UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number
000-51981
ASIA TIME CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | N/A (I.R.S. Employer Identification No.) | |
Room 1601-1604, 16/F., CRE Centre 889 Cheung Sha Wan Road, Kowloon, Hong Kong (Address of principal executive offices) | N/A (Zip Code) |
(852)-23100101
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There were 23,156,629 shares outstanding of registrant’s common stock, par value $.0001 per share, as of November 1, 2007.
ASIA TIME CORPORATION.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | 1 | |
ITEM 1. | FINANCIAL STATEMENTS | |
Condensed Consolidated Balance Sheets (Unaudited) | 2 | |
Condensed Consolidated Statements of Operations (Unaudited) | 4 | |
Condensed Consolidated Statements of Cash Flows (Unaudited) | 5 | |
Notes to Condensed Consolidated Financial Statements (Unaudited) | 7 | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | 30 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | 38 |
ITEM 4. | CONTROLS AND PROCEDURES | 39 |
PART II - OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | 39 |
ITEM 1A. | RISK FACTORS | 39 |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 40 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 40 |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 40 |
ITEM 5. | OTHER INFORMATION | 40 |
ITEM 6. | EXHIBITS | 40 |
SIGNATURES | 41 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements of Asia Time Corporation included in the Form 10-K/A for the fiscal year ended December 31, 2006 as filed with the Securities and Exchange Commission on September 26, 2007.
1
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | |||||||
$ | $ | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | 166,216 | 316,621 | |||||
Restricted cash | 5,551,704 | 4,523,679 | |||||
Accounts receivable, net | 15,482,635 | 8,188,985 | |||||
Prepaid expenses and other receivables – Note 8 | 6,397,568 | 2,101,133 | |||||
Income tax prepayments | - | 767 | |||||
Inventories, net – Note 9 | 6,520,527 | 6,620,361 | |||||
Prepaid lease payments – Note 11 | 17,193 | 22,958 | |||||
Total Current Assets | 34,135,843 | 21,774,504 | |||||
Deferred tax assets – Note 6 | 19,536 | 14,042 | |||||
Plant and equipment, net – Note 10 | 719,473 | 890,258 | |||||
Leasehold lands – Note 11 | 882,444 | 895,322 | |||||
Held-to-maturity investments – Note 12 | 300,771 | 301,196 | |||||
Intangible assets – Note 13 | 244,168 | 337,836 | |||||
Restricted cash – non-current | 256,937 | 257,301 | |||||
TOTAL ASSETS | 36,559,172 | 24,470,459 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
LIABILITIES | |||||||
Current Liabilities : | |||||||
Accounts payable | 1,075,980 | 770,360 | |||||
Other payables and accrued liabilities – Note 14 | 51,491 | 190,358 | |||||
Advance from a related party – Note 15 | 12,268 | - | |||||
Income taxes payable | 2,854,788 | 1,453,051 | |||||
Bank borrowings – Note 16 | 15,196,458 | 13,205,167 | |||||
Total Current Liabilities | 19,190,985 | 15,618,936 | |||||
Deferred tax liabilities – Note 6 | 37,180 | 31,711 | |||||
TOTAL LIABILITIES | 19,228,165 | 15,650,647 |
COMMITMENTS AND CONTINGENCIES – Note 19 |
2
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Stated in US Dollars)
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | |||||||
$ | $ | ||||||
STOCKHOLDERS’ EQUITY | |||||||
Preferred stock – Note 17 | |||||||
Par value : US$0.0001 | |||||||
Authorized: 10,000,000 shares | |||||||
Issued and outstanding: 2007 – 2,250,348 shares (2006 – none) | 225 | - | |||||
Common stock – Note 17 | |||||||
Par value : US$0.0001 | |||||||
Authorized: 100,000,000 shares (2006 – 100,000,000) | |||||||
Issued and outstanding: 2007 – 23,156,629 shares (2006 – 19,454,420 shares) | 2,316 | 1,946 | |||||
Additional paid-in capital | 3,287,386 | 654,298 | |||||
Accumulated other comprehensive income | 22,112 | 7,470 | |||||
Retained earnings | 14,018,968 | 8,156,098 | |||||
TOTAL STOCKHOLDERS’ EQUITY | 17,331,007 | 8,819,812 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | 36,559,172 | 24,470,459 |
See notes to condensed consolidated financial statements.
