concerns. Any significant consumer rejection of toys manufactured in China will adversely impact our ability to expand our business in future periods.

We depend on Xinzhongyang, and if our relationship with this company is harmed or if they independently encounter difficulties in their manufacturing processes, we could experience product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis, any of which could adversely affect our business, financial condition and results of operations.

Although we have a long term contract with Xinzhongyang, a related party, our sales of the Big Tree Magic Puzzle (3D) would be adversely affected if we lost our relationship with Xinzhongyang or if Xinzhongyang’s operations were disrupted or terminated even for a relatively short period of time. Although we do not purchase the raw materials used to manufacture our products, we are potentially subject to variations in the prices we pay Xinzhongyang to produce the Big Tree Magic Puzzle (3D), depending on what they pay for their raw materials.

We are dependent on third-party manufacturers and we are subject to risks of unexpected price increases and the failure of these manufacturers to timely fulfill our orders.

We depend on third-party manufacturers who develop, provide and use the tools, dyes and molds that we generally own to manufacture our products. However, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our business, financial condition and results of operations.

We do not have long-term contracts with our third-party manufacturers. Although we believe we could secure other third-party manufacturers to produce our products, our operations would be adversely affected if we lost our relationship with any of our current suppliers or if our current suppliers’ operations were disrupted or terminated even for a relatively short period of time. Our tools, dyes and molds are located at the facilities of our third-party manufacturers.

Although we do not purchase the raw materials used to manufacture our products, we are potentially subject to variations in the prices we pay our third-party manufacturers for products, depending on what they pay for their raw materials. There are no assurances that we would be able to pass along any unexpected price increase to our customers which would adversely impact our results of operations in future periods.

We are dependent on certain key personnel and the loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

Our success is, to a large degree, attributable to Wei Lin our Chief Executive Officer and Mr. Jiale Cai, our Chief Financial Officer. Messrs. Lin and Cai are responsible for the management, sales and marketing, and operational expertise of our PRC subsidiary and perform key functions in the operation of our business. Although we have no reason to believe that these individuals would discontinue their services with us, the loss of one or more of these key employees could have a material adverse effect upon our business, financial condition and results of operations.

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We may not be able to manage our business expansion and increasingly complicated operations effectively, which could harm our business.

We plan to expand through the expansion of our product offerings, by increasing our sales network and by development of an international distribution business. If our planned expansion is successful, it will result in substantial demands on our management and personnel and our operational, technological and other resources. To manage the expected growth of our operations, we will be required to expand our existing operational, administrative and technological systems and our financial systems, procedures and controls, and to expand, train and manage the planned growth in our employee base. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, or that we will be able to effectively and efficiently manage the growth of our operations, and recruit and retain qualified personnel. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our financial condition and results of operations.

We may inadvertently infringe third-party intellectual property rights, which could negatively impact our business and financial results.

We are not aware of, nor have we received any claims from third parties for, any violations or infringements of intellectual property rights of third parties by us as of the date of this report. Nevertheless, there can be no assurance that as we develop new product designs and production methods, we would not inadvertently infringe the intellectual property rights of others or others would not assert infringement claims against us or claim that we have infringed their intellectual property rights. Claims against us, even if untrue or baseless, could result in significant costs, legal or otherwise, cause product shipment delays, require us to develop non-infringing products, enter into licensing agreements or may be a distraction to our management. Licensing agreements, if required, may not be available on terms acceptable to us or at all. In the event of a successful claim of intellectual property rights infringement against us and our failure or inability to develop non-infringing products or to license the infringed intellectual property rights in a timely or cost-effective basis, our business and/or financial results will be negatively impacted.

We have not purchased insurance coverage and any loss resulting from product liability or third party liability claims or casualty losses must be paid by us.

We have not purchased insurance coverage for product liability or third party liability and are therefore not covered or compensated by insurance in respect of losses, damages, claims and liabilities arising from or in connection with product liability or third party liability. In addition, we currently do not maintain any property insurance policies covering losses due to fire, flood, earthquake, equipment failure, break-ins, typhoons and similar events, nor do we maintain business interruption insurance. As a result, our business and prospects could be adversely affected in the event of such problems in our operations and may suffer losses that could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

Violation of Foreign Corrupt Practices Act or China anti-corruption law could subject us to penalties and other adverse consequences.

We are subject to the United States Foreign Corrupt Practices Act (“FCPA”) which generally prohibits United States public companies from bribing or making prohibited payments to foreign officials to obtain or retain business. PRC law also strictly prohibits bribery of government officials. While we take precautions to educate our employees about the FCPA and Chinese anti-corruption law, there can be no assurance that we or the employees or agents of our subsidiaries will not engage in such conduct, for which we may be held responsible. If that were to occur, we could suffer penalties that may have a material adverse effect on our business, financial condition and results of operations.

Our status as an emerging growth company may result in reduced disclosure obligations.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (which we refer to as the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies, that are not emerging growth companies, including, but not limited to, (1) presenting only two years of audited financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations in this prospectus, (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions. Because of the reduced disclosure and because our business is conducted in the PRC, investors may find investing in our common shares less attractive as a result, which could have an adverse effect on our stock price.

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In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to opt out of such extended transition period and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

Risks related to doing business in China

Our business is subject to extensive government regulation and any violation by us of such regulations could result in product liability claims, loss of sales, diversion of resources, damage to our reputation, increased warranty costs or removal of our products from the market, and we cannot assure you that our product liability insurance for the foregoing will be sufficient.

Our business is subject to various laws, including China's National Safety Technical Code for Toys - GB 6657-2003 and Safety of Electric Toys – GB19865-2005. We cannot assure you that defects in our products will not be alleged or found. Any such allegations or findings could result in:

	•		product liability claims;
	•		loss of sales;
	•		diversion of resources;
	•		damage to our reputation;
	•		increased warranty costs; and
	•		removal of our products from the market

Any of these results may adversely affect our business, financial condition and results of operations.

Uncertainties with respect to the PRC legal system could harm us.

Our operations in China are governed by PRC laws and regulations. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, prior court decisions have limited precedential value. BT Shantou is generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises.

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some-time after the violation has occurred. Moreover, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities, including local government authorities, thus making strict compliance with all regulatory requirements impractical, or in some circumstances, impossible. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

In addition, on August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of its capital contribution in foreign currency into RMB. The notice requires that the capital of a foreign-invested company settled in RMB converted from foreign currencies shall be used only for purposes within the business scope as approved by the authorities in charge of foreign investment or by other competent authorities and as registered with the Administration for Industries and Commerce and, unless set forth in the business scope or in other regulations, may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, including heavy fines. As a result, Circular 142 may significantly limit our ability to capitalize our PRC operations, which could adversely affect our ability to invest in or acquire any other PRC companies.

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Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

Because substantially all of our revenue is denominated in RMB, restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund any business activities we may have outside China or to make dividend payments to our shareholders in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, RMB is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of SAFE is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign exchange transactions under our subsidiaries capital accounts, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.

Fluctuations in the value of the RMB may have a material adverse effect on your investment.

The change in value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently, the PRC has decided to proceed further with reform of the RMB exchange regime and to enhance the RMB exchange rate flexibility. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the RMB against the U.S. dollar.

As a result of inflation and continuous appreciation of RMB currency in the past few years, the toy manufacturers are facing the challenge of increased costs of raw materials and stagnant sale prices of final products which has resulted in reduced gross profit margins. Any significant revaluation of the RMB could adversely impact the price we pay for toys which could reduce our margins in future periods and adversely impact our ability to compete in our market segment. Any significant revaluation of the RMB may also have a material adverse effect on the value of, and any dividends payable on, our common stock in foreign currency terms. More specifically, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Consequently, appreciation or depreciation in the value of the RMB relative to the U.S. dollar could materially adversely affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

SAFE regulations could adversely impact our company and subject us to fines.

Recent PRC regulations relating to offshore investment activities by PRC residents and employee stock options granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.

In 2005, SAFE promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.

Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file or update the registration with the local branch of SAFE, with respect to that offshore company, any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or creation of any security interest. If any PRC shareholder fails to make the required SAFE registration, the PRC subsidiary of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We cannot provide any assurances that all of our shareholders who are PRC residents will make or obtain any applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in the SAFE regulations may subject BT Shantou to fines and legal sanctions, restrict our cross-border investment activities, or limit BT Shantou ability to distribute dividends to or obtain foreign-exchange dominated loans from our company.

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As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and obtaining foreign currency denominated borrowings, which may harm our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

The New M&A Rules establish more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisition in China.

The New M&A Rules that became effective on September 8, 2006 established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could materially adversely affect our ability to grow our business through acquisitions in China.

Under PRC laws, arrangements and transactions among related parties may be subject to a high level of scrutiny by the PRC tax authorities.

Under PRC laws, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Under the Regulation on the Implementation of the Enterprise Income Tax Law of the PRC, the “related party” means the enterprises, other organizations or individuals that have any of the following relations with an enterprise:

• direct or indirect control relationship with respect to capital, management, sale or purchase, etc.;

• directly or indirectly controlled by a common third-party;

• any other relationship of interest.

We engage in a number of transactions with related parties. If any of the transactions we enter into with related parties are found not to be on an arms-length basis, or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the authority to disallow any tax savings, adjust the profits and losses of such possible future PRC entities and assess late payment interest and penalties. A finding by the PRC tax authorities that we are ineligible for any such tax savings would in all likelihood substantially increase our possible future taxes and thus reduce our net income in future periods.

We face risks related to natural disasters and health epidemics in China, which could have a material adverse effect on our business and results of operations.

Our business could be materially adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome, or SARS. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome, or SARS. A renewed outbreak of SARS or another widespread public health problem, including the new strain of bird flu in the PRC which has recently resulted in deaths in the PRC, could significantly harm our operations. Our operations may be adversely impacted by a number of health-related factors, including quarantines or closures of our locations or those of our customers or potential customers. Any of the foregoing events or other unforeseen consequences of public health problems could significantly harm our operations.

Labor laws in the PRC may adversely affect our results of operations.

On June 29, 2007, the PRC government promulgated a new labor law, namely the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008. The New Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially adversely affecting our financial condition and results of operations.

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Risks related to our common stock

Due to recent Chinese accounting scandals, the price of our common stock might fluctuate significantly and if our stock price drops sharply, we may be subject to shareholder litigation, which could cause our stock price to fall further.

There have been well-publicized accounting problems at several U.S.-listed Chinese companies that have resulted in significant drops in the trading prices of their shares and, in some cases, have led to the resignation of outside auditors, trading halts or share delistings by NASDAQ or the New York Stock Exchange, and investigations by the Division of Enforcement of the Securities and Exchange Commission. Many, but not all, of the companies involved in these scandals had entered the U.S. trading market through “reverse mergers” into publicly traded shells. The scandals have had a broad effect on Chinese companies with shares listed or quoted in the United States. Because we were a shell company which has undertaken a reverse merger with a PRC-based company, past or future accounting scandals in other Chinese companies could have a material adverse effect on the market for shares of our common stock and the interest of investors in our company or generally in PRC companies. In this event, the fluctuations in the market prices of our common stock could result in decreased liquidity and/or declining stock prices unrelated to our results of operation or business. In addition, as set forth in the risk factor immediately below, we do not have any audit committee financial experts on our Board of Directors and, accordingly, the risk of future errors in our financial statements is increased.

None of our Board of Directors are considered audit committee financial experts and we have reported material weaknesses in our internal control over financial reporting. Because we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Our internal accounting staff and our Board of Directors are relatively inexperienced with United States generally accepted accounting principles (“U.S. GAAP”) and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions and restatements of our financial statements. Finally, we have not established an Audit Committee of our Board of Directors. As a result of the material weaknesses in our internal controls over financial reporting at December 31, 2012 which are identified later in this report, it is possible that these material weaknesses could result in errors in our financial statements in future periods which could cause us to restate those financial statements. Additional restatements of our financial statements could result in lost investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price in future periods and potentially subject us to litigation.

The tradability of our common stock is limited under the penny stock regulations which may cause the holders of our common stock difficulty should they wish to sell the shares.

Because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a “penny stock” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.

Our management may take actions that conflict with your interests.

As of May 12 , 2014, our management owns approximately 42.3% of our common stock. These shareholders are able to exercise control over all matters requiring shareholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and they have significant control over our management and policies. The directors elected by these shareholders will be able to significantly influence decisions affecting our capital structure. This control may have the effect of delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interest.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable to smaller reporting company

ITEM 2. DESCRIPTION OF PROPERTIES

Our principal executive offices are located at BT Shantou’s facilities. BT Shantou’s principal executive offices and its first toy showroom are located at South Part No.1-101, Nanshe Area, Pengnan Industrial Park on North Yingbinbei Road in Waisha Town of Longhu District in Shantou, Guangdong, China. We lease approximately 16,146 square feet of office space from Yunjia, a related party, for an annual expense of RMB 72,000 (approximately $11,631 as of December 31, 2013). The lease also provides us without additional charge a separate space of 114.5 square meters adjacent to our principal offices, which has served as our quality control testing lab since December 2011 (our quality control testing lab has relocated to our second showroom we leased on October 1, 2012) and a 21,258 square feet toy showroom. The lease for BT Shantou’s offices expires on December 31, 2021.

Effective on December 18, 2011 we have operated two mini showrooms with 570 and 600 square feet respectively located in the terminals for domestic flights and international flights in Jieyang Chaoshan International Airport. The vendor permits and leases associated with the showrooms obtained from Shantou Airport Company of Guangdong Airport Management Corporation (“GAMC”) will expire on February 17, 2015. During the term, we are obliged to pay for two showroom a combined monthly fee of RMB 15,929 (approximately $2,573 as of December 31, 2013) to Shantou Airport Company, including vendor permit fee of RMB8,299 (approximately $1,341 as of December 31, 2013) rent of RMB 6,540 (approximately $1,056 at December 31, 2013), and administration fee of RMB1,090 (approximately $176 as of December 31, 2013).

Effective October 1, 2012, we leased additional facility space which is used as a second showroom with 96,875 square feet located at Waisha Shanfen Road, Taixinglong Yard, East Part of Building 8, Longhu District, Shantou from Shantou Youbang, a company owned by Ms. Guihong Zheng, the wife of Mr. Lin, for an annual rent of RMB 1,440,000 (approximately $232,614). The lease for this showroom expires on November 30, 2017. In 2013, we opened this larger showroom to provide our customers and potential customers the opportunity to see all the toys we offer with a one-stop shop experience.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any pending litigation.

ITEM 4. Mine Safety Disclosures.

Not applicable to our company’s operations.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted in the over-the-counter market on OTC Markets Inc. OTCQB under the symbol BIGG. The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock by calendar quarters during 2013 and 2012 and the first quarter of 2014. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions. We effected a one-for-seven hundreds (1:700) reverse stock split on December 11, 2012. All share and per share information has been retroactively adjusted to reflect this reverse stock split.

	Low		High
2012
Quarter ended March 31, 2012	$	1.33	$	2.45
Quarter ended June 30, 2012	$	1.05	$	2.31
Quarter ended September 30, 2012	$	0.35	$	8.04
Quarter ended December 31, 2012	$	0.005	$	2.94
2013
Quarter ended March 31, 2013	$	0.05	$	2.99
Quarter ended June 30, 2013	$	0.19	$	1.85
Quarter ended September 30, 2013	$	0.09	$	0.22
Quarter ended December 31, 2013	$	0.15	$	0.28
Fiscal 2014
Quarter ended March 31, 2014	$	0.09	$	0.45

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The last sale price of our common stock as reported on the OTCQB was $0.11 per share on May 12, 2014. As of May 12, 2014, there were approximately 195 record owners of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Transfer Agent

The stock transfer agent for the common stock is Transfer Online, Inc. The stock transfer agent’s address is 512 SE Salmon Street, Portland, OR 07214, and its telephone number is (503) 227-2950.

Dividend Policy

No dividends have ever been declared by the Board of Directors on our common stock. The Colorado Business Corporations Act (CBCA) permits our Board of Directors to declare dividends from funds legally available for that purpose. This provision is subject to the CBCA requirement that the payment of distributions is generally permissible unless after giving effect to the dividend or distribution, the corporation would be unable to pay its debts as they become due in the usual course of business, or if the total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if we were dissolved at the time the dividend was paid, to satisfy the preferential rights of shareholders whose preferential rights upon dissolution of our company are greater than those of the shareholders receiving the dividend. Because Colorado law dispenses with the concepts of par value of shares as well as statutory definitions of capital and surplus, this limitation is the only limitation with respect to the declaration of dividends by our Board of Directors. We do not expect to declare or pay dividends on our common stock in the foreseeable future, if ever.

Recent Sales of Unregistered Securities

None

ITEM 6. SELECTED FINANCIAL DATA

Not applicable to smaller reporting company.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations for 2013 and 2012 should be read in conjunction with the consolidated financial statements and the notes to those statements that are included in this report.

Overview

Our main business focus is to function as a “one stop shop” for the sourcing, distribution and specialty manufacturing of toys and related products. We conduct these operations through both BT Brunei, which focuses on export sales, and BT Shantou, which concentrates on domestic sales. We are located in Shantou City of Guangdong province, the geographical region well-known for toys manufacturing and exporting in China. We provide procurement services for international toy distributors and wholesalers, including identifying, evaluating, and engaging one or more local manufacturers, trading companies or distributors for the requested supply of toys, as well as original equipment manufacturing (“OEM”) services. The OEM services include engaging toy manufacturers directly or through other toy trading companies or distributors to either manufacture toys to specific specifications requested by our customers, or customize an existing toy product to meet our customer’s request such as through changes in mechanical functionality, appearance, physical dimension, and materials. We do not manufacture any products. We source a wide variety toys made of plastic, wood, metal, wool, and electronic materials, primarily targeting children from infants to teenagers.