3
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in US Dollars)
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
$ | $ | $ | $ | ||||||||||
Net sales | 22,972,645 | 19,647,209 | 64,960,224 | 62,874,395 | |||||||||
Cost of sales | (18,099,186 | ) | (16,730,052 | ) | (54,644,056 | ) | (56,510,946 | ) | |||||
Gross profit | 4,873,459 | 2,917,157 | 10,316,168 | 6,363,449 | |||||||||
Other income – Note 4 | 48,425 | 41,724 | 145,203 | 125,504 | |||||||||
Depreciation | (64,635 | ) | (83,730 | ) | (193,499 | ) | (243,096 | ) | |||||
Administrative and other operating expenses | (490,225 | ) | (359,472 | ) | (1,443,283 | ) | (971,717 | ) | |||||
Income from operations | 4,367,024 | 2,515,679 | 8,824,589 | 5,274,140 | |||||||||
Fees and costs related to reverse merger – Note 1 | - | - | (736,197 | ) | - | ||||||||
Other income – Note 4 | 39,555 | 55,342 | 117,936 | 165,638 | |||||||||
Interest expense – Note 5 | (316,516 | ) | (265,872 | ) | (830,935 | ) | (763,726 | ) | |||||
Income before taxes | 4,090,063 | 2,305,149 | 7,375,393 | 4,676,052 | |||||||||
Income taxes – Note 6 | (752,221 | ) | (410,284 | ) | (1,512,523 | ) | (829,593 | ) | |||||
Net income | 3,337,842 | 1,894,865 | 5,862,870 | 3,846,459 | |||||||||
Earnings per common share – Note 3 | |||||||||||||
- Basic | $ | 0.14 | $ | 0.10 | $ | 0.26 | $ | 0.20 | |||||
- Diluted | 0.13 | 0.10 | 0.24 | 0.20 | |||||||||
Weighted average common shares | |||||||||||||
- Basic | 23,156,629 | 19,454,420 | 22,844,721 | 19,454,420 | |||||||||
- Diluted | 25,406,977 | 19,454,420 | 24,874,262 | 19,454,420 |
See notes to condensed consolidated financial statements.
4
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)
Nine months ended September 30, | |||||||
2007 | 2006 | ||||||
(Unaudited) | (Unaudited) | ||||||
$ | $ | ||||||
Cash flows from operating activities | |||||||
Net income | 5,862,870 | 3,846,459 | |||||
Adjustments to reconcile net income to net cash flows | |||||||
provided by (used in) operating activities: | |||||||
Amortization of intangible assets | 92,884 | 115,965 | |||||
Amortization of leasehold lands | 17,287 | 17,481 | |||||
Depreciation | 193,499 | 243,096 | |||||
Dividend income | - | (4,486 | ) | ||||
Loss on disposal of plant and equipment | 5,406 | 7,725 | |||||
Income taxes | 1,512,523 | 829,593 | |||||
Changes in operating assets and liabilities: | |||||||
(Increase) decrease in - Accounts receivable | (7,281,110 | ) | (3,264,603 | ) | |||
Prepaid expenses and other receivables | (4,260,214 | ) | (1,118,481 | ) | |||
Increase (decrease) in - Inventories | 90,180 | 1,679,040 | |||||
Accounts payable | 306,241 | (279,202 | ) | ||||
Other payables and accrued liabilities | (138,142 | ) | (37,981 | ) | |||
Income taxes payable | (112,601 | ) | (16,055 | ) | |||
Unearned income | - | (1,595,187 | ) | ||||
Net cash provided by (used in) operating activities | (3,711,177 | ) | 423,364 | ||||
Cash flows from investing activities | |||||||
Acquisition of plant and equipment | (30,257 | ) | (1,164,095 | ) | |||
Proceeds from disposal of plant and equipment | 320 | 2,034 | |||||
Dividend received | - | 4,486 | |||||
Net cash used in investing activities | (29,937 | ) | (1,157,575 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuance of Series A convertible preferred stock | 2,641,683 | - | |||||
Proceeds from new short-term bank borrowings | 2,816,620 | 33,932 | |||||
Repayment of short-term bank borrowings | (4,029,839 | ) | (259,532 | ) | |||
Net advance under short term bank borrowings | 3,175,698 | 3,925,836 | |||||
Increase in restricted cash | (1,031,003 | ) | (1,180,479 | ) | |||
Advances to related parties | (20,773 | ) | (28,798 | ) | |||
Decrease in bank overdrafts | 40,840 | 131,057 | |||||
Dividends paid | - | (2,445,712 | ) | ||||
Net cash flows provided by financing activities | 3,593,226 | 176,304 | |||||
Net decrease in cash and cash equivalents | (147,888 | ) | (557,907 | ) | |||
Effect of foreign currency translation on cash and cash equivalents | (2,517 | ) | (538 | ) | |||
Cash and cash equivalents - beginning of period | 316,621 | 778,563 | |||||
Cash and cash equivalents - end of period | 166,216 | 220,118 |
5
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Stated in US Dollars)
Nine months ended September 30, | |||||||
2007 | 2006 | ||||||
(Unaudited) | (Unaudited) | ||||||
$ | $ | ||||||
Supplemental disclosures for cash flow information: | |||||||
Cash paid for: | |||||||
Interest | 830,935 | 763,726 | |||||
Income taxes | 112,601 | 15,521 |
See notes to condensed consolidated financial statements.
6
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
1. Organization and recapitalization
Asia Time Corporation (the “Company”) (formerly SRKP 9, Inc.) was incorporated in the State of Delaware on January 3, 2006. Effective January 23, 2007, the Company changed its name from SRKP 9, Inc. to Asia Time Corporation.
Recapitalization
The Company entered into an Exchange Agreement dated December 15, 2006 (the “Exchange Agreement”) with Times Manufacture & E-Commerce Corporation Limited, a British Virgin Islands corporation (“Times Manufacture”), and Kwong Kai Shun, the sole shareholder of Times Manufacture (“Original Shareholder”). The closing of the Exchange Agreement occurred on January 23, 2007.
The Company effected a 1.371188519-for-one stock reverse split in the course of the share exchange process such that there were 3,702,209 shares of common stock outstanding immediately prior to the closing of the Exchange Agreement. These financial statements give retroactive effect to this share split.
At the closing of the Exchange Agreement, the Company acquired all of the capital shares of Times Manufacture from the Original Shareholder, in exchange for which the Company issued 19,454,420 shares of its Common Stock to the Original Shareholder. The 19,454,420 shares of common stock issued to the Original Shareholder in conjunction with this transaction have been presented as outstanding for all periods presented.
The Original Shareholder of Times Manufacture acquired 84% of the Company’s issued and outstanding common stock in conjunction with the completion of the Exchange Agreement. Therefore, although Times Manufacture became the Company’s wholly-owned subsidiary, the transaction was accounted for as a recapitalization in the form of a reverse merger of Times Manufacture, whereby Times Manufacture was deemed to be the accounting acquirer and was deemed to have retroactively adopted the capital structure of SRKP 9, Inc. Since the transaction was accounted for as a reverse merger, the accompanying consolidated financial statements reflect the historical consolidated financial statements of Times Manufacture for all periods presented, and do not include the historical financial statements of SRKP 9, Inc. All costs associated with the reverse merger transaction were expensed as incurred.
The Company agreed to register the 1,999,192 shares of common stock that were held by certain of the Company’s shareholders immediately prior to the closing of the Exchange Agreement. If the Company fails to register 1,999,192 shares due to failure on the part of the Company, additional shares of its common stock shall be issued to the respective shareholders in the amount of 0.0333% of their respective shares for each calendar day until the registration becomes effective. There is no maximum potential consideration to be transferred in connection with the registration of these shares. The Company agreed to file a registration statement no later than the tenth (10) day after the end of the six (6) month period that immediately follows the filing date of the initial registration statement (the “Required Filing Date”). The Company agreed to use reasonable best efforts to cause such registration statement to become effective within one hundred and twenty (120) days after the Required Filing Date or the actual filing date, whichever is earlier, or one hundred fifty (150) days after the Required Filing Date or the actual filing date, whichever is earlier, if the registration statement is subject to a full review by the SEC. In addition, the Company agreed to use its reasonable best efforts to maintain the registration statement effective for a period of twenty-four (24) months at the Company’s expense.