We source toys to distributors, trading companies, and wholesalers primarily located in mainland China, Hong Kong, Europe, South America, and Asia. The end customers are typically children, ranging from infants to teenagers, in these countries and regions. In 2013, we opened our toy experience center and a second showroom which is being used to provide our customers and potential customers the opportunity to see all the toys we offer with a one-stop shop experience.

We are dependent upon certain customers and suppliers. During 2013, one customer represented 35.7% of our total revenues and 30.5% of our accounts receivables at December 31, 2013 as compared to the same customer representing 27.5% of our total revenues and 56.4% of our accounts receivables at December 31, 2012. Additionally, in 2013, two suppliers accounted for total of 70.9% (42.4% and 28.5%) of our purchases while in 2012 the same two suppliers accounted for total of 68.5% (41.8% and 26.7%) of our total purchases.

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In 2011, we started selling Big Tree Magic Puzzle (3D) directly to Chinese domestic end consumers including children and grown-ups through our own sales counters in Dennis Department Stores and online store at Taobao Mall (www. Tmall.com), the biggest B2C online retailing platform in China. In 2012, we closed our counters at Dennis Department Stores. The sales from this product represented approximately $186 and $10,752 of our total sales during 2013 and 2012. During 2013, we utilized our existing distribution channels in an effort to increase the sales of this proprietary product. In addition, and subject to the availability of additional capital, of which there are no assurances, should sales of this product increase in 2014 we plan on opening retail locations from which this propriety product can be offered. While we are in the early stages of planning these locations and have not finalized any of these expansion plans, including the target number of locations, we estimate that the cost per new location will be approximately RMB50,000 to RMB100,000 (approximately US $8,000 to US $16,000).

In addition to a continued focus on increasing our revenues from our export and domestic sourcing services, and sales of our Big Tree Magic Puzzle (3D), our growth strategies include possibly opening satellite sales offices and branches in the U.S. and other cities in China as well as the potential acquisition of distributors. We are in the early stages of development of these plans as well and have not finalized any cost or timing estimates and are not a party to any agreements. Our ability to undertake any of these expansion plans is also dependent upon our ability to raise additional capital, of which there are no assurances.

Lastly, we continue to evaluate the financial and operating benefits of acquisitions of Yunjia and/or Xinzhongyang, related parties, as discussed earlier in this report. If we should determine to proceed with the acquisition of Yunjia or Xinzhongyang, or both, of which there is no assurance, it is likely that we would acquire these companies for equity in our company which will be dilutive to our existing shareholders. We are not a party to any agreements at this time for an acquisition of either Yunjia or Xinzhongyang and we may determine that neither acquisition would provide a financial or operating benefit to our company.

Our Outlook

The Chinese toy industry is gradually recovering in the year of 2013, based on the information provided by China Customs Bureau, in the first three quarters of 2013, the total toy export from China was about $16.8 billion, which is 8.7% lower compare to the same period in 2012. However, the international purchase order has kept an increase trending through the first nine months of 2013. The sale of our company has maintained a steady increase pace in the past two years, even through the European Financial Crisis.

Consistent with the recovery of Europe and world economy, we believed the toy market will gradually recover to the same level as before the financial crisis, the purchase orders that we received from European countries increased by approximately 28.6% in 2013 compare to 2012. We strongly believe that our sales revenue to European countries will continue increase in the next fiscal year.

In addition, we further developed our relationship with our partners in South America countries, including some of the top retail stores in Mexico who ordered large amount of toys from us in 2013. We expected that our sales in Mexico and other South American countries will continue to rise in the following years, and will be one of our key revenue generators.

In contrast with our positive expectation in Europe and South America, we do not see a huge improvement in North America, especially in United States in the fiscal year of 2014. We plan on attending more U.S toy exhibitions to further develop our operation in United States, but we do not see a huge break in the next 2 to 3 years.

Results of Operations

Revenues

Our consolidated revenues for 2013 increased 17.2% over 2012. The increase in revenues for 2013 as compared to 2012 was primarily due to the sales increase in South America and Europe. For the year ended December 31, 2013, BT Shantou’s revenues increase by approximately $5.8 million. This increase was primarily due to an increase in sales to one customer, Always Trading International Limited (“Always”) which we accounted for on a gross basis as a principal. For the years ended December 31, 2013 and 2012, sales to Always accounted for 35.7% and 27.5% of total sales, respectively. Pursuant to our revenue recognition policy, in the 2013 periods, we recorded less sales on a net basis as an agent as compared to the comparable period in 2012. Our revenue accounted for on a net basis as an agent decreased during the year ended December 31, 2013 as compared to the year ended December 31, 2012 mainly due to the nature of the sales transactions completed in the comparative period. For the year ended December 31, 2013, BT Brunei’s revenues remained relatively the same as for the year ended December 31, 2012. In 2013, we increased our customer base from 259 customers in 2012 to 338 customers in 2013. Generally, we have higher sales in the second and third quarters and lower sales in the first and fourth quarters.

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Our strategy is to utilize BT Brunei to continue to increase our customer base for export sales of toys, while continuing to expand our domestic distribution sales channels within China through BT Shantou. In connection with our export sale, we are susceptible to the fluctuations and uncertainty of international trading conditions, currency exchange rates, and global financial crisis. In addition, due to the inflation and continuous appreciation of RMB in the past few years which has resulted in an increase in the wholesale price of toys, we will continue to face challenges in finding ways to effectively compete in the pricing of toy products in our domestic and export markets while maintaining our margins. We expect our revenues to increase in 2014 over 2013 as we continue to expand our export sales efforts, however we cannot predict our revenues and cannot assure that our revenues will increase.

In accordance with ASC 605-45-45, “Principal Considerations - Other Presentation Matters”, we report our revenues from sales of toys as follows:

Revenue Recognition
	2013						2012
Allocation of Revenues	Gross Method		Net Method		Total		Gross Method		Net Method		Total
Revenues, excluding sales reported on net basis	$	39,546,250	$	-	$	39,546,250	$	33,308,254	$	-	$	33,308,254
Net revenues from sales reported on net basis		-		180,752		180,752		-		580,381		580,381
Total Revenues	$	39,546,250	$	180,752	$	39,727,002	$	33,308,254	$	580,381	$	33,888,635

(1) Certain revenues from our sales are based on a net reporting because they do not meet the criteria for gross reporting method pursuant to ASC 605-45-45. This means that all cost of purchases from those sales will be netted with the sales revenues generated by the sale of those toys. All other revenues from sales are based on gross reporting pursuant to criteria outlined in ASC 605-45-45, as follows:

•

we are the primary obligor to provide the product or services desired by our customers;

•

we have discretion in supplier selection.

•

we have latitude in establishing price;

•

we have credit risk – see Note 13 for customer concentrations and credit risk; and

•

we have inventory risk before customer order and upon customer return;

Additionally, handing fees related to sales reported on a net basis are also netted with these revenues.

If we change the relationship with our customers or vendors and do not meet any of the criteria, pursuant to our revenue recognition policy, we record revenues on a net basis (sales less cost of sales).

Cost of Revenues

Cost of revenues was approximately $35.5 million for 2013, an increase of approximately $5.2 million over 2012, while cost of revenues as a percentage of revenues decreased to 89.4% in 2013 from 89.6% in 2012. Cost of revenues attributable to BT Brunei accounted for approximately $22.1 million in 2013. As a result of increased sales during the 2013 period, cost of revenue increased accordingly. Generally the amount of cost of revenues and cost of revenues as a percentage of revenues fluctuates depending on our revenue recognition policy. For example, if we record more revenue on a gross basis, cost of revenues will increase and cost of revenues as a percentage of revenues will increase. Conversely, if we record less revenue on a gross basis, cost of revenues will decrease and cost of revenues as a percentage of revenues will decrease.

Gross Profit

As a percentage of revenues, gross margins were 10.6% for 2013, which is almost the same as compared to 10.4% for 2012. The gross profit of our international sales is approximately 3% lower than our domestic sales, which is primarily due to the strategic lower international sale price to gain a higher market share. We expect gross margins to remain at its current percentage. As previously discussed above, revenue is accounted for in accordance with the ASC 605-45, reporting revenue either on a gross basis as a principal or net basis as an agent depending upon the nature of the sales transaction. Accordingly, our gross margin will fluctuate if we change the relationship with our customers or vendors and do not meet any of the criteria, pursuant to our revenue recognition policy. Currently, we are not able to quantify this future fluctuation in gross margins.

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Operating Expenses

Operating expenses, comprising of selling, rent – related party, and general and administrative expenses, increased 34.2% in 2013 over 2012. The change in operating expenses comprised of the following:

●

Selling expense increased approximately $89,000 or 14% primarily due to an increase in salaries and related payroll benefit taxes incurred to sales employees of $89,000 related to an increase in sales staff and commissions as a result of a 17.2% increase in revenues, and an increase in shipping expense of $102,000, offset by a decrease in marketing expense of $49,000 and a decrease in other miscellaneous expenses of $41,000.

●

Rent-related party increased $233,000 or 2,038% in 2013 as compared to 2012. Effective October 1, 2012 we leased a second showroom in Shantou from Shantou Youbang International Supervise Center, Co., Ltd. (“Shantou Youbang”), a company owned by Ms. Guihong Zheng, our chief executive officer’s wife, for an annual rent of RMB 1,440,000 (approximately $232,614). For the years ended December 31, 2013 and 2012, rent expense related to this showroom amounted to $232,614 and $0, respectively.

●

General and administrative expenses increased 26.8% in 2013 as compared to 2012. This increase was primarily due to an increase in bad debt expense of $223,000 based on our analysis of outstanding accounts receivable, and an increase in salaries and related payroll benefit taxes of $138,000, offset by a decrease in consulting expense of $50,000 and a decrease in accounting fee and legal fee of $98,000 attributable to higher audit fees incurred in 2012 which also included 2011 audit fees. We expect operating expenses to continue to increase in 2014, including increased costs associated with increased sales and our public company reporting obligations, but we are unable at this time to quantify the amount of the expected increase.

Other Expenses

Other expenses, comprising of realized losses (gains) from foreign currency exchange, a gain from change in fair value of derivative liabilities, interest expenses and other expenses, amounted to approximately $754,000 and $319,000 in 2013 and 2012, respectively. In fiscal year 2013, we incurred interest expense of approximately $502,000 as compared to $31,000 interest expenses in 2012. This increase was due to the recording of a non-cash interest expense of $225,361 related to the convertible notes we entered into in December 2013 and an increase in interest expense incurred on borrowings. In fiscal year 2013, we record realized loss from foreign currency exchange of approximately $179,000 as compared to realized gain from foreign currency exchange of approximately $2,000 in 2012. In fiscal year 2013, we recorded a $43,300 gain from change in fair value of derivative liabilities related to the convertible notes we entered into in December 2013. In fiscal year 2013, we accrued a $97,900 interest and penalties related to accrued income tax payable and employee benefits as compared to $239,000 interest and penalties in 2012.

Income Tax

BT Shantou and BT Brunei are governed by the Income Tax Law of the People’s Republic of China Concerning Foreign Investment Enterprise and Foreign Enterprises and local income tax laws (the “PRC Income Tax Law”). Pursuant to the PRC Income Tax Law, BT Shantou and BT Brunei are subject to tax at a maximum statutory rate of 25% (inclusive of state and local income taxes).

Net Income

As a results of the discussion above, our net income for 2013 and 2012 amounted to approximately of $510,000, or $0.05 per common share (basic and diluted) and approximately $827,000, or $0.08 per common share (basic and diluted), respectively.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate sufficient cash to meet its operational cash requirements. We had net working capital of $0.5 million as of December 31, 2013, as compared to a working capital of $1.2 million as of December 31, 2012. Our primary uses of cash have been for purchases of toy products, selling, and general and administrative expenses, including payments to related parties, as well as advances to related parties. Our primary sources of cash are derived from revenues from the sales of our toy products, from bank loans, and other loans and from advances from related parties.

At December 31, 2013 and 2012, the Company’s cash balances by geographic area were as follows:

	December 31, 2013				December 31, 2012
Country:
PRC	$	211,352	95.8	%	$	11,001	49.6	%
Hong Kong		5,381	2.4	%		10,787	48.7	%
USA		3,852	1.8	%		379	1.7	%
Total cash and cash equivalents	$	220,585	100.0	%	$	22,167	100.0	%

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Cash held in banks in the PRC and Hong Kong are not insured. The value of cash on deposit in China has been converted to U.S. dollars based on the exchange rates as of respective balance sheet dates. In 1996, the Chinese government introduced regulations, which relaxed restrictions on the conversion of the RMB; however restrictions still remain, including but not limited to restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility and outflow of RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

Total current assets at December 31, 2013 increased by approximately $2.8 million from December 31, 2012. The principal contributors to this change was the $198,000 increase in cash, $293,000 increase in due from related party, and $4.6 million increase in accounts receivable due to increased sale as well as the extending of longer credit terms to our customers, offset by a $115,000 decrease in prepaid expenses, a $460,000 decrease in advance to suppliers resulting from the timing of payments made to suppliers, and a $1.2 million and $529,000 decrease in inventories and advance to suppliers-related parties, respectively. The decrease in inventories relates to the timing of shipments to our customers. The average days’ sales outstanding in accounts receivable increased to 63 days as of December 31, 2013, as compared to 41 days as of December 31, 2012 as a result of extending longer credit terms to our customer, thus giving our customers more time to pay. Total current liabilities at December 31, 2013 increased by $3.5 million from December 31, 2012 primarily due to a $653,500 increase in loan payable, a $205,700 increase in convertible loans payable, a $182,000 increase in derivative liabilities, a $1.3 million increase in accounts payable and accrued expenses, a $188,000 increase in salaries payable, a $268,000 increase in taxes payable, a $269,000 increase in other payables and a $445,000 increase in due to related parties.

We do not have any commitments for capital expenditures and expect that our cash on hand and cash flow from operations will be sufficient to sustain our operations for at least the next twelve months. However, the following trends are reasonably likely to require us to raise additional capital.

	•		An increase in working capital requirements to finance near term and long term growth strategy including possible acquisitions;
	•		The impact of related party transactions on our results operations and liquidity;
	•		Increases in capital expenditures, marketing and administrative expenses to support the sales growth of our company;
	•		The costs for recruitment and retention of additional management and personnel to support our operations and expansion plans; and
	•		The additional costs, including legal accounting and consulting fees, associated with being a public company and related compliance activities.

In March and May 2012, we entered into two-year promissory note agreements for $20,000 and $41,711 with China Direct Investments, Inc., respectively, for an aggregate loan amount of $61,711. The proceeds of the loans were used for working capital purposes. The loan amounts of $20,000 and $41,711 and all accrued and unpaid interest are due no later than the earlier of on March 20, 2014 and May 9, 2014, respectively, or upon the completion of an offering of our securities to raise capital. The loans bear interest at 2% per annum. In January 2014, these notes were assigned to third parties.

On November 2, 2012, we borrowed RMB 23,000,000 ($3,764,074 and $3,650,156 at December 31, 2013 and 2012 respectively) from Guangfa Bank Co., Ltd. Shantou Zhongshan Branch. We used the proceeds of this loan for working capital purposes, including the purchase of toy products. Under the terms of loan agreement, interest is payable monthly at an annual rate of 6.9% and was due on November 2, 2013. In October 2013, the loan due date was extended to April 17, 2014 and the annual interest rate was increased to 7.28%, If the loan is not paid by the due date, the default interest rate shall be 8.97% per annum. The loan is secured by a property owned by Shantou Youbang, a company owned by Ms. Guihong Zheng, Mr. Wei Lin’s wife, and personally guaranteed by Xinna Cai, the legal representative of BT Shantou.

In November 2013, Bank of China Co., Ltd Shantou Branch (“BOC”) and BT Shantou entered a line of credit agreement, in which BOC granted BT Shantou a line of credit of RMB 10,000,000 RMB (approximately $1,636,554 at December 31, 2013) expiring on May 21, 2014.Under the term of this line of credit agreement, Mr. Wei Lin the CEO of the Company and Ms. Xinna Cai, the legal representative of BT Shantou have both signed personal guarantee agreements with BOC to guarantee this debt. BT Shantou also entered onto a pledge agreement which uses the pending export tax refund receivable and related export tax refund receivable as security for the line of credit. On November 26, 2013, BOC provided a short term loan with the principal amount of RMB 3.4 million to BT Shantou under the line of credit. The loan term is for six months term with the annual interest rate of 7.28%, the due amount will be directly transfer from BT Shantou’s export tax refund receivable escrow account to BOC on the due date. Through December 31, 2013, BT Shantou has repaid RMB 2.48 million and the remaining balance is RMB 920,000 ($150,563 at December 31, 2013).

On December 21, 2013, we borrowed RMB 2,000,000 ($327,311 at December 31, 2013) from Guangdong Huaxing Bank. The loan bears annual interest at the Chinese benchmark interest rate plus 30% (7.28% at December 31, 2013). Pursuant to the loan terms, aggregate principal and interest payments of RMB 300,000 (approximately $49,100) is due on the 20 th day of each month, and all remaining principal and interest is dueon the maturity date (June 20, 2014). This loan is personally guaranteed by the Company’s CEO and the Company guaranteed the loan by using its intellectual property right on four patents owned by the Company. The patents are registered as number 3142578, 1657120, 1321347 and 2512437.