7
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
1. | Organization and recapitalization (continued) |
Restatement with respect to accounting for fees and costs related to reverse merger
The Company has revised its interim 2007 statement of operations to reflect all fees and costs related to the reverse merger as charges to operations. In the Company’s previously filed financial statements for the interim periods ended March 31, 2007 and June 30, 2007, the Company had previously recognized $419,197 as reverse merger expenses charged to operations. The revised interim 2007 statement of operations increased that amount by $317,000 to $736,197, primarily to include the amounts paid to acquire equity control of the public shell, which had been previously recorded as a reduction to additional paid-in capital. The effect of recording this adjustment was to reduce basic and fully diluted earnings per share by approximately $0.01 for the nine months ended September 30, 2007. This adjustment had no effect on basic or diluted earnings per share for the three months ended September 30, 3007. The Company is currently in the process of preparing revised Quarterly Reports on Form 10-Q for the three months ended March 31, 2007 and June 30, 2007 to reflect this adjustment.
2. Description of business
The Company and its subsidiaries are engaged in sales to distributors of completed watches and watch components.
Name of company | Place and date of incorporation | Issued and fully paid capital | Principal activities |
Times Manufacture & E-Commerce Corporation Ltd | British Virgin Islands March 21, 2002 | US$20,002 Ordinary | Investment holding |
Times Manufacturing & E-Commerce Corporation Ltd (“TMEHK”) | British Virgin Islands January 2, 2002 | US$20,000 Ordinary | Investment holding |
Billion Win International Enterprise Ltd (“BW”) | Hong Kong March 5, 2001 | HK$5,000,000 Ordinary | Trading of watch components |
Goldcome Industrial Ltd (“GI”) | Hong Kong March 2, 2001 | HK$10,000 Ordinary | Trading of watch components |
Citibond Industrial Ltd (“CI”) | Hong Kong February 28, 2003 | HK$1,000 Ordinary | Trading of watch components |
Megamooch International Ltd (“MI”) | Hong Kong April 2, 2001 | HK$100 Ordinary | Trading of watches and watch components |
TME Enterprise Ltd | British Virgin Islands November 28, 2003 | US$2 Ordinary | Investment holding |
Citibond Design Ltd | British Virgin Islands August 1, 2003 | US$2 Ordinary | Inactive |
Megamooch Online Ltd | British Virgin Islands September 6, 2003 | US$2 Ordinary | Trading of watches and watch components |
8
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies
Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Basis of presentation
The accompanying condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America for interim consolidated financial information. Accordingly, they do not include all the information and notes necessary for a comprehensive set of consolidated financial statements.
In the opinion of the management of the Company, the accompanying financial statements include all adjustments, including those of a normal recurring nature, necessary for a fair presentation of the results of operations for the three-month and nine months ended September 30, 2007 and 2006. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the full fiscal year. These condensed financial statements should be read in conjunction with the consolidated financial statements of Times Manufacture & E-Commerce Corporation Ltd and the notes thereto for the year ended December 31, 2006.
Use of estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of plant and equipment and intangible assets. Actual results could differ from those estimates.
Restricted cash
Deposits in banks for securities of bank borrowings that are restricted in use are classified as restricted cash.
9
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies (continued)
Accounts receivable
Accounts receivable are stated at their original amount less an allowance for doubtful accounts, based on a review of outstanding amounts at the period end. An allowance for doubtful accounts is also recorded when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Uncollectible amounts are written off when identified. The Company extends unsecured credit to customers in the normal course of business and believes all accounts receivable in excess of the allowances for doubtful receivables are fully collectible. The Company does not accrue interest on trade accounts receivable.
During the reporting period, the Company had no uncollectible accounts receivable and, accordingly, did not record any allowance for doubtful accounts.
Rebate receivable
Rebate receivables are recognized as a reduction of cost of sales at fair value, less a provision for impairment. A provision for impairment of rebate receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of such receivables. The amount of the provision is recognized in the statement of operations. No provision was required during the periods presented herein.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis and includes only purchase costs. There are no significant freight charges, inspection costs and warehousing costs incurred for any of the periods presented. In assessing the ultimate realization of inventories, management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company’s inventory reserve requirements generally increase as the management’s projected demand requirements; decrease due to market conditions and product life cycle changes. During the reporting period, the Company estimated that no allowance for slow-moving or defective inventories was required.
Leasehold land
Leasehold lands, representing upfront payments or land use rights, are recorded at their acquisition cost and amortized using the straight-line method over the lease terms.