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On December 3, 2013, we issued a 12% convertible note to JSJ Investments, Inc. (“JSJ”) in the principal amount of $50,000. The principal amount is due on June 3, 2014. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to a price which is 55% of the average of three lowest closing price in the 10 consecutive trading days prior to the day that JSJ requests conversion. The note has a cash redemption premium of 125% of the principal amount and may be prepaid at any time by the issuer. If an Event of Default occurs and is continuing for more than thirty days, the Holder of this Note may declare this entire Note, including any interest and Default Interest and other amount due, to be due and payable immediately. At December 31, 2013, principal amount due under this convertible note amounted to $50,000.

On December 17, 2013, we and Iconic Holdings, LLC (“Iconic”) entered into a note purchase agreement, providing the issuance of a 10% convertible promissory note with the principal amount of $52,500. The note is due on December 17, 2014. Iconic is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the lower of $ 0.238 or 60% of the lowest trading price in the 15 consecutive trading days prior to the date that Iconic requests Conversion. If an Event of Default occurs and is continuing with respect to the Note, the Holder may declare all of the then outstanding Principal Amount of this Note, including any interest due thereon, to be due and payable immediately without further action or notice. In the event of such acceleration, the amount due and owing to the Holder shall be increased to one hundred and fifty percent (150%) of the outstanding Principal Amount of the Note held by the Holder plus all accrued and unpaid interest, fees, and liquidated damages, if any. Additionally, this Note shall bear interest on any unpaid principal from and after the occurrence and during the continuance of an Event of Default at a rate of twenty percent (20%). At December 31, 2013, principal amount due under this convertible note amounted to $52,500.

On January 6, 2014, we, CDI and GEL Properties, LLC (“GEL”) entered into a debt purchase agreement, in which GEL purchased the assigned portion of $5,000 under the $ 41,711 convertible note issued by us to CDI dated on May 2012 as well as a $20,000 convertible note dated in March 2012. We issued a 12% replacement convertible note to GEL with the principal amount of $25,000, which is due on September 30, 2014. GEL is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 60% of the lowest closing price in the 5 consecutive trading days prior to the date that GEL requests conversion. During the first six months of this Note is in effect, we may redeem this Note by paying to GEL an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; GEL may consider this Note immediately due and payable. In January and February 2014, GEL has fully converted this note into 230,678 shares of our common stock at an average price of $0.13 per share.

On January 6, 2014, we issued a 12% convertible note to GEL, with the principal amount of $25,000, which is due on September 30, 2014. GEL is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 60% of the lowest closing price in the 5 consecutive trading days prior to the date that GEL requests Conversion. During the first six months this Note is in effect, we may redeem this Note by paying to the Holder an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; GEL may consider this Note immediately due and payable.

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On January 6, 2014, we issued a 12% convertible note to LG, with the principal amount of $50,000, which is due on September 30, 2014. LG is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 50% of the average of two lowest closing price in the 10 consecutive trading days prior to the date that LG requests Conversion. During the first six months of this Note is in effect, we may redeem this Note by paying to LG an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. None of this note has been converted as of the date of this report.

On January 7, 2014, we, CDI and LG Capital Funding, LLC (“LG”) entered into a debt purchase agreement, in which LG purchased the assigned portion of $ 36,711 under the $ 41,711 convertible note issued by us to CDI dated in May 2012. We issued a 12% replacement convertible note to LG with the principal amount of $36,711, which is due on September 30, 2014. LG is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 50% of the average of two lowest closing price in the 10 consecutive trading days prior to the date that LG requests Conversion. During the first six months this Note is in effect, we may redeem this Note by paying to LG an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. During January 2014, LG has fully converted this note into 376,426 shares of our common stock at $0.10 per share.

On January 30, 2014, we, CDI and JSJ entered into an assignment agreement, in which JSJ purchased the $87,800 convertible note issued by us to CDI on May 21, 2013 and the $15,416 convertible note dated on May 10, 2013 (See Note 15 – Subsequent Events). We issued a 12% replacement convertible note to JSJ with the principal amount of $103,216, which is due on January 30, 2015. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 45% of the average of three lowest biding price in the 20 consecutive trading days prior to the date that JSJ requests conversion. This note has a cash redemption premium of 150% of the principal amount only upon approval and acceptance by JSJ, Any amount of principal on this Note which is not paid when due shall bear twelve percent (12%) interest per annum from the date thereof until the same is paid. If we fail to deliver the Shares as requested in a Conversion Notice and within three business days of the receipt thereof, there shall accrue a penalty of additional shares due to JSJ equal to 25% of the number stated in the conversion notice beginning on the fourth business day after the date of the Notice. The additional shares shall be issued and the amount of the Note retired will not be reduced beyond that stated in the conversion notice. Each additional business day beyond the fourth business day after the date of this Notice shall accrue an additional 25% penalty for delinquency, without any corresponding reduction in the amount due under the Note, for so long as we fail to provide the shares so demanded. If an event of default occurs and is continuing, JSJ may declare the entire Note, including any interest and default interest and other amounts due, to be due and payable immediately. During February and March 2014, JSJ has fully converted this note into 1,572,404 shares of our common stock at $0.07 per share.

On January 30, 2014, we and Asher Enterprises, Inc (“Asher”) entered a security purchase agreement, and issued an 8% convertible note with the principal amount of $ 93,500, which is due on October 21, 2014. Asher is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 58% of the average of three lowest trading price in the 10 consecutive trading days prior to the date that Asher requests conversion. Any amount of principal or interest of this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid. Upon an event of default, the Note shall become immediately due and payable and we shall pay to Asher in full satisfaction of its obligations. None of this note has been converted as of the date of this report.

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On February 13, 2014, we issued a 12% convertible note to JSJ, with the principal amount of $125,000, which is due on July 30, 2014. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to 45% of the average of lowest bid price for the 20 consecutive trading days prior to the date that JSJ requests conversion. This note has a cash redemption premium of 150% of the principal amount only upon approval and acceptance by JSJ, Any amount of principal on this Note which is not paid when due shall bear twelve percent (12%) interest per annum from the date thereof until the same is paid. If we fail to deliver the shares as requested in a conversion notice and within three business days of the receipt thereof, there shall accrue a penalty of additional shares due to JSJ equal to 25% of the number stated in the conversion notice beginning on the fourth business day after the date of the notice. The additional shares shall be issued and the amount of the note retired will not be reduced beyond that stated in the conversion notice. Each additional business day beyond the fourth business day after the date of this notice shall accrue an additional 25% penalty for delinquency, without any corresponding reduction in the amount due under the note, for so long as we fail to provide the shares so demanded. If an event of default occurs and is continuing, JSJ may declare the entire note, including any interest and default interest and other amounts due, to be due and payable immediately. None of this note has been converted as of the date of this report.

On March 17, 2014, we and LG entered into a security purchase agreement and issued an 8% convertible note in the principal amount of $ 40,000, which is due on February 25, 2015. LG is entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 60% of the average of lowest closing price during the 15 consecutive trading days prior to the date that LG requests conversion. During the first 180 days this Note is in effect, we may redeem this note by paying to LG an amount equal to 150% of the unpaid principal amount of this note along with any prepaid and earned interest. This note may not be redeemed after 180 days. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. None of this note has been converted as of the date of this report.

On March 17, 2014, we and Union Funding, LLC (“UF”) entered into a security purchase agreement, and issued an 8% convertible note with the principal amount of $20,000, which is due on March 12, 2015. UF is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 50% of the lowest closing price during the 15 consecutive trading days prior to the date that UF requests conversion. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; UF may consider this note immediately due and payable. None of this note has been converted as of the date of this report.

On March 28, 2014, Mr. Chaojun Lin, the Deputy General Manager of BT Shantou since March 2004 and a member of our Board of Directors since December 30, 2011 has repaid the advances the Company made to him during 2013 (See Note 15 - Subsequent Events).

Other than the loans discussed above and working capital advanced from related parties, we do not have any external sources of working capital. We may seek to raise capital through the sale of equity in our company, however, we are not a party to any agreement or understandings at this time and there are no assurances we will be able to raise capital on terms satisfactory to us, or at all. If we are unable to raise additional capital as may be needed, our ability to grow our company and increase our revenues in future periods will be adversely impacted.

Cash Flows Analysis

NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES:

Net cash provided by operating activities was $802,494 in 2013, as compared to net cash used in operating activities of approximately $2,715,743 in 2012. In 2013, net cash provided by operating activities was primarily attributable to our net income of approximately $510,000 adjusted for the add back of non-cash interest expense of $225,361, stock-based compensation of $94,501, gain from change in fair market value of derivative liabilities of $43,265, and a change in allowance for doubtful accounts of $232,144, and changes in operating assets and liabilities such as a decrease in advances to suppliers of approximately $472,000, a decrease in advances to suppliers-related parties of approximately $539,000, a decrease in prepaid expenses and other current assets of approximately $177,000, and increase in other payables of approximately $259,000, an increase in accounts payable and accrued expenses of approximately $1,296,000, an increase in salaries payable of $178,000, an increase in taxes payable of $237,000, a decrease in inventories of approximately $1,218,000, offset by an increase in accounts receivable of approximately $4,650,000.

Net cash used in operating activities was approximately $2,716,000 in 2012, primarily attributable t o the add back of stock-based compensation of $208,000, and changes in operating assets and liabilities such as an increase in accounts receivable of approximately $1,569,000 related to an increase in sales, an increase in advances to suppliers of approximately $530,000, an increase in advances to suppliers – related parties of approximately $462,000, an increase on prepaid expenses and other current assets of approximately $1,069,000, an increase in inventories of approximately $1,326,000 and a decrease in advances from customers of approximately $807,000 offset by an increase in salaries payable of $164,000, an increase in taxes payable of $466,000, an increase in other payables of $284,000, an increase in accounts payable and accrued expenses of approximately $1,066,000 and net income of $827,000.

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NET CASH FLOW USED IN INVESTING ACTIVITIES:

Net cash used in investing activities amounted to $3,425 in 2013 as compared to net cash used in investing activities of $127,626 in 2012. In 2013, we received cash of $5,654 from the sale of property and equipment and we purchased property and equipment of $9,079. In 2012, we purchased property and equipment of $127,626.

NET CASH FLOW (USED IN) PROVIDED BY FINANCING ACTIVITIES:

Net cash used in financing activities was $603,383 in 2013, as compared to net cash provided in financing activities approximately of $2,617,000 in 2012. Net cash used in financing activities in 2013 was primarily due to repayment of amounts due to related parties of approximately $1,664,000, an increase in working capital advance paid to related party of approximately $1,343,000, and advance to related party of $289,000 offset by approximately $102,500 proceeds from convertible loans payable, approximately $472,000 proceeds from bank loans and proceeds from related party advances of approximately $2,118,000.

Net cash provided by financing activities in 2012 was approximately $2,617,000, primarily due to approximately $3,711,000 proceeds from bank loans and proceeds from related party advances of approximately $8,224,000, offset by the repayment of amounts due to related parties of approximately $8,766,000, payments of obligation due to related parties for acquisition of BT Shantou of approximately $291,000, and increase in due from related party of approximately $262,000.

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of December 31, 2013, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
Contractual obligations:	Total		Less than 1 year		1-3 years		3-5 years		5 + years
Loans payable	$	4,303,659	$	4,303,659	$	-	$	-	$	-
Convertible loans payable		205,716		205,716
Taxes payable		1,133,075		1,133,075		-		-		-
Total	$	5,642,450	$	5,642,450	$	-	$	-	$	-

Off Balance Sheet Arrangements

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us as a party, under which we have:

	•		Any obligation under certain guarantee contracts,
	•		Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
	•		Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position, and
	•		Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with U.S. GAAP.

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Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other significant accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our consolidated financial statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

Revenue recognition

We follow the guidance of ASC 605, "Revenue Recognition" and the SEC Staff Accounting Bulletin (SAB) No. 104 and SAB Topic 13 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable and collectability is reasonably assured.

Revenues for our product sales are recognized when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists through a formal purchase order; (ii) delivery of the products has occurred and risks and rewards of ownership have passed to the customer; (iii) the selling price is both fixed and determinable based upon an agreement between our company and our customer; and (iv) collectability is reasonably assured. For any advance payments from customers, revenues are deferred until such a time when all the four criteria mentioned above are fully met.

Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2013 and 2012 include the allowance for doubtful accounts on accounts receivable, allowance for obsolete inventory, the useful life of property and equipment and intangible assets, the fair value of derivative liabilities, and the valuation of stock-based compensation.

Foreign Currency Translation

Our reporting currency is the U.S. dollar. Our functional currency is the Chinese Renminbi (“RMB”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 830-20-35, the consolidated financial statements were translated into United States dollars using balance sheet date rates of exchange for assets and liabilities, and average rates of exchange for the period for the statement of operations. Net gains and losses resulting from foreign exchange transactions were included in the consolidated statements of operations and comprehensive income. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss within shareholders’ equity.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into United States dollars (“$”) was made at the following exchange rates for the respective periods:

December 31, 2013:
Balance sheet	RMB 6.1104 to $1.00
Statement of operations and comprehensive income	RMB 6.1905 to $1.00
December 31, 2012:
Balance sheet	RMB 6.3011 to $1.00
Statement of operations and comprehensive income	RMB 6.3034 to $1.00

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Cash flows from our operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued Accounting Standards Update "ASU" 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for an NOL carryforward, a similar tax loss, or a tax credit carryforward except in circumstances when the carryforward or tax loss is not available at the reporting date under the tax laws of the applicable jurisdiction to settle any additional income taxes or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new financial statement presentation provisions relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. The Company does not anticipate a material impact to the consolidated financial statements related to this guidance.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, we have not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements begin on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures??as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure as a result of both our failure to timely file five Current Reports on Form 8-K during the fourth quarter of 2013 as well as the material weaknesses in our internal control over financial reporting described below. Subsequent to December 31, 2013, we failed to file additional Current Reports on Form 8-K reporting eight new loan transactions. See Part II, Item 9B. of this report.

Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

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• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that, due to the material weaknesses described below, our internal control over financial reporting was not effective as of December 31, 2013.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the company’s financial reporting. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The specific material weaknesses identified by our management relates to our inadequate number of personnel with the requisite expertise in U.S. GAAP to ensure the proper application thereof. Our CFO, Mr. Jiale Cai, is an accountant and while he has significant experience in PRC accounting, he lacks expertise in U.S. GAAP. The balance of our internal accounting staff is primarily engaged in ensuring compliance with PRC accounting and reporting requirements and their U.S. GAAP knowledge is also limited. As a result, a majority of our internal accounting staff is relatively inexperienced with U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. Management has determined that our lack on an internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions and that the lack of an Audit Committee of our Board of Directors also contributed to insufficient oversight of our accounting and audit functions. During 2012, we were required to restate our 2011 consolidated financial statements as a result of the retrospective application of a change in accounting principle related to our revenue recognition policy. In addition, subsequent to the date of management’s evaluation for the period covered by our report, in April 2013, we were required to restate our 2011 consolidated financial statements a second time as well as our quarterly unaudited consolidated financial statements for each of the first three quarters of 2012 to correct an error in those financial statements related to the understatement of an obligation due to the related parties.

During 2013 and 2012, we relied on China Direct Investments, Inc. ("CDI"), our corporate management services provider, to ensure that our financial statements contain all necessary adjustments to conform to U.S. GAAP. CDI employs professional staff accountants. The majority of CDI’s accounting staff is bilingual and capable of translating financial statements and schedules from Chinese to English, as well as reviewing detailed trial balances and other financial information to ensure that U.S. GAAP has been properly applied. However, notwithstanding this reliance, our historic financial statements have contained errors. We expect to be materially dependent upon CDI, or another third party which can provide us with the same level of accounting consulting services, for the foreseeable future. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses in our internal control over financial reporting will not result in errors in additional our financial statements which could lead to more restatements of those financial statements.

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

In light of this significant deficiency, we performed additional analyses and procedures in order to conclude that our financial statements for the years ended December 31, 2013 and 2012 included in this Annual Report on Form 10-K were fairly stated in accordance with U.S. GAAP. Accordingly, management believes that despite the material weaknesses, our consolidated financial statements for the years ended December 31, 2013 and 2012 are fairly stated, in all material respects, in accordance with U.S. GAAP.

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Auditor Attestation

This a nnual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting during the year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

In November 2013, BOC and BT Shantou entered a line of credit agreement, in which BOC granted BT Shantou a line of credit of RMB 10,000,000 (approximately $1,636,554 at December 31, 2013) expiring on May 21, 2014.Under the term of this line of credit agreement, Mr. Wei Lin the CEO of the Company and Ms. Xinna Cai, the legal representative of BT Shantou have both signed personal guarantee agreements with BOC to guarantee this debt. BT Shantou also entered onto a pledge agreement which uses the pending export tax refund receivable as security for the line of credit.

On November 26, 2013, BOC provided a short term loan with the principal amount of RMB 3.4 million to BT Shantou under the line of credit. The loan term is six months with the annual interest rate of 7.28%, the due amount will be directly transfer from BT Shantou’s export tax refund receivable escrow account to BOC on the due date. Till the date of this report, BT Shantou has repaid RMB 2.48 million Yuan, the remaining balance is RMB 920,000 ($150,563 at December 31, 2013).

On December 21, 2013, we borrowed RMB 2,000,000 ($327,311 at December 31, 2013) from Guangdong Huaxing Bank. The loan bears annual interest at Libor plus 30% (7.28% at December 31. 2013). Pursuant to the loan terms, aggregate principal and interest payments of RMB 300,000 (approximately $49,100) are due is payable monthly and on the maturity date (June 20, 2014) all remaining principal and interest is due. This is personally guaranteed by the Company’s CEO and the Company guaranteed the loan by using its intellectual property right on four patents owned by the Company. The patents are registered as number 3142578, 1657120, 1321347 and 2512437.