10
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies (continued)
Intangible assets
Intangible assets with limited useful lives are stated at cost less accumulated amortization and accumulated impairment losses.
Amortization of intangible assets is provided using the straight-line method over their estimated useful lives at the following annual rates:
Trademarks | 20 | % | ||
Websites | 20 | % |
Held-to-maturity investments
The Company’s policies with respect to investments in debt and equity securities are as follows:
Non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company has the positive ability and intention to hold to maturity are classified as held-to-maturity securities. Held-to-maturity securities are initially recognized in the balance sheet at cost to purchase including transaction costs. Subsequently, they are stated in the balance sheet at amortized cost using the effective interest method less any identified impairment losses.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.
Depreciation of plant and equipment is provided using the straight-line method over their estimated useful lives at the following annual rates:
Buildings | over the unexpired lease term | |||
Furniture and fixtures | 20 - 25 | % | ||
Office equipment | 25 - 33 | % | ||
Machinery and equipment | 25 - 33 | % | ||
Moulds | 33 | % | ||
Motor vehicles | 25 - 33 | % |
Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to the statement of operations.
11
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies (continued)
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets.
No impairment of long-lived assets was recognized for any of the periods presented.
Revenue recognition
Revenue is recognized according to the terms of the sale arrangement, which is customarily when the customer receives title to the goods, generally upon delivery. Revenue is recorded on a gross basis, since the Company is responsible for fulfillment, including the acceptability of the products ordered by the customer. Management believes that adequate controls are in place to ensure compliance with sale arrangements, a substantial history of such performance has been established, and historical returns and allowances have not been significant. The Company revenue recognition policy is with respect to the following two product categories: watch movements and completed watches. The Company’s sales arrangements do not have multiple-deliverable arrangements as described in EITF 00-21.
Earnings per share
The Company computes earnings per share (“EPS’) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as Net Income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
12
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies (continued)
Earnings per share (continued)
The Convertible Preferred stock is included on an “as converted “basis when these shares are dilutive.
The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted earnings per share for the periods presented (amounts in thousands, except per share data):
Three Months Ended September 30, | |||||||||||||||||||
2007 | 2006 | ||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||
Average | Average | ||||||||||||||||||
Income | Shares | Per-Share | Income | Shares | Per-Share | ||||||||||||||
Earnings per share - basic | |||||||||||||||||||
Net income | $ | 3,337,842 | 23,156,629 | $ | 0.14 | $ | 1,894,865 | 19,454,420 | $ | 0.10 | |||||||||
Effect of dilutive securities | |||||||||||||||||||
Convertible preferred stock | - | 2,250,348 | - | - | |||||||||||||||
Earnings per share - diluted | |||||||||||||||||||
Net income | $ | 3,337,842 | 25,406,977 | $ | 0.13 | $ | 1,894,865 | 19,454,420 | $ | 0.10 |
Nine Months Ended September 30, | |||||||||||||||||||
2007 | 2006 | ||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||
Average | Average | ||||||||||||||||||
Income | Shares | Per-Share | Income | Shares | Per-Share | ||||||||||||||
Earnings per share - basic | |||||||||||||||||||
Net income | $ | 5,862,870 | 22,844,721 | $ | 0.26 | $ | 3,846,459 | 19,454,420 | $ | 0.20 | |||||||||
Effect of dilutive securities | |||||||||||||||||||
Convertible preferred stock | - | 2,029,541 | - | - | |||||||||||||||
Earnings per share - diluted | |||||||||||||||||||
Net income | $ | 5,862,870 | 24,874,262 | $ | 0.24 | $ | 3,846,459 | 19,454,420 | $ | 0.20 |
13
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies (continued)
Recent adopted accounting pronouncements
In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings, if any, adoption of FIN 48 did not have an effect on our results of operations or financial condition. We did not have any material unrecognized tax benefits as of January 1, 2007 the implementation of FIN 48 had no impact on the Company.
Recent accounting pronouncements
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. The Company is currently evaluating the effect, if any, of SFAS 157 on its financial statements. Although the Company will continue to evaluate the provisions of SFAS No.157, management currently does not believe the adoption of SFAS No. 157 will have a material impact on the Company’s consolidated financial statements.
On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of SFAS No. 115.” The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS. No.157. The Company has not chosen to early adopt this statement. Although the Company will continue to evaluate the provisions of SFAS No.159, management
14
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
3. Summary of significant accounting policies (continued)
Recent accounting pronouncements
currently does not believe the adoption of SFAS No. 159 will have a material impact on the Company’s consolidated financial statements.
4. Other income
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
$ | $ | $ | $ | ||||||||||
Operating income | |||||||||||||
License fee of intangible assets | 32,668 | 41,724 | 97,955 | 125,504 | |||||||||
Rental income | 15,757 | - | 47,248 | - | |||||||||
48,425 | 41,724 | 145,203 | 125,504 | ||||||||||
Non-operating income | |||||||||||||
Bank interest income | 35,114 | 47,246 | 112,020 | 141,250 | |||||||||
Net exchange gains | 600 | 276 | 2,075 | 574 | |||||||||
Other interest income | - | 7,820 | - | 23,787 | |||||||||
Sundry | 3,841 | - | 3,841 | 27 | |||||||||
39,555 | 55,342 | 117,936 | 165,638 | ||||||||||
87,980 | 97,066 | 263,139 | 291,142 |
15
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
5. Interest expense
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
$ | $ | $ | $ | ||||||||||
Interest on bank trust receipts | 291,499 | 252,359 | 759,539 | 709,661 | |||||||||
Interest on short-term bank loans | 10,844 | 2,384 | 27,608 | 10,758 | |||||||||
Interest on bank overdrafts | 11,859 | 11,129 | 33,050 | 43,307 | |||||||||
Interest on other loans | 2,314 | - | 10,738 | - | |||||||||
316,516 | 265,872 | 830,935 | 763,726 |
6. Income taxes
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
$ | $ | $ | $ | ||||||||||
Hong Kong profits tax | |||||||||||||
Current period | 752,221 | 410,284 | 1,512,523 | 829,593 |
The Company’s subsidiaries operating in Hong Kong are subject to profits tax of 17.5% on the estimated assessable profits during the periods. The difference in the periods between the actual effective tax rate and the Hong Kong Statutory rate results from minor non-deductable items in the periods ending in 2006 and the three months ended September 30,2007 which result in less than a 1% increase to the Company’s effective tax rate. During the nine months ended September 30, 2007, the tax rate was approximately 21% due to the effect on the tax rate of non tax deductable fees and costs related to the reverse merger that were charged to operations during the period.
Deferred tax (assets) liabilities as of September 30, 2007 and December 31, 2006 are composed of the following:
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Temporary difference on accelerated tax | |||||||
depreciation on plant and equipment | 17,644 | 17,669 | |||||
Deferred tax liabilities, net | 17,644 | 17,669 | |||||
Recognized in the balance sheet: | |||||||
Net deferred tax assets | (19,536 | ) | (14,042 | ) | |||
Net deferred tax liabilities | 37,180 | 31,711 | |||||
17,644 | 17,669 |
16
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
7. Comprehensive income
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
$ | $ | $ | $ | ||||||||||
Net income | 3,337,842 | 1,894,865 | 5,862,870 | 3,846,459 | |||||||||
Foreign currency translation adjustment | 62,784 | (13,703 | ) | 14,642 | (23,976 | ) | |||||||
Total comprehensive income | 3,400,626 | 1,881,162 | 5,877,512 | 3,822,483 |
8. Prepaid expenses and other receivables
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Rebate receivable | 2,379,725 | - | |||||
Interest receivable | - | 20,218 | |||||
Rental receivable | - | 46,314 | |||||
Other receivable | 300,617 | - | |||||
Purchase deposits paid | 3,573,480 | 1,530,372 | |||||
Sales proceeds of intangible assets receivable | - | 301,042 | |||||
Other deposits and prepayments | 143,746 | 203,187 | |||||
6,397,568 | 2,101,133 |
9. Inventories
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Completed watches, at cost | - | 1,745,648 | |||||
Watch movements, at cost | 6,520,527 | 4,874,713 | |||||
6,520,527 | 6,620,361 |
17
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
10. Plant and equipment
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Cost | |||||||
Buildings | 242,007 | 242,350 | |||||
Furniture and fixtures | 489,780 | 492,866 | |||||
Office equipment | 58,816 | 145,911 | |||||
Machinery and equipment | 407,944 | 321,626 | |||||
Moulds | 384,121 | 384,665 | |||||
Motor vehicles | 70,455 | 45,928 | |||||
1,653,123 | 1,633,346 | ||||||
Accumulated depreciation | |||||||
Buildings | 12,856 | 8,441 | |||||
Furniture and fixtures | 308,224 | 237,508 | |||||
Office equipment | 39,951 | 100,612 | |||||
Machinery and equipment | 224,203 | 93,475 | |||||
Moulds | 316,232 | 276,936 | |||||
Motor vehicles | 32,184 | 26,116 | |||||
933,650 | 743,088 | ||||||
Net | |||||||
Buildings | 229,151 | 233,909 | |||||
Furniture and fixtures | 181,556 | 255,358 | |||||
Office equipment | 18,865 | 45,299 | |||||
Machinery and equipment | 183,741 | 228,151 | |||||
Moulds | 67,889 | 107,729 | |||||
Motor vehicles | 38,271 | 19,812 | |||||
719,473 | 890,258 |
Depreciation expense included in administrative and other operating expenses for the three months and nine months ended September 30, 2007 and September 30, 2006 was $64,635, $193,499, $83,730, and $243,096, respectively.