On December 3, 2013, we issued a 12% convertible note to JSJ in the principal amount of $50,000. The principal amount is due on June 3, 2014. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to a price which is 55% of the average of three lowest closing price in the 10 consecutive trading days prior to the day that JSJ requests conversion. The note has a cash redemption premium of 125% of the principal amount and may be prepaid at any time by the issuer. If an Event of Default occurs and is continuing for more than thirty days, the Holder of this Note may declare this entire Note, including any interest and Default Interest and other amount due, to be due and payable immediately. At December 31, 2013, principal amount due under this convertible note amounted to $50,000.

On December 17, 2013, we and Iconic entered into a note purchase agreement, providing the issuance of a 10% convertible promissory note with the principal amount of $52,500. The note is due on December 17, 2014. Iconic is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the lower of $ 0.238 or 60% of the lowest trading price in the 15 consecutive trading days prior to the date that Iconic requests Conversion. If an Event of Default occurs and is continuing with respect to the Note, the Holder may declare all of the then outstanding Principal Amount of this Note, including any interest due thereon, to be due and payable immediately without further action or notice. In the event of such acceleration, the amount due and owing to the Holder shall be increased to one hundred and fifty percent (150%) of the outstanding Principal Amount of the Note held by the Holder plus all accrued and unpaid interest, fees, and liquidated damages, if any. Additionally, this Note shall bear interest on any unpaid principal from and after the occurrence and during the continuance of an Event of Default at a rate of twenty percent (20%). At December 31, 2013, principal amount due under this convertible note amounted to $52,500.

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On January 6, 2014, we, CDI and GEL entered into a debt purchase agreement, in which GEL purchased the assigned portion $5,000 under the $ 41,711 convertible note issued by us to CDI dated on May 2012 as well as a $20,000 convertible note dated in March 2012. We issued a 12% replacement convertible note to GEL with the principal amount of $25,000, which is due on September 30, 2014. GEL is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 60% of the lowest closing price in the 5 consecutive trading days prior to the date that GEL requests conversion. During the first six months this Note is in effect, we may redeem this Note by paying to GEL an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; GEL may consider this Note immediately due and payable. In January and February 2014, GEL has fully converted this note into 230,678 shares of our common stock at an average price of $0.13 per share.

On January 6, 2014, we issued a 12% convertible note to LG, with the principal amount of $50,000, which is due on September 30, 2014. LG is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 50% of the average of two lowest closing price in the 10 consecutive trading days prior to the date that LG requests Conversion. During the first six months this Note is in effect, we may redeem this Note by paying to LG an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. None of this note has been converted as of the date of this report.

On January 7, 2014, we, CDI and LG entered into a debt purchase agreement, in which LG purchased the assigned portion of $ 36,711 under the $ 41,711 convertible note issued by us to CDI dated in May 2012. We issued a 12% replacement convertible note to LG with the principal amount of $36,711, which is due on September 30, 2014. LG is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 50% of the average of two lowest closing price in the 10 consecutive trading days prior to the date that LG requests Conversion. During the first six months this Note is in effect, we may redeem this Note by paying to LG an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. During January 2014, LG has fully converted this note into 376,426 shares of our common stock at $0.10 per share.

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On January 30, 2014, we, CDI and JSJ entered into an assignment agreement, in which JSJ purchased the $87,800 convertible note issued by us to CDI on May 21, 2013 and the $15,416 convertible note dated on May 10, 2013 (See Note 15 -Subsequent Events). We issued a 12% replacement convertible note to JSJ with the principal amount of $103,216, which is due on January 30, 2015. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 45% of the average of three lowest biding price in the 20 consecutive trading days prior to the date that JSJ requests conversion. This note has a cash redemption premium of 150% of the principal amount only upon approval and acceptance by JSJ, Any amount of principal on this Note which is not paid when due shall bear twelve percent (12%) interest per annum from the date thereof until the same is paid. If we fail to deliver the Shares as requested in a Conversion Notice and within three business days of the receipt thereof, there shall accrue a penalty of additional shares due to JSJ equal to 25% of the number stated in the conversion notice beginning on the fourth business day after the date of the Notice. The additional shares shall be issued and the amount of the Note retired will not be reduced beyond that stated in the conversion notice. Each additional business day beyond the fourth business day after the date of this Notice shall accrue an additional 25% penalty for delinquency, without any corresponding reduction in the amount due under the Note, for so long as we fail to provide the shares so demanded. If an event of default occurs and is continuing, JSJ may declare the entire Note, including any interest and default interest and other amounts due, to be due and payable immediately. During February and March 2014, JSJ has fully converted this note into 1,572,404 shares of our common stock at $0.07 per share.

On January 30, 2014, we and Asher entered into a security purchase agreement, and issued an 8% convertible note with the principal amount of $ 93,500, which is due on October 21, 2014. Asher is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 58% of the average of three lowest trading price in the 10 consecutive trading days prior to the date that Asher requests conversion. Any amount of principal or interest of this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid. Upon an event of default, the Note shall become immediately due and payable and we shall pay to Asher in full satisfaction of its obligations. None of this note has been converted as of the date of this report.

On March 17, 2014, we and entered into a security purchase agreement, and issued an 8% convertible note with the principal amount of $20,000, which is due on March 12, 2015. UF is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock at a conversion price for each share of common stock equal to the 50% of the lowest closing price during the 15 consecutive trading days prior to the date that UF requests conversion. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; UF may consider this note immediately due and payable. None of this note has been converted as of the date of this report.

On March 28, 2014, Mr. Chaojun Lin, the Deputy General Manager of BT Shantou and a member of our Board of Directors repaid to the Company RMB 2.04 million (approximately $333,857) of the working capital advances made by the Company to him of $292,943 at December 31, 2013. There is a balance of approximately $41,000 due to Mr. Chaojun Lin as of the date of this report.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Name	Age		Positions
Wei Lin		43	Chief Executive Officer and Chairman of the Board of Directors
Jiale Cai		35	Chief Financial Officer
Chaojun Lin		51	Director
Chaoqun Xian		32	Director

Wei Lin is the founder and the Chairman of BT Shantou since its formation in 2003 and our Chief Executive Officer and Chairman of the Board since December 30, 2011. Mr. Lin has extensive experience with small businesses and in corporate management. Mr. Lin was the founder and president of Guangtong Network Calling Station, former CEO of Jieyang Toys Complex Group Co., Ltd, and former Chairman of Beijing Junze Cultural Communications Co., Ltd. and Shanghai Xikang Electronic Technology Development Co., Ltd. Mr. Lin is the majority owner of Xinzhongyang Toy Industrial Co., Ltd. and Yunjia Fashion Clothing Co., Ltd., companies with whom we engage in related party transactions as described later in this section. Mr. Lin graduated with an Associate’s Degree in Economic Management from Central South University, China (formerly known as Central South Industrial University) in 1996.

Jiale Cai has been the Accounting Director of BT Shantou since July 2011 and our Chief Financial Officer since December 30, 2011. Mr. Cai has extensive experience in management accounting and was also accounting manager and director for state-owned, private, and foreign-owned enterprises including Guangdong Kinde Network & Technology Co., Ltd. Fukutomi (Shantou) Industrial Limited from, Shantou LonghuDongnan Industrial Co., Ltd. and Shantou Zhongmin Group Corp. Mr. Cai obtained an Associate Degree in Accounting through the professional continuous education program from Guangdong Jinan University, China in 2009.

Chaojun Lin is the Deputy General Manager of BT Shantou and a member of our Board of Directors since December 30, 2011. Mr. Lin was the former deputy principal of ChenghaiTantou School. Since 1995, he was the former deputy general manager of Guangtong Network Calling Station and the principal of Guangtong Computer Training School. Mr. Lin is experienced in managing operations. Mr. Lin graduated from Chenghai Normal School, China in 1985.

Chaoqun Xian is the current International Trading Director of BT Shantou and a member of our Board of Directors since December 30, 2011. Ms. Xian is experienced in marketing and team management. In January 2006, Ms. Xian joined BT Shantou and has successfully established a stable and productive sales team and a large base of customers that we expect to lead to future growth in sales. Ms. Xian graduated from Xiamen University, China with a Bachelor’s Degree in Automation in 2005.

Director Qualifications

The following is a discussion for each director of the specific experience, qualifications, attributes or skills that led to our conclusion that such person should be serving as a member of our Board of Directors as of the date of this report in light of our business and structure. In addition to their individual skills and backgrounds which are focused on our industry as well as financial and managerial experience, we believe that the collectively skills and experience of our Board members are well suited to guide us as we make the transition from a company with limited operations to a company which seeks to expand through acquisitions.

Wei Lin. Mr. Lin has over 17 years of experience in the operation and management of companies engaged in the sale and distribution of toys and product development.

Chaojun Lin. Mr. Lin has over 19 years of experience in the operation and management of a variety of companies engaged in sales and marketing.

Chaoqun Xian. Ms. Xian has over 9 years of experience in the marketing and sales management in the toy distribution business.

Committee of our Board of Directors

We have not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by Board of Directors as a whole. Because none of our directors are independent, we believe that the establishment of these committees would be more form over substance.

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We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees. In considering a director nominee, it is likely that our Board will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our Board.

None of our directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:

●	understands generally U.S. GAAP and financial statements,

●	is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,

●	has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,

●	understands internal controls over financial reporting, and

●	understands audit committee functions.

Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.

Board oversight in risk management

Mr. Wei Lin serves as both our Chief Executive Officer and as one of the three members of our Board of Directors. The balance of our directors are not considered independent. The business and operations of our company are managed by our Board as a whole, including oversight of various risks, such as operational and liquidity risks that our company faces. Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole, has responsibility for the oversight of risk management. Our directors meet regularly with Mr. Wei Lin to discuss strategy and risks we face and to address any questions or concerns they may have on risk management and any other matters.

Code of Ethics and Business Conduct

We have adopted a code of ethics applicable to our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial and accounting officer. We will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to South Part 1-101, Nanshe Area, Pengnan Industrial Park on North Yingbinbei Road in Waisha Town of Longhu District in Shantou, Guangdong, China 515023.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports in a timely manner during 2013.

ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes all compensation recorded by us in each of the last two completed fiscal years for our principal executive officer, each other executive officer serving as such whose annual compensation exceeded $100,000 and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at December 31, 2013.

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Summary Compensation Table

Name and principal position	Year		Salary ($)				Bonus				Stock Awards				Option Awards				N on-Equity Incentive Plan Compensation				Nonqualified Deferred Compensation Earnings				All Other Compensation				Total ($)
Wei Lin, Chief Executive Officer and Chairman of the Board of Directors(1)	2013 2012			34,890 32,862				- -				- -				- -				- -				- -				- -				34,890 32,862

(1) Mr. Wei Lin has served as our Chief Executive Officer since December 30, 2011. His compensation in 2013 and 2012 include amounts paid by BT Shantou. All amounts are approximate, were paid in RMB and assume a conversion rate of RMB 6.19 to U.S. $1.00. The amounts paid to Mr. Wei Lin in 2013 and 2012 excludes the following::

• Approximately $288,000, respectively, paid to him by BT Brunei for his interest in BT Shantou in 2012,

• $0.5 million and $0.9 million, respectively, purchase from Xinzhongyang, a related party controlled by him and or his wife for manufacture of the Big Tree Magic Puzzle (3D) in 2013 and 2012;

• a security deposit of $57,133 paid in 2012 to related parties controlled by him and or his wife for a lease on our new showroom;

• $244,245 and $11,430, respectively, paid to related parties controlled by him and or his wife for the leasing of facilities; and

• approximately $1,630,580 and $262,000 advanced to a company controlled by Mr. Lin and his wife for working capital , all of which is outstanding at December 31, 2013 and 2012.

How our Chief Executive Officer’s compensation is determined

In December 2011 we entered into an employment agreement with Mr. Lin. Mr. Lin’s compensation for 2012 was determined pursuant to the terms of a one year employment agreement between Mr. Lin and BT Shantou. Under the terms of this agreement, Mr. Lin received monthly base compensation of RMB15,000 ($2,423) from January 2012 through March 2012 and RMB18,000 ($2,908) from April 2012 to December 2012. He is entitled to certain insurance benefits and paid holiday and vacation time. The agreement may be terminated upon certain conditions by either party, in which event there are no severance or other payment due. We expect to sign a new employment agreement with Mr. Lin in the near future upon terms and conditions to be determined. As Mr. Lin is a member of our Board of Directors, the employment agreements with him are not negotiated on an arm-length basis. In December 2012, Mr. Lin and the Company decided to extend the employment agreement at the compensation of RMB 18,000 (approximately $2,908) per months till the end of 2014.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each of our named executive officer outstanding as of December 31, 2013:

OPTION AWARDS

STOCK AWARDS

Name

Number of Securities Underlying Unexercised Options

(#) Exercisable

Number of Securities Underlying Unexercised Options

(#) Unexercisable

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options

(#)

Option Exercise Price

($)

Option Expiration Date

Number of Shares or Units of Stock That Have Not Vested (#)

Market Value of Shares or Units of Stock That Have Not Vested ($)

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested (#)

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#)

Wei Lin

Stock Option Plan

On November 28, 2004, we adopted the 2004 Incentive Stock Option Plan (the "Plan"). The Plan, as amended, provides options to be granted, exercisable for a maximum of 7,000,000 shares of common stock. Both incentive and nonqualified stock options may be granted under the Plan. The exercise price of options granted, the expiration date, and the vesting period, pursuant to this plan, are determined by a committee of the Board of Directors. At December 31, 2013, we had no options outstanding. The Plan expires on December 1, 2014.

Compensation of Directors

We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf. None of our directors received any compensation specifically for their services as a director.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

At May 12, 2014, we had 12,529,700 shares of issued and 12,529,700 shares of outstanding common stock. The following table sets forth information known to us as of December 31, 2013 relating to the beneficial ownership of shares of our voting securities by:

	•		each person who is known by us to be the beneficial owner of more than 5% of our outstanding voting stock;
	•		each director;
	•		each named executive officer; and
	•		all named executive officers and directors as a group.

Unless otherwise indicated, the business address of each person listed is in care of Shantou Big Tree Toys Co., Ltd., South Part 1-101, Nanshe Area, Pengnan Industrial Park on North Yingbinbei Road in Waisha Town of Longhu District, Shantou, Guangdong, China, 515023. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date.

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Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.

	Common Stock
Name of Beneficial Owner	Number of Shares		% of Class
Wei Lin (1)		4,100,000		32.7%
Chaojun Lin		400,000		3.2%
Chaoqun Xian		400,000		3.2%
Jiale Cai		400,000		3.2%
All officers and directors as a group (four persons) (1)		5,300,000		42.3%

(1) Mr. Lin is the Chief Executive Officer of our company and a member of the board of directors. The number of shares he owned includes 1,600,000 shares that are held by his wife and children over which he has voting and dispositive control .

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of December 31, 2013.

Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)

Weighted average exercise price of outstanding options, warrants and rights (b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Plan category

Plans approved by our shareholders:

2004 Incentive Stock Option Plan

n/a

5,286

Plans not approved by stockholders

n/a

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

From time to time, we engage in business transactions with related parties. During 2013 and 2012, these related party transactions included:

Transactions with Universal Toys

•

We purchase products from Universal Toys that we sell to our customers. The sole shareholder of Universal Toys is Mr. Xiaodong Ou, the brother-in-law of our Chairman and Chief Executive Officer, Mr. Wei Lin. During 2013 and 2012, we purchased $0.2 million and $2.0 million from Universal Toys, respectively, and at December 31, 2013 we owed that company $0. Under the terms of a purchase agreement, the Company agrees to purchase various products from Universal Toys, Universal Toys fills the purchase order in accordance with the Company’s specifications, and the Company is then obligated to pay Universal Toys upon delivery in accordance with its customary terms offered other suppliers/vendors, and

•

We advance funds to Universal Toys for prepayments for purchases of toy products not yet received. At December 31, 2013 and 2012, advances to Universal Toys were $0 and $64,943, respectively.

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Transactions with Xinzhongyang

On June 1, 2010, BT Shantou entered into a 10-year contract manufacturing agreement with Xinzhongyang, a company owned by our CEO Mr. Lin and his wife, Guihong Zheng, to produce the Big Tree Magic Puzzle (3D). We purchased $0.9 million from Xinzhongyang during 2012 and $0.5 million in 2013. We advanced funds to Xinzhongyang for prepayments for purchases of toy products not yet received. At December 31, 2013 and 2012, these advances to Xinzhongyang were $0 and $464,205 respectively

During 2012, Xinzhongyang advanced us funds for working capital purposes and we made repayments of such advances. During 2012, Xinzhongyang advanced us approximately $6.0 million and we repaid Xinzhongyang approximately $6.5 million. During 2012, Xinzhongyang entered into an offset agreement with Mr. Lin whereby the excess amounts repaid by us to Xinzhongyang amounting to approximately $524,000 were offset against amount that we owed to Mr. Lin. At December 31, 2013 and 2012, amounts payable to Xinzhongyang amounted to $0 and $0, respectively.

Additionally, from time to time, BT Shantou receives advances from and makes advances to Xinzhongyang, for working capital purposes. At times the total payment the Company repaid to Xinzhongyang exceeds the total balance due to Xinzhongyang. Xinzhongyang is under the common control of Mr. Lin and his wife. At December 31, 2013 and 2012, amounts due from Xinzhongyang amounted to $1,630,580 and $261,970, respectively. The Company accounted for and presented the advances due from related party as a reduction of stockholders’ equity in accordance with the guidance of ASC 505-10-45. It is possible that these working capital advances made by us to Xinzhongyang could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002, however, we have not made a determination as of the date hereof if the advances resulted in a violation of that provision. We expect that the working capital advance made by us to Xinzhongyang will be repaid. If, however, the amount is not repaid and/or it was determined that these advances violated the prohibitions of Section 402 from making loans to executive officers or directors, the Company could be subject to investigation and/or litigation that could involve significant time and costs and may not be resolved favorably. The Company is unable to predict the extent of its ultimate liability with respect to these transactions. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company’s financial condition and operating results.

For the years ended December 31, 2013 and 2012, due from related party activity for Xinzhongyang is reflect in shareholder equity and consisted of the following:

Balance, December 31, 2011	$	-
Working capital advances made to Xinzhongyang		2,172,606
Repayments made by Xinzhongyang		(1,910,636	)
Effect of foreign currency exchange		-
Balance, December 31, 2012		261,970
Working capital advances made to Xinzhongyang		4,149,784
Repayments made by Xinzhongyang		(2,789,350	)
Effect of foreign currency exchange		8,176
Balance, December 31, 2013	$	1,630,580

Transactions with Wei Lin, Guihong Zheng and their affiliated entities

•

In July 2011, BT Brunei acquired 100% of the equity interest in BT Shantou from Mr. Lin and Ms. Zheng, at the price of RMB 5,000,000 (approximately US $781,000). During 2011, approximately $490,000 of this amount was paid by BT Brunei to Mr. Lin and Ms. Zheng, leaving a balance of approximately $290,000 due at December 31, 2011. During 2012 this amount was further reduced by approximately $290,000, leaving a balance of $0 at December 31, 2012.

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Below is a table which provides the detail of amounts due to related parties including payments for the purchase price of equity interest in BT Shantou as well as working capital advances and repayments made during 2012 and 2013:

	Wei Lin			Guihong Zheng			Xinzhongyang			Total
Balance, December 31, 2011 - Due to related parties	$	794,420		$	28,845		$	-		$	823,265
Working capital advances received		2,197,453			-			6,016,436			8,213,889
Repayments made		(2,212,495	)		-			(6,540,353	)		(8,752,848	)
Payment for acquisition		(261,623	)		(29,069	)		-			(290,692	)
Amount offset pursuant to offset agreement		(523,917	)		-			523,917			-
Effect of foreign currency exchange		6,162			224			-			6,386
Balance, December 31, 2012 - Due to related parties		-			-			-			-
Working capital advances received		2,030,515			-			-			2,030,515
Repayments/advances made		(1,585,766	)		-			-			(1,585,766	)
Effect of foreign currency exchange		-			-			-			-
Balance, December 31, 2013 - Due to related parties	$	444,749		$	-		$	-		$	444,749

. Related party operating leases

•

BT Shantou leases its principal executive offices and our toy showroom from Yunjia, a company owned by Mr. Lin and his wife. During 2013 and 2012, we paid Yunjia RMB 72,000 ($11,631) and RMB 72,000 ($11,430) in rental expense, respectively.

•

Effective October 1, 2012, BT Shantou leased a new showroom from Shantou Youbang International Supervise Center, Co., Ltd., a company owned by Ms. Zheng, for an annual rent of RMB 1,440,000 (approximately $232,614 at December 31, 2013). In connection with this lease, in 2012 we paid a security deposit to Shantou Youbang of RMB 360,000 ($57,133 at December 31, 2012 and $58,916 at December 31, 2013). For the years ended December 31, 2013 and 2012, rent expense related to this showroom amounted to $232,614 and $0, respectively.

Others

As of December 31, 2012, we advanced Ms. Zheng $1,484 for business expenses and travel which is reflected on the accompanying consolidated balance sheet as prepaid expenses.

Mr. Chaojun Lin is the Deputy General Manager of BT Shantou since March 2004 and a member of our Board of Directors since December 30, 2011. During 2012, we repaid Mr. Chaojun Lin approximately $12,600 for amount due to him at December 31, 2011. The balance due from Mr. Chaojun Lin as December 31, 2013 amounted to $292,943 as was reflected on the balance sheet as due from related party in current assets. It is possible that these funds advance by us to him could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. On March 28, 2014, Mr. Lin repaid these funds to the Company (See Note-15 Subsequent Events).

Director Independence

None of our directors is considered “independent” within the meaning of meaning of Rule 5605 of the NASDAQ Marketplace Rules.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the fees billed by our principal independent registered public accountants for each of our last two fiscal years for the categories of services indicated.

	Years Ended December 31,
Category	2013		2012
Audit Fees	$	100,500	$	82,500
Audit Related Fees		-		-
Tax Fees		-		-
All Other Fees	$	100,500	$	82,500

Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

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Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.

Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

All Other Fees — This category consists of fees for other miscellaneous items.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following exhibits are filed with this Annual Report on Form 10-K:

Exhibit Number		Description of Exhibit
	3.1	Articles of Incorporation - Incorporated by reference to the Company's Report filed on Form 10-SB filed on October 27, 1999.
	3.2	By Laws - Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form SB-2 as filed with the SEC on May 9, 2006.
	3.3	Articles of Amendment to Articles of Incorporation designating Series B Convertible Preferred Stock and Series C Convertible Preferred Stock - Incorporated by reference to the Current Report on Form 8-K as filed on November 27, 2012.
	4.1	2004 Stock Option Plan, effective January 1, 2004 - Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 as filed with the SEC on April 18, 2005.
	4.2	Big Tree Group, Inc. 2013 Employee and Consultant Compensation Plan – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on October 10, 2013.
	10.1	Merger Agreement, dated July 22, 2003, by and among the Company, Vega-Atlantic Acquisition Corporation, Transax Limited and certain selling shareholders of Transax International Limited - Incorporated by reference to the Company's Annual Report filed on Form 10-KSB for the year ended December 31, 2003 as filed with the SEC on April 14, 2004.
	10.2	Agreement to Redeem Shares of Series A Preferred Stock dated May 4, 2011 between Transax International Limited and YA Global Investments L.P – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on May 10, 2011.
	10.3	Contract Manufacturing Agreement dated June 1, 2010 between Shantou Big Tree Toys Co., Ltd. and Shantou Xinzhongyang Toy Industrial Co., Ltd. – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.4	Building Lease Agreement between Shantou Yunjia Fashion Handicraft Co., Ltd. and Shantou Big Tree Toys Co., Ltd. for the period beginning January 1, 2011 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.5	Stock Transfer Agreement dated July 5, 2011 between the shareholders of Shantou Big Tree Toys Co., Ltd. and Big Tree International Co., Ltd. – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.6	Option Agreement dated December 29, 2011 between Lins (HK) Intl Trading Limited and certain shareholders of Big Tree International Co., Ltd. – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.7	Share Exchange Agreement dated December 30, 2011 between Transax International Limited, Big Tree International Co., Ltd., and Lins (HK) Int’l Trading Limited – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.8	Bill of Sale and Assignment dated December 30, 2011 between Stephen Walters and China Direct Investments, Inc. – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.9	Debt Exchange Agreement dated December 30, 2011 between China Direct Investments, Inc. and Transax International Limited – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.10	Debt Exchange Agreement dated December 30, 2011 between Stephen Walters and Transax International Limited – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.11	Debt Exchange Agreement dated December 30, 2011 between Carlingford Investments Limited and Transax International Limited – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.

- 43 -

	10.12		Debt Exchange Agreement dated December 30, 2011 between CFO Oncall, Inc. and Transax International Limited – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.13		Consulting Agreement dated December 30, 2011 between Transax International Limited and China Direct Investments, Inc. and Capital One Resource Co., Ltd. – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.14		Stock Option Termination Agreement dated December 30, 2011 between Transax International Limited and Laurie Bewes – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.15		Stock Option Termination Agreement dated December 30, 2011 between Transax International Limited and Stephen Walters – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.16		Stock Option Termination Agreement dated December 30, 2011 between Transax International Limited and Adam Wasserman – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.17		Management Termination Agreement dated December 30, 2011 between Transax International Limited and Carlingford Investments Limited – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.18		Certificate of Grant of Patent No. HK1133784 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.19		Certificate of Registration of Design No. 0902157.3 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.20		Utility Model Patent Certification No. 1657120 for Patent No. ZL. 2009 2 0292981.6 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.21		Design Patent Certification No. 1321347 for Patent No. ZL 2010 3 0103327.4 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.22		Design Patent Certification No. 1315842 for Patent No. ZL 2009 3 0680023.1 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.23		Trademark Registration of Big Tree Carnival dated December 14, 2010 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.24		Trademark Registration of Big Tree dated December 14, 20106 – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.25		Assignment Agreement for patent No. ZL 2009 3 0680023.1 dated December 29, 2011 between Shantou Big Tree Toys Co., Ltd. and Wei Lin – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.26		Assignment Agreement for patent No. ZL 2010 3 0103327.4 dated December 29, 2011 between Shantou Big Tree Toys Co., Ltd. and Wei Lin – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.27		Assignment Agreement for patent No. ZL. 2009 2 0292981.6 dated December 29, 2011 between Shantou Big Tree Toys Co., Ltd. and Wei Lin – Incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 6, 2012.
	10.28		Employment Agreement dated January 1, 2011 between Shantou Big Tree Toys Co., Ltd. and Wei Lin - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2011.
	10.29		Employment Agreement dated December 31, 2011 between Shantou Big Tree Toys Co., Ltd. and Wei Lin Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2011.*
	10.30		Consulting Agreement dated January 3, 2013 between Big Tree Group, Inc. and Dore Perler – Incorporated by reference to the Annual Report on Form 10-K as filed on May 14, 2013.
	10.31		Translation of Loan Agreement dated November 2, 2102 between Shantou Big Tree Toys Co., Ltd. and Guangfa Bank Co., Ltd. Shantou Zhongshan Branch – Incorporated by reference to the Annual Report on Form 10-K as filed on May 14, 2013.
	10.32		Consulting Agreement dated as of September 12, 2012 by and between Transax International Limited and Pearl Group Advisors, Inc. – Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2012.
	10.33		Translation of lease agreement dated September 30, 2012 between Big Tree International Co., Ltd and Shantou Youbang International Supervise Center, Co., Ltd. – Incorporated by reference to the Annual Report on Form 10-K as filed on May 14, 2013.
	10.34		Translated Loan Agreement dated November 26, 2013 between BT Shantou and Bank of China Co., Ltd. Shantou Branch. *
	10.35		Translated Loan Agreement dated December 21, 2013 between BT Shantou and and Guangdong Huaxing Bank Co., Ltd.*
	10.36		Translated Line of Credit Agreement entered by BT Shantou and Bank of China Co., Ltd. Shantou Branch. *
	10.37		Translated Pledge Agreement entered by BT Shantou and Bank of China Co., Ltd. Shantou Branch. *

- 44 -

	10.38	$50,000 Convertible Note issued by the Company to JSJ dated by December 3, 2013 *
	10.39	Note purchase agreement dated December 17, 2013 between Iconic and the Company. *
	10.40	$ 52,500 Convertible Note issued by the Company to Iconic dated by December 17, 2013. *
	10.41	$25,000 Convertible Note issued by the Company to GEL dated by January 6, 2014 *
	10.42	$25,000 Convertible Note issued by the Company to GEL dated by January 6, 2014 *
	10.43	Debt Purchase Agreement entered by the Company, CDI and GEL on January 6, 2014. *
	10.44	$36,711 Replacement Convertible Note issued by the Company to LG by January 7, 2014 *
	10.45	$50,000 Convertible Note issued by the Company to LG dated by January 6, 2014 *
	10.46	Debt Purchase Agreement entered by the Company, CDI and LG on January 7, 2014. *
	10.47	Assignment Agreement entered by the Company, CDI and JSJ on January 30, 2014. *
	10.48	$103,216 Replacement Convertible Note issued by the Company to JSJ by January 30, 2014 *
	10.49	$93,500 Convertible Note issued by the Company to Asher on January 30, 2014. *
	10.50	$125,000 Convertible Note issued by the Company to JSJ on February 13, 2014 *
	10.51	$40,000 Convertible Note issued by the Company to LG on March 17, 2014 *
	10.52	$20,000 Convertible Note issued by the Company to UF on March 17, 2014 *
	14.1	Code of Ethics - Incorporated by reference to Exhibit 14.1 to the Company's Registration Statement on Form SB-2 as filed with the SEC on May 9, 2006.

	21.1	Subsidiaries of the Registrant. - Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2011.
	31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *
	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *
	32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer*
101.INS		XBRL INSTANCE DOCUMENT **
101.SCH		XBRL TAXONOMY EXTENSION SCHEMA **
101.CAL		XBRL TAXONOMY EXTENSION CALCULATION LINKBASE **
101.DEF		XBRL TAXONOMY EXTENSION DEFINITION LINKBASE **
101.LAB		XBRL TAXONOMY EXTENSION LABEL LINKBASE **
101.PRE		XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE **

* Filed herein.

** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Annual Report on Form 10-K shall be deemed “furnished” and not “filed”.

- 45 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BIG TREE GROUP INC.

Dated: May 13, 2014	By: /s/ Wei Lin
	Wei Lin, Chief Executive Officer and
	Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Wei Lin	Chief Executive Officer and Chairman of the Board of Directors, principal executive officer	May 13, 2014
Wei Lin

/s/ Jiale Cai	Chief Financial Officer, principal financial and accounting officer	May 13, 2014
Jiale Cai

/s/ Chaojun Lin	Director	May 13, 2014
Chaojun Lin

/s/ Chaoqun Xian	Director	May 13, 2014
Chaoqun Xian

- 46 -

BIG TREE GROUP, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

Report of Independent Registered Public Accounting Firm	F - 2

Consolidated Financial Statements:

Consolidated Balance Sheets:
As of December 31, 2013 and 2012	F - 3

Consolidated Statements of Operations and Comprehensive Income:
For the Years Ended December 31, 2013 and 2012	F - 4

Consolidated Statements of Changes in Shareholders' Equity:
For the Years Ended December 31, 2013 and 2012	F - 5

Consolidated Statements of Cash Flows:
For the Years Ended December 31, 2013 and 2012	F - 6

Notes to Consolidated Financial Statements	F - 7 to F - 22

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Big Tree Group, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Big Tree Group, Inc. and Subsidiaries (the "Company") as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Big Tree Group, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 16 to the consolidated financial statements, the Company has restated its 2012 consolidated financial statements to correct errors in accounting for corporate income and employment taxes.

/s/ RBSM LLP

New York, New York

May 13, 2014

F - 2

BIG TREE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2013			2012
ASSETS				(As Restated)
CURRENT ASSETS:
Cash	$	220,585		$	22,167
Restricted Cash		4,910			-
Accounts receivable, net of allowance of $291,011 and $54,135, respectively		9,171,976			4,554,077
Inventories		134,699			1,327,342
Other receivables		1,181,321			1,202,750
Prepaid expenses		56,754			171,629
Due from related party		292,943			-
Advances to suppliers - related parties		-			529,148
Advances to suppliers		113,792			574,219
Total Current Assets		11,176,980			8,381,332

Security deposit - related party		58,916			57,133
Property and equipment, net		131,198			201,757
Intangible assets, net		7,751			10,592
Total Assets	$	11,374,845		$	8,650,814

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	3,286,443		$	2,003,390
Loans payable		4,303,659			3,650,156
Convertible loans payable		205,716			-
Derivative liabilities		182,096			-
Advances from customers		124,851			142,125
Salaries payable		426,186			238,239
Other payables		569,995			300,525
Taxes payable		1,133,075			865,552
Due to related parties		444,749			-
Total Current Liabilities		10,676,770			7,199,987

Loans payable- related party - long term		-			61,711
Total Liabilities		10,676,770			7,261,698

SHAREHOLDERS' EQUITY:
Preferred stock No par value; 20,000,000 shares authorized; none issued and outstanding		-			-
Common stock $0.00001 par value; 100,000,000 shares authorized;
10,350,192 and 10,200,179 shares issued and outstanding at
December 31, 2013 and December 31, 2012, respectively		104			102
Additional paid-in capital		302,399			207,900
Retained earnings		1,964,561			1,454,487
Accumulated other comprehensive income (loss)		61,591			(11,403	)
Advances due from related party		(1,630,580	)		(261,970	)
Total Shareholders' Equity		698,075			1,389,116
Total Liabilities and Shareholders' Equity	$	11,374,845		$	8,650,814

See accompanying notes to consolidated financial statements.

F - 3

BIG TREE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

	For the Years Ended
	December 31,
	2013			2012
				(As Restated)
Revenues	$	39,727,002		$	33,888,635
Cost of revenues		35,513,691			30,361,609
Gross profit		4,213,311			3,527,026

OPERATING EXPENSES:
Selling expenses		744,570			655,458
Rent - related party		244,245			11,422
General and administrative		1,621,637			1,278,697
Total operating expenses		2,610,452			1,945,577
Operating income		1,602,859			1,581,449

OTHER INCOME (EXPENSES):
Other income (expenses)		(116,867	)		(290,254	)
Realized (loss) gain from foreign currency exchange		(179,069	)		1,990
Gain from change in fair value of derivative liabilities		43,265			-
Interest expense, net		(501,762	)		(30,677	)
Total other expenses		(754,433	)		(318,941	)

Income before income taxes		848,426			1,262,508
Income taxes		(338,352	)		(435,912	)
Net income	$	510,074		$	826,596

COMPREHENSIVE INCOME:
Net income	$	510,074		$	826,596
Foreign currency translation income		72,994			1,255

COMPREHENSIVE INCOME	$	583,068		$	827,851

NET INCOME PER COMMON SHARE
Basic	$	0.05		$	0.08
Diluted	$	0.05		$	0.08

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		10,348,956			10,060,288
Diluted		11,153,187			10,060,288

See accompanying notes to consolidated financial statements.