As at September 30, 2007 and December 31, 2006, the carrying amount of buildings pledged as security for the Company’s banking facilities amounted to $229,151 and $233,909, respectively.
18
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
11. Leasehold lands
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Cost | 948,172 | 949,514 | |||||
Accumulated amortization | (48,535 | ) | (31,234 | ||||
Net | 899,637 | 918,280 | |||||
Analyzed for reporting purposes as: | |||||||
Current asset | 17,193 | 22,958 | |||||
Non-current asset | 882,444 | 895,322 | |||||
899,637 | 918,280 |
Amortization expense included in administrative and other operating expenses for the three months and nine months ended September 30, 2007 and September 30, 2006 are $5,765, $17,287, $8,187, and $17,481, respectively.
As at September 30, 2007 and December 31, 2006, the carrying amount of leasehold lands pledged as security for the Company’s banking facilities amounted to $899,637 and $918,280, respectively.
12. Held-to-maturity investments
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Hang Seng Capital Guarantee Investment Fund | |||||||
- 30,000 units at $10 each, interest rate at 10.5% in 3.75 years | |||||||
Cost | 300,771 | 301,196 |
The carrying amount of the held-to-maturity investments approximate its fair value at September 30, 2007.
As at September 30, 2007 and December 31, 2006, the carrying amount of held-to-maturity investments pledged as security for the Company’s banking facilities amounted to $300,771 and $301,196, respectively.
19
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
13. Intangible assets
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Cost | |||||||
Trademarks | 420,863 | 200,695 | |||||
Websites | 200,411 | 421,459 | |||||
621,274 | 622,154 | ||||||
Accumulated amortization | |||||||
Trademarks | 234,814 | 112,389 | |||||
Websites | 142,292 | 171,929 | |||||
377,106 | 284,318 | ||||||
Net | |||||||
Trademarks | 186,048 | 88,306 | |||||
Websites | 58,119 | 249,530 | |||||
244,168 | 337,836 |
Amortization expense included in administrative and other operating expenses for the three months and nine months ended September 30, 2007 and September 30, 2006 are $30,977, $92,884, $38,552, and $115,965, respectively.
14. Other payables and accrued liabilities
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Accrued expenses | 42,498 | 181,352 | |||||
Sales deposits received | 8,993 | 9,006 | |||||
51,491 | 190,358 |
20
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
15. Advance from a related party
Advance from a related party for working capital is as follows:
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Advance from a director | 12,268 | - |
The advance is interest-free, unsecured and has no fixed repayment terms.
16. Bank borrowings
As of | |||||||
September 30, | December 31, | ||||||
2007 | 2006 | ||||||
(Unaudited) | (Audited) | ||||||
$ | $ | ||||||
Secured: | |||||||
Bank overdrafts repayable on demand | 591,908 | 551,714 | |||||
Repayable within one year | |||||||
Short-term bank loans | 283,956 | 1,469,866 | |||||
Other bank borrowings | 14,320,594 | 11,183,587 | |||||
15,196,458 | 13,205,167 |
As of September 30, 2007, the above banking borrowings were secured by the following:
(a) | first fixed legal charge over leasehold land and buildings with carrying amounts of $1,128,788 (notes 10 and 11); |
(b) | charge over bank deposits of $5,808,641; |
(c) | charge over held-to-maturity investments of $300,711 (note 12); |
(d) | personal guarantee executed by a director of the Company; and |
(e) | other financial covenant :- |
The bank borrowings require one of the Company’s subsidiaries to maintain a minimum net worth of $3,854,060. The Company’s subsidiary was in compliance with this requirement at September 30, 2007.