F - 4

BIG TREE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2013 and 2012

																										Total shareholders' equity
	Series B Convertible Preferred Stock					Series C Convertible Preferred Stock					Common Stock
	Number of Shares			Amount		Number of Shares			Amount		Number of Shares		Amount		Additional paid-in capital			Advances due from related party			Retained earnings		Accumulated other comprehensive income (loss)
Balance, December 31, 2011 , as restated		3,362,749		$	-		6,500,000		$	-		137,430	$	1	$	-		$	-		$	627,891	$	(12,658	)	$	615,234

Common stock issued for services		-			-		-			-		200,000		2		207,999			-			-		-			208,001
Conversion of Series B and C preferred stock		(3,362,749	)		-		(6,500,000	)		-		9,862,749		99		(99	)		-			-		-			-
Working capital advances made to related party, net												-		-		-			(261,970	)		-		-			(261,970	)
Net income for the year		-			-		-			-		-		-		-			-			826,596		-			826,596
Comprehensive income		-			-		-			-		-		-		-			-			-		1,255			1,255
Balance, December 31, 2012, as restated		-			-		-			-		10,200,179		102		207,900			(261,970	)		1,454,487		(11,403	)		1,389,116

Common stock issued for services		-			-		-			-		150,000		2		94,499			-			-		-			94,501
Fractional rounding		-			-		-			-		13		-		-			-			-		-			-
Working capital advances made to related party, net		-			-		-			-		-		-		-			(1,368,610	)		-		-			(1,368,610	)
Net income for the year		-			-		-			-		-		-		-			-			510,074		-			510,074
Comprehensive income		-			-		-			-		-		-		-			-			-		72,994			72,994
Balance, December 31, 2013		-		$	-		-		$	-		10,350,192	$	104	$	302,399		$	(1,630,580	)	$	1,964,561	$	61,591		$	698,075

F - 5

BIG TREE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
	For the Years Ended
	December 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:				(As Restated)
Net income	$	510,074		$	826,596
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		79,566			61,852
Non-cash Interest expense		225,361			-
Gain from change in fair market value of derivative liabilities		(43,265	)		-
Stock-based compensation		94,501			208,000
Bad debt expense		232,144			27,331
Loss on disposal of property and equipment		3,313			-
Changes in operating assets and liabilities:
Accounts receivable		(4,650,001	)		(1,569,192	)
Advances to suppliers		472,158			(529,223	)
Advances to suppliers-related parties		538,602			(461,841	)
Prepaid expenses and other current assets		176,855			(1,068,677	)
Inventories		1,218,101			(1,326,153	)
Security deposit-related party		-			(57,112	)
Restricted cash		(4,846	)		-
Accounts payable and accrued expenses		1,296,343			1,065,522
Other payables		259,443			284,161
Salaries payable		178,176			163,746
Taxes payable		237,397			466,230
Advances from customers		(21,428	)		(806,983	)
Net cash provided by (used in) operating activities		802,494			(2,715,743	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		5,654			-
Purchase of property and equipment		(9,079	)		(127,626	)
Net cash used in investing activities		(3,425	)		(127,626	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party advances		2,118,305			8,224,466
Repayment of related parties advances		(1,663,894	)		(8,765,539	)
Payments of obligation due to related parties for acquisition of BT Shantou		-			(290,692	)
Working capital advance paid to related party, net		(1,342,831	)		(261,875	)
Advances to related party		(289,153	)		-
Proceeds from convertible loans payable		102,500			-
Proceeds from loans payable		471,690			3,710,536
Net cash (used in) provided by financing activities		(603,383	)		2,616,896

Effect of exchange rate on cash		2,732			1,920
Net increase (decrease) in cash		198,418			(224,553	)
Cash - beginning of year		22,167			246,720
Cash - end of year	$	220,585		$	22,167

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	72,269		$	12,424
Cash paid for interest	$	268,481		$	30,083
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accounts payable reclassified to convertible debt	$	87,800		$	-
Other payable reclassified to convertible debt	$	15,416		$	-
Amount due from related party offset pursuant to offset agreement with another related party	$	-		$	523,917

See accompanying notes to consolidated financial statements.

F - 6

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

NOTE 1 – ORGANIZATION AND OPERATIONS

The Company

Big Tree Group, Inc. (formerly Transax International Limited) (“we”, “us”, “our,” or the "Company") was incorporated in the State of Colorado in 1987. Effective December 11, 2012, we changed our name to Big Tree Group, Inc. Prior to December 2011, the Company, through its subsidiary, Medlink Conectividade em Saude Ltda (“MedlinkConectividade?? was an international provider of information network solutions specifically designed for healthcare providers and health insurance companies. On April 4, 2011, pursuant to a Quota Purchase and Sale Agreement amongst Transax Limited, QC Holding I Participacoes S.A., a corporation organized under the laws of Brazil (“QC Holding”), and MedlinkConectividade, the Company sold 100% of its interest in MedlinkConectividade to QC Holding. From April 4, 2011 until December 30, 2011, we had nominal assets, no revenues and limited operations consisting of financial reporting, general administration, and seeking new business opportunities with a merger candidate.

On December 30, 2011, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement") with Big Tree International Co., Ltd., a Brunei company (“BT Brunei”) and its shareholder, Lins (HK) International Trading Limited (“BT Hong Kong”). Under the Share Exchange Agreement, we exchanged 6,500,000 shares of our Series C Convertible Preferred Stock (the "Series C Preferred Stock") to acquire 100% of the issued and outstanding shares of BT Brunei from its sole shareholder BT Hong Kong. Each share of the Series C Preferred Stock was convertible into one share of our common stock after giving effect to a pending 1 for 700 reverse stock split (the “Reverse Stock Split”) and represented approximately 65% of the issued and outstanding shares of our common stock, and is hereinafter referred to as the “Exchange”. On December 30, 2011, BT Hong Kong became a shareholder of the Company. The Share Exchange Agreement was approved by our Board of Directors on December 30, 2011 and no approval of our shareholders was necessary under Colorado law. The transaction was accounted for as a reverse merger and recapitalization of BT Brunei whereby BT Brunei is considered the acquirer for accounting purposes and the 6,500,000 shares of our Series C Preferred Stock were accounted for as paid in capital of our company. As a result of the consummation of the Share Exchange, BT Brunei and its subsidiary, Shantou Big Tree Toys Co., Ltd., a Chinese company (“BT Shantou”), are now our wholly-owned subsidiaries. Accordingly, the historical financial statements are those of BT Brunei and BT Shantou upon the consummation of the Share Exchange transaction on December 30, 2011. Management of BT Brunei and BT Shantou has assumed operational, management and governance control immediately following the reverse merger transaction.

After the acquisition of BT Brunei, we are in the business of toys sourcing, distribution and contractual manufacturing targeting international and domestic distributors and customers in the toys industry. Our main business focus is to function as a “one stop shop” for the sourcing, distribution and specialty manufacturing of toys and related products. The Company conducts these operations through both BT Brunei and our BT Shantou subsidiaries. We are located in Shantou City of Guangdong province, the geographical region well-known for toys manufacturing and exporting in China. We are not a manufacturer. We provide procurement services for international toy distributors and wholesalers, including identifying, evaluating, and engaging one or more local manufacturers, trading companies or distributors for the requested supply of toys, as well as original equipment manufacturing (“OEM”) services. The OEM services include engaging toy manufacturers directly or through other toy trading companies or distributors to either manufacture toys to specific specifications requested by our customers, or customize an existing toy product to meet our customer’s request such as through changes in mechanical functionality, appearance, physical dimension, and materials. We sources a wide variety of toys made of plastic, wood, metal, wool, and electronic materials, primarily targeting children from infants to teenagers. We enable our customers to view these toys either through our website or at our extensive toy showrooms located in Shantou, China. Customers can easily contact our online representatives for inquiry and place orders, or visit the toy showrooms and choose from the displayed toy samples provided by our manufacturing partners.

In 2009, BT Shantou developed a proprietary construction toy consisting of plastic pieces that can plug-in together to make a wide variety of objects, and which we refer to as the Big Tree Magic Puzzle (3D). We registered the patents for its utility model and appearance design in Hong Kong and mainland China during 2010 and 2011. On June 1, 2010, BT Shantou entered into a 10-year contract manufacturing agreement with a toy manufacturer Shantou Xinzhongyang Toy Industrial Co., Ltd. (“Xinzhongyang”), a related party, to produce this proprietary toy under the name of Big Tree Educational Magic Puzzle (the “Big Tree Magic Puzzle”).

Basis of presentation

The accompanying consolidated financial statements and related notes were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements as of and for the years ended December 31, 2013 and 2012, reflect the consolidated financial position and result of operations of the Company and its wholly-owned subsidiaries, BT Brunei and BT Shantou. All significant intercompany accounts and transactions have been eliminated in consolidation.

F - 7

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. Our functional currency is the Chinese Renminbi (“RMB”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Section 830-20-35, the consolidated financial statements were translated into United States dollars using balance sheet date rates of exchange for assets and liabilities, and average rates of exchange for the period for the statement of operations. Net gains and losses resulting from foreign exchange transactions were included in the consolidated statements of operations and comprehensive income. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss within shareholders’ equity.

December 31, 2013:
Balance sheet	RMB 6.1104 to $1.00
Statement of operations and comprehensive income	RMB 6.1905 to $1.00
December 31, 2012:
Balance sheet	RMB 6.3011 to $1.00
Statement of operations and comprehensive income	RMB 6.3034 to $1.00

Cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2013 and 2012 include the allowance for doubtful accounts on accounts receivable, allowance for obsolete inventory, the useful life of property and equipment and intangible assets, the valuation of derivative liability, and the valuation of stock-based compensation.

Fair value of financial instruments

We adopted the guidance of ASC 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, other receivables, prepaid expenses, advances to suppliers, accounts payable and accrued expenses, loans payable, advances to customers, and other payables approximate their fair market value based on the short-term maturity of these instruments.

F - 8

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. We did not elect to apply the fair value option to any outstanding instruments.

The following table reflects changes for the year ended December 31, 2013 for all financial assets and liabilities categorized as Level 3 as of December 31, 2013.

Liabilities:
Balance of derivative liabilities as of January 1, 2013	$	-
Initial fair value of derivative liabilities attributable to conversion feature		225,361
Gain from change in the fair value of derivative liabilities		(43,265	)
Balance of derivative liabilities as of December 31, 2013	$	182,096

Reclassifications

Certain reclassifications have been made in prior year’s financial statements to conform with the current year’s financial presentation.

Cash and equivalents

For purposes of the consolidated statements of cash flows, we consider all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. We maintain cash and cash equivalents with various financial institutions mainly in the PRC and Hong Kong. Balances in banks in the PRC and Hong Kong are uninsured.

Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of the amount of probable credit losses in our existing accounts receivable. We determined the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expense. Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. For the years ended December 31, 2013 and 2012, the allowance for doubtful account totaled $291,011 and $54,135, respectively.

Inventor ies

We value inventories, consisting of finished goods only, at the lower of cost or market value. Cost is determined on the first in-first out method. We regularly review our inventories on hand and, when necessary, record a provision for excess or obsolete inventories if inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand. For the years ended December 31, 2013 and 2012, there were no charges for inventory reserve provision.

Prepaid expenses

Prepaid expenses primarily consist of prepaid advertising expenses and prepaid consulting fee.

Advance to suppliers (related and non-related parties)

Advance to suppliers (related and non-related parties) consists of advance to suppliers for merchandise that had not yet been shipped.

Property and equipment

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives. Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

F - 9

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

Impairment of long-lived assets

In accordance with ASC 360, our long-lived assets, which include property and equipment and automobiles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. We determined there were no impairments of long-lived assets as of December 31, 2013 and 2012.

Advance from customers

Advance from customers represent prepayments to us for merchandise that had not yet been shipped to customers.

Revenue recognition

We follow the guidance of ASC 605, "Revenue Recognition,” and the Securities and Exchange Commission's Staff Accounting Bulletin (“SAB”) No. 104 and SAB Topic 13 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Revenues for our product sales are recognized when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists through a formal purchase order or contract; (ii) delivery of the products has occurred and risks and rewards of ownership have passed to the customer; (iii) the selling price is both fixed and determinable based on agreement between us and our customer; and (iv) collectability is reasonably assured. For any advance payments from customers, revenues are deferred until such a time when all the four criteria mentioned above are fully met.

In accordance with ASC 605-45-45, “Principal Considerations - Other Presentation Matters”, we report our revenues from sales of toys as follows:

Revenue Recognition (1)
	2013						2012
Allocation of Revenues	Gross Method		Net Method		Total		Gross Method		Net Method		Total
Revenues, excluding sales reported on net basis	$	39,546,250	$	-	$	39,546,250	$	33,308,254	$	-	$	33,308,254
Net Revenues from sales reported on net basis		-		180,752		180,752		-		580,381		580,381
Total Revenues	$	39,546,250	$	180,752	$	39,727,002	$	33,308,254	$	580,381	$	33,888,635

•

we are the primary obligor to provide the product or services desired by our customers;

•

we have discretion in supplier selection.

•

we have latitude in establishing price;

•

we have credit risk – see Note 13 for customer concentrations and credit risk; and

•

we have inventory risk before customer order and upon customer return;

F - 10

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

Income taxes

The Company is governed by the U.S. Internal Revenue Code of 1986, as amended.

All of BT Shantou operations are in the PRC and are subject to China’s Unified Corporate Income Tax Law (the “EIT Law”) which became effective in January 2008. The EIT Law established a single unified 25% income tax rate for most companies, including BT Shantou in China.

Big Tree International Co., Ltd. (“BT Brunei”) was incorporated in the State of Brunei Darussalam, and may be subject to China incomes taxes pursuant to EIT Law as a non-resident company.

We applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2013, we had accrued China income taxes on taxable income generated by BT Brunei as a non-resident China company. We have not paid such taxes and we are reviewing our corporate tax structure and plan on restructuring our tax structure to ensure that BT Brunei is not subject to such taxes in China. There is no assurance that we can reach such a conclusion and we may be required to pay such income taxes. We had no other uncertain tax positions, and will continue to evaluate for uncertain positions in the future. (See Note 16)

Value added taxes

Pursuant to the Provisional Regulation of China on Value Added Tax (“VAT”) and their rules, all entities and individuals that are engaged in the sale of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to a portion of or a full refund of the VAT that it has already paid or borne.

Shipping costs

Shipping costs are included in selling expenses and totaled $175,869 and $74,195 for the years ended December 31, 2013 and 2012, respectively.

Advertising

Advertising is expensed as incurred and is included in selling expenses on the accompanying consolidated statements of operations and comprehensive income. For the years ended December 31, 2013 and 2012, advertising expense amounted to $98,211 and $147,542, respectively.

Comprehensive income (loss)

Comprehensive income (loss) consists of net income and foreign currency translation adjustments, and is presented in our Consolidated Statements of Operations and Comprehensive Income (Loss).

Reverse stock split and conversion of preferred shares

We effected a one-for-700 reverse stock split on December 11, 2012. All share and per share information has been retroactively adjusted to reflect this reverse stock split. Additionally, upon the effectiveness of the reverse stock split, all outstanding convertible series B and C shares were automatically converted into common shares.

Net income per share of common stock

F - 11

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. In 2012, both basic and diluted weighted-average number of common shares included the 3,362,749 shares of Series B convertible preferred shares issued in connection with the pre-merger transactions and the 6,500,000 shares of Series C convertible preferred shares issued in connection with the Shares Exchange Transaction as if the common shares are issued at the issuance date in connection with the pre-merger transactions and are issued at the earliest period presented or retroactively restated as a result of recapitalization since these convertible preferred shares have automatic conversion feature and were converted in December 2012. As of December 31, 2013 and 2012, we did not have any common stock equivalents and potentially dilutive common shares other than the Series B and C convertible preferred shares which have been included in the basic earnings per share computation. Potentially dilutive common shares consist of common stock issuable upon conversion of outstanding convertible debt (using the as-if converted method). The following table presents a reconciliation of basic and diluted net income per common share:

	Years Ended December 31,
	2013		2012
			(As Restated)
Net income available to common shareholders for basic and diluted net income per common share	$	510,074	$	826,596

Weighted average common shares outstanding – basic		10,348,956		10,060,288
Effect of dilutive securities:
Convertible debt		804,231		-
Weighted average common shares outstanding– diluted		11,153,187		10,060,288
Net income per common share - basic	$	0.05	$	0.08
Net income per common share - diluted	$	0.05	$	0.08

Recently issued accounting pronouncements

In July 2013, the FASB issued Accounting Standards Update “(ASU”) 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for an NOL carryforward, a similar tax loss, or a tax credit carryforward except in circumstances when the carryforward or tax loss is not available at the reporting date under the tax laws of the applicable jurisdiction to settle any additional income taxes or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new financial statement presentation provisions relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. The Company does not anticipate a material impact to the consolidated financial statements related to this guidance.

NOTE 3 - OTHER RECEIVABLES

Other receivable mainly consists of export tax refund receivable from China's State Administration of Taxation. As a measure to encourage export, the Chinese tax code provides for a tax refund based on the amount and products exported by Chinese corporate taxpayers. The statutory tax refund rate is 15% of cost of goods sold for export sales. Other receivable consist of the following:

F - 12

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

	December 31, 2013			December 31, 2012
Export tax refund receivable		$	1,169,702	$	1,189,971
Others			11,619		12,779
Total		$	1,181,321	$	1,202,750

In November 2013, Bank of China Co., Ltd Shantou Branch (“BOC”) and BT Shantou entered a line of credit agreement, in which BOC granted BT Shantou a line of credit of RMB 10,000,000 (approximately $1,636,554 at December 31, 2013) expiring on May 21, 2014. Under the term of this line of credit agreement, BT Shantou entered onto a pledge agreement which uses the pending export tax refund receivable as security for the line of credit (See Note 7).

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	Estimated Life	December 31, 2013			December 31, 2012

Office equipment	5 Years	$	38,305		$	34,639
Vehicles	5 Years		52,370			79,920
Machinery and equipment	3 Years		176,429			170,743
			267,104			285,302
Less: accumulated depreciation			(135,906	)		(83,545	)
		$	131,198		$	201,757

Depreciation expenses amounted to $76,435 and $58,776 for the years ended December 31, 2013 and 2012, respectively.

The Company recognized a loss from sales/disposal of $3,313 on certain property and equipment during the year ended December 31, 2013.

NOTE 5 – INTANGIBLE ASSETS

Intangible assets represent accounting software purchased in July 2011, which is amortized on a straight line basis during its useful life of 5 years. For the years ended December 31, 2013 and 2012, amortization expenses amounted to $3,131 and $3,076, respectively.

NOTE 6 – ADVANCE FROM CUSTOMERS

Advance from customers represent prepayment to us for merchandise that had not been shipped to customers. Advance from customers amounted to $124,851 and $142,125 as of December 31, 2013 and 2012, respectively.

NOTE 7 – LOANS PAYABLE

In March and May 2012, we entered into two-year promissory note agreements for $20,000 and $41,711 with China Direct Investments, Inc., respectively, for an aggregate loan amount of $61,711. The proceeds of the loans were used for working capital purposes. The loan amounts of $20,000 and $41,711 and all accrued and unpaid interest are due no later than the earlier of on March 20, 2014 and May 9, 2014, respectively, or upon the completion of an offering of the Company’s securities to raise capital. The loans bear interest at 2% per annum. For the years ended December 31, 2013 and 2012, interest expense related to these loans amounted to $1,341 and $668, respectively. In January 2014, these notes were assigned to third parties (See Note 15 – Subsequent Events).

On November 2, 2012, we borrowed RMB 23,000,000 ($3,764,074 and $3,650,156 at December 31, 2013 and 2012, respectively) from Guangfa Bank Co., Ltd. Shantou Zhongshan Branch. Under the terms of loan agreement, interest is payable monthly at an annual rate of 6.9% and was due on November 2, 2013. In October 2013, the loan due date was verbally extended to April 17, 2014 and the annual interest rate was increased to 7.28%, If the loan is not paid by the due date, the default annual interest rate shall be 8.97% per annum. The loan is secured by a property owned by Shantou Youbang International Express Supervision Center Co., Ltd., a company owned by Ms. Guihong Zheng, Mr. Wei Lin’s wife, and by a personal guarantee of Xinna Cai, the legal representative of BT Shantou.

F - 13

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

In November 2013, Bank of China Co., Ltd Shantou Branch (“BOC" and BT Shantou entered a line of credit agreement, in which BOC granted BT Shantou a line of credit of RMB 10,000,000 (approximately $1,636,554 at December 31, 2013) expiring on May 21, 2014. Under the term of this line of credit agreement, Mr. Wei Lin the CEO of the Company and Ms. Xinna Cai, the legal representative of BT Shantou have both signed personal guarantee agreements with BOC to guarantee this debt. BT Shantou also entered onto a pledge agreement which uses the pending export tax refund receivable as security for the line of credit. On November 26, 2013, BOC provided a short term loan with the principal amount of RMB 3.4 million to BT Shantou under the line of credit. The loan term is six months with the annual interest rate of 7.28%, the due amount will be directly transfer from BT Shantou’s export tax refund receivable escrow account to BOC on the due date. Through December 31, 2013, BT Shantou has repaid RMB 2.48 million Yuan, the remaining balance is RMB 920,000 ($150,563 at December 31, 2013).

On December 21, 2013, we borrowed RMB 2,000,000 ($327,311 at December 31, 2013) from Guangdong Huaxing Bank. The loan bears annual interest at the Chinese benchmark interest rate plus 30% of the Chinese benchmark interest rate rate (7.28% at December 31, 2013). Pursuant to the loan terms, aggregate principal and interest payments of RMB 300,000 (approximately $49,100) are due is payable monthly and on the maturity date (June 20, 2014) all remaining principal and interest is due. This is personally guaranteed by the Company’s CEO and the Company guaranteed the loan by using its intellectual property right on four patents owned by the Company. The patents are registered as number 3142578, 1657120, 1321347 and 2512437.

NOTE 8 – RELATED PARTY TRANSACTIONS

Prepaid expense - related party

From time to time we advance funds to related parties for business travel and expenses. On December 31, 2013 and 2012, we advanced Guihong Zheng $0 and $1,484 for business expenses, respectively, which has been included in prepaid expenses on the accompanying consolidated balance sheets.

Advances to suppliers – related parties

We purchase products from Universal Toys Trading (Hong Kong) Limited (“Universal Toys”) that we sell to our customers. The sole shareholder of Universal Toys is Mr. Xiaodong Ou, the brother-in-law of our Chairman and Chief Executive Officer, Mr. Wei Lin. During 2013 and 2012, we purchased $0.2 million and $2 million from Universal Toys and at December 31, 2013 and 2012, we owed Universal Toys $0 and $0, respectively. The Company agreed to purchase various products from Universal Toys, Universal Toys fills the purchaser order in accordance with the Company’s specifications, and the Company is then obligated to pay Universal Toys upon delivery in accordance with its customary terms offered other suppliers / vendors.

On June 1, 2010, BT Shantou entered into a 10-year contract manufacturing agreement with Xinzhongyang Toys Industrial Co. Ltd., (“Xinzhongyang”) to produce the Big Tree Magic Puzzle (3D). Mr. Lin, our Chief Executive Officer and Ms. Guihong Zheng, his wife own Xinzhongyang. During the years ended December 31, 2013 and 2012, we purchased $0.5 million and $0.9 million from Xinzhongyang, respectively.

Advances to suppliers – related parties reflect prepayments to the above related party suppliers for purchases of toy products not yet received. As of December 31, 2013 and 2012, advances to suppliers – related parties consisted of the following:

	December 31, 2013		December 31, 2012
Advances to supplier - Universal Toys	$	-	$	64,943
Advances to supplier - Xinzhongyang		-		464,205
Total	$	-	$	529,148

Due from related party

From time to time, BT Shantou receives advances from and makes advances to Xinzhongyang, for working capital purposes. At times the total payment the Company repaid to Xinzhongyang exceeds the total balance due to Xinzhongyang. Xinzhongyang is under the common control of Mr. Lin and his wife. At December 31, 2013 and 2012, amounts due from Xinzhongyang amounted to $1,630,580 and $261,970, respectively. The Company accounted for and presented the advances due from related party as a reduction of stockholders’ equity in accordance with the guidance of ASC 505-10-45. It is possible that these working capital advances made by us to Xinzhongyang could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002, however, we have not made a determination as of the date hereof if the advances resulted in a violation of that provision. We expect that the working capital advance made by us to Xinzhongyang will be repaid. If, however, the amount is not repaid and/or it was determined that these advances violated the prohibitions of Section 402 from making loans to executive officers or directors, the Company could be subject to investigation and/or litigation that could involve significant time and costs and may not be resolved favorably. The Company is unable to predict the extent of its ultimate liability with respect to these transactions. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company’s financial condition and operating results.

F - 14

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

For the years ended December 31, 2013 and 2012, due from related party activity for Xinzhongyang is reflect in shareholder equity and consisted of the following:

Balance, December 31, 2011	$	-
Working capital advances made to Xinzhongyang		2,172,606
Repayments made by Xinzhongyang		(1,910,636	)
Effect of foreign currency exchange		-
Balance, December 31, 2012		261,970
Working capital advances made to Xinzhongyang		4,149,784
Repayments made by Xinzhongyang		(2,789,350	)
Effect of foreign currency exchange		8,176
Balance, December 31, 2013	$	1,630,580

Mr. Chaojun Lin is the Deputy General Manager of BT Shantou since March 2004 and a member of our Board of Directors since December 30, 2011. The balance due from Mr. Chaojun Lin as December 31, 2013 amounted to $292,943 as was reflected on the consolidated balance sheet as due from related party in current assets. It is possible that these funds advance by us to him could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. On March 28, 2014, Mr. Lin repaid these funds to the company. (See Note-15 Subsequent Events).

Due to related parties

From time to time we received advances from related parties for working capital purposes. The advances bear no interest and are payable on demand. For the years ended December 31, 2013 and 2012, due to related parties’ activities consisted of the following:

	Wei Lin (1)			Guihong Zheng (2)			Chaojun Lin (3)			Xinzhongyang (4)			Total
Balance, December 31, 2011	$	794,420		$	28,845		$	12,594		$	-		$	835,859
Working capital advances		2,197,453			-			-			6,016,436			8,213,889
Repayments		(2,212,495	)		-			(12,692	)		(6,540,353	)		(8,765,540	)
Payment on remaining balance on the acquisition		(261,623	)		(29,069	)		-			-			(290,692	)
Amount offset pursuant to offset agreement		(523,917	)		-			-			523,917			-
Effect of foreign currency exchange		6,162			224			98			-			6,484
Balance, December 31, 2012		-			-			-			-			-
Working capital advances		2,030,515			-			-			-			2,030,515
Repayments		(1,585,766	)		-			-			-			(1,585,766	)
Effect of foreign currency exchange		-			-			-			-			-
Balance, December 31, 2013	$	444,749		$	-		$	-		$	-		$	444,749

(1)	Mr. Wei Lin is our chief executive officer and Chairman of the Board. At December 31, 2013 and 2012, balances due to Mr. Lin primarily consisted of advances for working capital and amounts due to Mr. Lin for the acquisition of BT Shantou by BT Brunei.

(2)	Ms. Guihong Zheng is a principal shareholder of Yunjia Fashion Clothing Co., Ltd. (“Yunjia”), an apparel company, a shareholder in Xinzhongyang, and the shareholder of Shantou Youbang International Supervise Center, Co., Ltd. Ms. Guihong Zheng is Mr. Wei Lin’s wife.

(3)

Mr. Chaojun Lin is the Deputy General Manager of BT Shantou since March 2004 and a member of our Board of Directors since December 30, 2011. The balance due from Mr. Chaojun Lin as December 31, 2013 amounted to $292,943 as was reflected on the consolidated balance sheet as due from related party in current assets and as disclosed above under "Due from related party". It is possible that these funds advance by us to him could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002. On March 28, 2014, Mr. Lin repaid these funds to the company. (See Note-15 Subsequent Events).

(4)

During 2012, Xinzhongyang advanced us funds for working capital purposes and we made repayments of such advances. During 2012, Xinzhongyang advanced us approximately $6.0 million and we repaid Xinzhongyang approximately $6.5 million. During 2012, Xinzhongyang entered into an offset agreement with Mr. Wei Lin whereby the excess amounts repaid by us to Xinzhongyang amounting to approximately $524,000 were offset against amount that we owed to Mr. Wei Lin. At December 31, 2013 and 2012, amounts payable to Xinzhongyang amounted to $0 and $0, respectively.

F - 15

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

Operating lease– related parties

BT Shantou leases its principal executive offices and our first toy showroom from Yunjia, a company owned by Mr. Lin and his wife, Guihong Zheng. During 2013 and 2012, we paid Yunjia RMB72,000 and RMB 72,000 (approximately $11,631 and $11,430), respectively, in rent expense and is included in general and administrative expenses. The lease expires on December 31, 2021.

Effective October 1, 2012 we leased a second showroom in Shantou from Shantou Youbang International Supervise Center, Co., Ltd. (“Shantou Youbang”), a company owned by Ms. Guihong Zheng, Mr. Wei Lin’s wife, for an annual rent of RMB 1,440,000 (approximately $232,614). The lease of the showroom expires on December 31, 2017. In connection with this lease, we paid a security deposit to Shantou Youbang of RMB 360,000 ($58,916 and $57,133 at December 31, 2013 and 2012, respectively) which is reflected as a security deposit – related party on the accompanying consolidated balance sheets. For the years ended December 31, 2013 and 2012, rent expense related to this showroom amounted to $232,614 and $0, respectively.

NOTE 9 – CONVERTIBLE LOANS PAYABLE

On May 10, 2013 and May 21, 2013, the Company issued 2% convertible note agreements to China Direct Investments, Inc. (“CDI" for principal amounts of $15,416 and $87,800, respectively, for an aggregate principal amount of $103,216 (the "CDI Convertible Notes"). CDI is entitled, at its option, at any time after the issuance of the CDI Convertible Notes, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 80% of the lowest trading price of any day during the 10 consecutive trading days prior to the date that CDI requests conversion. Pursuant to ASB Topic 470-20-525 (Debt with conversion and other options), since the CDI Convertible Notes had fixed conversion percentages of 80% of the stock price, the Company determined it had a fixed maximum amounts that can be settled for the debt. Accordingly, the Company accrued a put premium amount aggregating $25,804 since the CDI Convertible Notes are convertible for the conversion premium and recorded interest expense of $25,804. Subsequent to December 31, 2013, on January 30, 2014, the Company, CDI and JSJ entered into an assignment agreement, in which JSJ purchased the $87,800 convertible note issued by the Company to CDI dated on May 21, 2013 and the $15,416 convertible note dated on May 10, 2013 (See Note 15 – Subsequent Events).

On December 3, 2013, the Company issued a 12% convertible note to JSJ Investments, Inc. (“JSJ”) in the principal amount of $50,000. The principal amount is due on June 3, 2014. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to a price which is 55% of the average of three lowest closing price in the 10 consecutive trading days prior to the day that JSJ requests conversion. The note has a cash redemption premium of 125% of the principal amount and may be prepaid at any time by the issuer. If an Event of Default occurs and is continuing for more than thirty days, the Holder of this Note may declare this entire Note, including any interest and Default Interest and other amount due, to be due and payable immediately. At December 31, 2013, principal amount due under this convertible note amounted to $50,000.

On December 17, 2013, the Company and Iconic Holdings, LLC (“Iconic”) entered into a note purchase agreement, providing the issuance of a 10% convertible promissory note with the principal amount of $52,500. The note is due on December 17, 2014. Iconic is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the lower of $ 0.238 or 60% of the lowest trading price in the 15 consecutive trading days prior to the date that Iconic requests Conversion. If an Event of Default occurs and is continuing with respect to the Note, the Holder may declare all of the then outstanding Principal Amount of this Note, including any interest due thereon, to be due and payable immediately without further action or notice. In the event of such acceleration, the amount due and owing to the Holder shall be increased to one hundred and fifty percent (150%) of the outstanding Principal Amount of the Note held by the Holder plus all accrued and unpaid interest, fees, and liquidated damages, if any. Additionally, this Note shall bear interest on any unpaid principal from and after the occurrence and during the continuance of an Event of Default at a rate of twenty percent (20%). At December 31, 2013, principal amount due under this convertible note amounted to $52,500.

In connection with the issuance of the JSJ and Iconic convertible notes above, the Company determined that the terms of the convertible notes include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the convertible instruments were accounted for as a derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date. The Company has recognized derivative liabilities of $182,096 and $0 at December 31, 2013 and 2012, respectively. The gain resulting from the decrease in fair value of these convertible instruments was $43,265 and $0 for the years ended December 31, 2013 and 2012, respectively.

F - 16

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

The Company used the following range of assumptions for determining the fair value of the convertible instruments at inception and as of December 31, 2013 under the Black-Scholes option pricing model:

Dividend rate		0	%
Term (in years)	0.5 to 1.0 year
Volatility		607	%
Risk-free interest rate		0.10% – 0.13	%

At December 31, 2013 and December 31, 2012, aggregate convertible loans payable amounted to $205,716 and $0, respectively.

NOTE 10 - OTHER PAYABLE

On December 31, 2013, other payable of $569,995 consisted of accrued consulting fee, accrued shipping expense, accrued interest and penalties and employee benefit expense. On December 31, 2012, other payable of $300,525 consisted of accrued shipping, inspection fees, accrued interest and penalties, and employee benefit expense.

NOTE 11 - STOCKHOLDERS’ EQUITY

Preferred stock

The Company is authorized to issue 20,000,000 shares of Preferred Stock, no par value, with such designations, rights and preferences as may be determined from time to time by the Board of Directors. As of December 31, 2013 and 2012, there were no shares issued and outstanding.

Common stock

The Company is authorized to issue 100,000,000 shares of Common Stock; $0.00001 par value. As of December 31, 2013 and 2012, there were 10,350,192 and 10,200,179 shares of common stock issued and outstanding, respectively.

Common stock issued for services

On January 3, 2013, the Company entered into a consulting agreement with Dore Perler to engage Mr. Perler to provide the Company with sales consulting and managerial services related to the Company’s operations in North America for a period terminating on January 31, 2014. The consulting agreement provides that we shall issue Pearl Group 150,000 shares of the Company’s post-reverse-split common stock. Such shares were issued on March 28, 2013. The Company valued these common shares at the fair value of $0.63 per common share based on the quoted trading price of the common stock on the grant date which is the measurement date. In connection with issuance of these common shares, the Company recorded stock-based compensation of $94,501.

NOTE 12 – INCOME TAXES

We account for income taxes under ASC 740, “Expenses – Income Taxes ”. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary differences related to the deduction of stock-based compensation for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.

BT Shantou is governed by the Income Tax Law of the People’s Republic of China Concerning Foreign Investment Enterprise and Foreign Enterprises and local income tax laws (the “PRC Income Tax Law”). Pursuant to the PRC Income Tax Law, BT Shantou is subject to tax at a maximum statutory rate of 25% (inclusive of state and local income taxes). The income tax provision described in the table below was due to permanent differences.

Based upon analysis of our current tax research and interpretations of China tax regulations, we have determined that BT Brunei may be considered a non-resident PRC company and may be subject to China income taxes and other payroll benefit taxes. Accordingly we have decided to accrue China income taxes and payroll benefit taxes pursuant to China tax regulations.

F - 17

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

The Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $4,666,000 and $3,132,000 as of December 31, 2013 and 2012, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s PRC and Brunei operations. Accordingly, no provision has been made for any deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

The components of income (loss) before income tax consist of the following:

	Years Ended December 31,
	2013			2012
				(As Restated)
U.S. Operations	$	(504,983	)	$	(465,030	)
Brunei Operations (BT Brunei)		1,065,051			1,642,882
Chinese Operations (BT Shantou)		288,358			84,656
Total	$	848,426		$	1,262,508

The components of the provision (benefit) for income taxes are as follows:

	Years Ended December 31,
	2013		2012
			(As Restated)
Federal, State and Local	$	-	$	-
PRC EIT tax		338,352		435,192
Total	$	338,352	$	435,192

The table below summarizes the reconciliation of our income tax provision (benefit) computed at the statutory U.S. Federal rate and the actual tax provision (presented to the nearest thousand):

	Years Ended December 31,
	2013			2012
				(As Restated)
Income tax provision at federal statutory rate	$	288,000		$	429,000
State income taxes, net of federal benefit		39,000			58,000
Permanent differences		70,000			84,000
U.S. tax rate in excess of foreign tax rate		(184,000	)		(235,000	)
Change in U.S. valuation allowance		125,000			99,000
Tax provision	$	338,000		$	435,000

We have a net operating loss (“NOL”) carry forward for U.S. income tax purposes at December 31, 2013 expiring through the year 2033. Management estimates the NOL as of December 31, 2013 to be approximately $11,738,000. The utilization of our NOL’s will be significantly limited because of a change in ownership as defined under Section 382 of Internal Revenue Code. Such change in ownership, for purposes of utilization of the Company’s NOL’s under Section 382, occurred with the Share Exchange Agreement entered into on December 30, 2011. The NOL subject to this limitation was approximately $10,900,000.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Included in the deferred tax asset is the aforementioned NOL. We are not able to predict if such future taxable income will be more likely than not sufficient to utilize the benefit. As such, we do not believe the benefit is more likely than not to be realized and we recognize a full valuation allowance for those deferred tax assets. Our deferred tax asset as of December 31, 2013 and 2012 is as follows:

	December 31,
	2013			2012
Total deferred tax asset - from NOL carry forwards	$	4,531,000		$	4,330,000
Valuation allowance		(4,531,000	)		(4,330,000	)
Deferred tax asset, net of allowance	$	-		$	-

During 2013, the valuation allowance was increased by approximately $201,000 from the prior year.

F - 18

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

NOTE 13 – CONCENTRATIONS AND CREDIT RISK

(i) Customer Concentrations

Customer concentrations for the years ended December 31, 2013 and 2012 are as follows:

	Net Sales					Accounts Receivable
	For the years ended December 31,					As of December 31,
	2013		2012			2013			2012
Always Trading International Limited	35.7	%		27.5	%		30.5	%		56.4	%
Poundland Far East Ltd	9.1	%		8.1	%		5.9	%		-
Total	44.8	%		35.6	%		36.4	%		56.4	%

A reduction in sales from or loss of such customers would have a material adverse effect on our results of operations and financial condition.

(ii) Vendor Concentrations

Vendor purchase concentrations for December 31, 2013 and 2012 are as follows:

	Net Purchases					Accounts Payable
	For the years ended December 31,					As of December 31,
	2013		2012			2013			2012
Jiada Toys	7.3	%	8.5		%	11.0		%	35.1		%
Guangdong Chenghai Xiongcheng Plastic Toys	3.8	%		-		18.3		%		19.8	%
Changtai Toys (Prosperous Toys)	42.4	%		41.8	%		28.9	%		-
Yintai International (Win Tide)	28.5	%		26.7	%		6.3	%		-
Total	82.0	%		77.0	%		64.5	%		54.9	%

(iii) Credit Risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, the currency of which is not free trading, and no deposits are covered by insurance. Foreign exchange transactions are required to be conducted through institutions authorized by the Chinese government and there is no guarantee that Chinese currency can be converted to U.S. or other currencies. We have not experienced any losses in such accounts and believe we are not exposed to any risks on its cash in bank accounts.

At December 31, 2013 and 2012, the Company’s cash balances by geographic area were as follows:

Country:	December 31, 2013				December 31, 2012
PRC	$	211,352	95.8	%	$	11,001	49.6	%
United States		3,852	1.8	%		379	1.7	%
Hong Kong		5,381	2.4	%		10,787	48.7	%
Total cash and cash equivalents	$	220,585	100.0	%	$	22,167	100.0	%

F - 19

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

(iv) Foreign currency risk

We cannot guarantee that the current exchange rate will not fluctuate. There is always the possibility that we could post the same amount of profit for two comparable periods, and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of RMB and Hong Kong dollar converted to U.S. dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Effective on December 18, 2011 we have operated two mini showrooms with 570 and 600 square feet respectively located in the terminals for domestic flights and international flights in Jieyang Chaoshan International Airport. The vendor permits and leases associated with the showrooms obtained from Shantou Airport Company of Guangdong Airport Management Corporation (“GAMC”) will expire on February 17, 2015. During the term, we are obliged to pay for two mini showrooms with a combined monthly fee of RMB15,929 (approximately $2,573 as of December 31, 2013) to Shantou Airport Company, including vendor permit fee of RMB8,299 (approximately $1,341 as of December 31, 2013) rent of RMB6,540 (approximately $1,056 at December 31, 2013), and administration fee of RMB1,090 (approximately $176 as of December 31, 2013).

See Note 8 – Related Party Transactions for the detail terms on the related party operating leases of our principal executive offices and the two showroom facilities.

Future minimum rental payments required under third party and related parties operating leases are as follows:

Years Ending December 31:	Third Party		Related Parties (See Note 8)		Total
2014	$	12,677	$	244,245	$	256,922
2015		2,113		244,245		246,358
2016		-		244,245		244,245
2017		-		244,245		244,245
2018		-		11,631		11,631
Thereafter		-		34,892		34,892
Total	$	14,790	$	1,023,503	$	1,038,293

Litigation

From time to time we may be a defendant and plaintiff in various other legal proceedings arising in the normal course of our business. As of the date of this Annual Report, our management is not aware of any proceedings to which any of our directors, officers, or affiliates, or any associate of any such director, officer, affiliate, or security holder is a party adverse to our company or has a material interest adverse to us.

NOTE 15 – SUBSEQUENT EVENTS

On January 6, 2014, the Company, CDI and GEL Properties, LLC (“GEL”) entered into a debt purchase agreement, in which GEL purchased the assigned portion $5,000 under the $ 41,711 convertible note issued by the Company to CDI dated on May 2012 as well as a $20,000 convertible note dated in March 2012. The Company issued a 12% replacement convertible note to GEL with the principal amount of $25,000, which is due on September 30, 2014. GEL is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 60% of the lowest closing price in the 5 consecutive trading days prior to the date that GEL requests conversion. During the first six months this Note is in effect, the Company may redeem this Note by paying to GEL an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; GEL may consider this Note immediately due and payable. In January and February 2014, GEL has fully converted this note into 230,678 shares of the Company’s common stock at an average price of $0.13 per share.

F - 20

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

On January 6, 2014, the Company issued a 12% convertible note to GEL, with the principal amount of $25,000, which is due on September 30, 2014. GEL is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 60% of the lowest closing price in the 5 consecutive trading days prior to the date that GEL requests Conversion. During the first six months this Note is in effect, the Company may redeem this Note by paying to the Holder an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; GEL may consider this Note immediately due and payable.

On January 6, 2014, the Company issued a 12% convertible note to LG, with the principal amount of $50,000, which is due on September 30, 2014. LG is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 50% of the average of two lowest closing price in the 10 consecutive trading days prior to the date that LG requests Conversion. During the first six months this Note is in effect, the Company may redeem this Note by paying to the Holder an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. None of this note has been converted as of the date of this report.

On January 7, 2014, the Company, CDI and LG Capital Funding, LLC (“LG”) entered into a debt purchase agreement, in which LG purchased the assigned portion of $ 36,711 under the $ 41,711 convertible note issued by the Company to CDI dated in May 2012. The Company issued a 12% replacement convertible note to LG with the principal amount of $36,711, which is due on September 30, 2014. LG is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 50% of the average of two lowest closing price in the 10 consecutive trading days prior to the date that LG requests Conversion. During the first six months this Note is in effect, the Company may redeem this Note by paying to the Holder an amount as follows: (i) if the redemption is within the first 60 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any prepaid and earned interest, (ii) if the redemption is after the 61st day this Note is in effect but less than the 120th day this Note is in effect, then for an amount equal to 140% of the unpaid principal amount of this Note along with any prepaid and earned interest, (iii) if the redemption is after the 121st day this Note is in effect but less than the 180th day this Note is in effect, then for an amount equal to 150% of the unpaid principal amount of this Note along with any prepaid and earned interest. This Note may not be redeemed after 180 days. Upon an Event of Default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. During January 2014, LG has fully converted this note into 376,426 shares of the Company’s common stock at $0.10 per share.

On January 30, 2014, the Company, CDI and JSJ entered into an assignment agreement, in which JSJ purchased the $87,800 convertible note issued by the Company to CDI on May 21, 2013 and the $15,416 convertible note dated on May 10, 2013 (See Note 15 – Subsequent Events). The Company issued a 12% replacement convertible note to JSJ with the principal amount of $103,216, which is due on January 30, 2015. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 45% of the average of three lowest biding price in the 20 consecutive trading days prior to the date that JSJ requests Conversion. This note has a cash redemption premium of 150% of the principal amount only upon approval and acceptance by JSJ, Any amount of principal on this Note which is not paid when due shall bear twelve percent (12%) interest per annum from the date thereof until the same is paid. If Company fails to deliver the Shares as requested in a Conversion Notice and within three business days of the receipt thereof, there shall accrue a penalty of Additional Shares due to Holder equal to 25% of the number stated in the Conversion Notice beginning on the Fourth business day after the date of the Notice. The Additional Shares shall be issued and the amount of the Note retired will not be reduced beyond that stated in the Conversion Notice. Each additional business day beyond the Fourth business day after the date of this Notice shall accrue an additional 25% penalty for delinquency, without any corresponding reduction in the amount due under the Note, for so long as Company fails to provide the Shares so demanded. If an Event of Default occurs and is continuing, the Holder of this Note may declare the entire Note, including any interest and Default Interest and other amounts due, to be due and payable immediately. During February and March 2014, JSJ has fully converted this note into 1,572,404 shares of the Company’s common stock at $0.07 per share.

F - 21

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years ended December 31, 2013 and 2012

On January 30, 2014, the Company and Asher Enterprises, Inc (“Asher”) entered into a security purchase agreement, and issued an 8% convertible note with the principal amount of $ 93,500, which is due on October 21, 2014. Asher is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 58% of the average of three lowest trading price in the 10 consecutive trading days prior to the date that Asher requests Conversion. Any amount of principal or interest of this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid. Upon an event of default, the Note shall become immediately due and payable and the Company shall pay to Asher in full satisfaction of its obligations. None of this note has been converted as of the date of this report.

On February 13, 2014, the Company issued a 12% convertible note to JSJ, with the principal amount of $125,000, which is due on July 30, 2014. JSJ is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to 45% of the average of lowest bid price for the 20 consecutive trading days prior to the date that JSJ requests conversion. This note has a cash redemption premium of 150% of the principal amount only upon approval and acceptance by JSJ, Any amount of principal on this Note which is not paid when due shall bear twelve percent (12%) interest per annum from the date thereof until the same is paid. If the Company fails to deliver the shares as requested in a conversion notice and within three business days of the receipt thereof, there shall accrue a penalty of additional shares due to JSJ equal to 25% of the number stated in the conversion notice beginning on the fourth business day after the date of the notice. The additional shares shall be issued and the amount of the note retired will not be reduced beyond that stated in the conversion notice. Each additional business day beyond the fourth business day after the date of this notice shall accrue an additional 25% penalty for delinquency, without any corresponding reduction in the amount due under the note, for so long as Company fails to provide the shares so demanded. If an event of default occurs and is continuing, JSJ may declare the entire note, including any interest and default interest and other amounts due, to be due and payable immediately. None of this note has been converted as of the date of this report.

On March 17, 2014, the Company and LG entered a security purchase agreement and issued an 8% convertible note in the principal amount of $ 40,000, which is due on February 25, 2015. LG is entitled, at its option, at any time after the issuance of this note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 60% of the average of lowest closing price during the 15 consecutive trading days prior to the date that LG requests conversion. During the first 180 days this Note is in effect, the Company may redeem this note by paying to LG an amount equal to 150% of the unpaid principal amount of this note along with any prepaid and earned interest. This note may not be redeemed after 180 days. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; LG may consider this Note immediately due and payable. None of this note has been converted as of the date of this report.

On March 17, 2014, the Company and Union Funding, LLC (“UF”) entered into a security purchase agreement, and issued an 8% convertible note with the principal amount of $20,000, which is due on March 12, 2015. UF is entitled, at its option, at any time after the issuance of this Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price for each share of common stock equal to the 50% of the lowest closing price during the 15 consecutive trading days prior to the date that UF requests conversion. Upon an event of default, interest shall be accrued at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law; UF may consider this note immediately due and payable. None of this note has been converted as of the date of this report.

F - 22

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – RESTATEMENT

The Company’s consolidated financial statements have been restated as of December 31, 2012 and for the year ended December 31, 2012. Based upon analysis of our current tax research and interpretations of China tax regulations, we have determined that our subsidiary, Big Tree International Co., Ltd., a Brunei company, may be considered a non-resident PRC company and may be subject to China income taxes and other payroll benefit taxes. Accordingly, we have decided to accrue China income taxes and payroll benefit taxes pursuant to China tax regulations. At December 31, 2012, we increased our current liabilities by $1,216,648, reduced net income by $768,443 or $0.08 per common share (basic and diluted) to reflect the accrual of income taxes, payroll benefit taxes and all related estimated penalties and interest, we reduced beginning retained earnings by $440,099 to reflect the accrual of such taxes and penalties for the 2011 period, and increased accumulated other comprehensive loss by $8,106. Currently, we are reviewing our corporate tax structure and plan on restructuring our tax structure to ensure that Big Tree International Co., Ltd. is not subject to such taxes in China.

Additionally, for the year ended December 31, 2012, we reduced comprehensive income by $8,106 on the consolidated statement of operations and comprehensive income and we reduced net income per common share.

Accordingly, the Company’s consolidated balance sheet at December 31, 2012 and for the year ended December 31, 2012, the consolidated statement of operation and comprehensive income have been restated herein. There was no change to the components of the Company's previous reported consolidated statement of cash flows for the year eneded December 31, 2012. The effect of this restatement in the Company’s consolidated financial statements at December 31, 2012 and for the year ended December 31, 2012 are shown in the table as follows:


Consolidated Balance Sheet data	December 31, 2012
	As previously filed			Adjustments to Restate				As Restated
Total Assets	$	8,650,814		$	-			$	8,650,814

Salaries and related benefits payable		60,578			177,661		(a)		238,239
Other payables		61,504			239,021		(a)		300,525
Taxes payable		65,586			799,966		(a)		865,552
Total Current Liabilities		5,983,339			1,216,648				7,199,987
Total Liabilities		6,045,050			1,216,648				7,261,698

Stockholders’ Equity:
Common stock ($0.00001 par value; 100,000,000 shares authorized; 10,200,179 shares issued and outstanding at December 31, 2012)		102			-				102
Additional paid-in capital		207,900			-		(a)		207,900
Retained earnings		2,663,029			(1,208,542	)	(a)		1,454,487
Accumulated other comprehensive loss		(3,297	)		(8,106	)	(a)		(11,403	)
Due from related party		(261,970	)		-				(261,970	)
Total Stockholders’ Equity		2,605,764			(1,216,648	)			1,389,116
Total Liabilities and Stockholders’ Equity	$	8,650,814		$	-			$	8,650,814

(a)

To increase current liabilities by $1,216,648, to reduce net income by $768,443 to reflect the accrual of income taxes, payroll benefit taxes and all related estimated penalties and interest, to reduce beginning retained earnings by $440,099 to reflect the accrual of such taxes and penalties for the 2011 period, and to increase accumulated other comprehensive loss by $8,106.

F - 23

BIG TREE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Statement of operations and comprehensive income	For the Year Ended December 31, 2012
	As previously filed			Adjustments to Restate				As Restated
Gross profit	$	3,527,026		$	-				$	3,527,026
Operating expenses		1,818,876			126,701		(a)			1,945,577
Operating income		1,708,150			(126,701	)				1,581,449
Other income (expenses)		(80,006	)		(238,935	)	(a)			(318,941	)
Income before income taxes		1,628,144			(365,636	)				1,262,508
Income taxes		(33,105	)		(402,807	)	(a)			(435,912	)
Net income		1,595,039			(768,443	)				826,596
Foreign currency translation income (loss)		9,361			(8,106	)	(a)			1,255
Comprehensive Income	$	1,604,400		$	(776,549	)			$	827,851
Net Income Per Common Share
Basic	$	0.16		$	(0.08	)			$	0.08
Diluted	$	0.16		$	(0.08	)			$	0.08

(a)	To reduce net income by $768,443 to reflect the accrual of income taxes, payroll benefit taxes and all related estimated penalties and interest and to decrease foreign currency translation income by $8,106.

F - 24

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