21
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
17. Common stock and convertible preferred stock
A reconciliation of certain of the equity accounts of SRKP 9, Inc. and Times Manufacture as a result of the reverse merger is as follows:
Series A Convertible Preferred Stock | Common Stock | Additional | ||||||||||||||||||||
($0.0001 Par Value) | ($0.0001 Par Value) | Paid-In | ||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Total | |||||||||||||||||
Balances, December 31, 2006 | 0 | $ | 0 | 19,454,420 | $ | 1,946 | $ | 654,298 | $ | 656,244 | ||||||||||||
Jan 23, 2007 | Shares issued to SRKP 9 founders at inception: | |||||||||||||||||||||
Originally issued on Jan 23, 2007 | ||||||||||||||||||||||
Deemed issued on Jan 23, 2007 for reverse merger purposes | 2,700,000 | 270 | (270 | ) | 0 | |||||||||||||||||
Issued in connection with 1.371188519 - for -1 retroactive | ||||||||||||||||||||||
stock split | 1,002,209 | 100 | (100 | ) | 0 | |||||||||||||||||
Jan 23, 2007 | Adjustment to SRKP 9 accounts to reflect reverse merger | (7,999 | ) | (7,999 | ) | |||||||||||||||||
Jan 23, 2007 | Gross proceeds from shares sold in offering – initial closing | 1,749,028 | 175 | 2,256,071 | 2,256,246 | |||||||||||||||||
Jan 23, 2007 | Offering costs – initial closing (9% of gross) | (203,062 | ) | (203,062 | ) | |||||||||||||||||
Feb 9, 2007 | Gross proceeds from shares sold in offering – final closing | 501,320 | 50 | 646,651 | 646,701 | |||||||||||||||||
Feb 9, 2007 | Offering costs – initial closing (9% of gross) | (58,203 | ) | (58,203 | ) | |||||||||||||||||
Balances, September 30, 2007 | 2,250,348 | $ | 225 | 23,156,629 | $ | 2,316 | $ | 3,287,386 | $ | 3,289,927 | ||||||||||||
22
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
17. Common stock and convertible preferred stock (continued)
The Company conducted a private placement (“Private Placement”) pursuant to subscription agreements (the “Subscription Agreement”) entered into by the Company and certain investors. Pursuant to the Private Placement, the Company sold an aggregate of 2,250,348 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) at $1.29 per share for an aggregate gross proceeds of $2,902,947.
At the initial closing of the Private Placement on January 23, 2007, the Company sold an aggregate of 1,749,028 shares of Series A Preferred Stock. At the second and final closing of the Private Placement on February 9, 2007, the Company sold an aggregate of 501,320 shares of Series A Preferred Stock.
Each share of the Company’s Series A Preferred Stock is convertible into shares of common stock at a conversion price equal to the share purchase price, subject to adjustments.
If the Company at any time prior to the first trading day on which the common stock is quoted on the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market or the New York Stock Exchange (each a “Trading Market”) sells or issues any shares of common stock in one or a series of transactions at an effective price less than such conversion price where the aggregate gross proceeds to the Company are at least $1.0 million, then the aforementioned conversion price shall be reduced to such effective price. Each share of Series A Convertible Preferred Stock shall automatically convert into shares of common stock if (i) the closing price of the common stock on the Trading Market for any 10 consecutive trading day period exceeds $3.00 per share, (ii) the shares of common stock underlying the Series A Convertible Preferred Stock are subject to an effective registration statement, and (iii) the daily trading volume of the common stock on a Trading Market exceeds 25,000 shares per day for 10 out of 20 prior trading days.
The Company agreed to file a registration statement covering the common stock underlying the Series A Convertible Preferred Stock sold in the Private Placement within 30 days of the closing of the Share Exchange pursuant to the Subscription Agreement with each investor.
The Company agreed to a penalty provision with respect to its obligation to register the Series A Convertible Preferred Stock. If the Company fails to register the Series A Convertible Preferred Stock due to failure on the part of the Company, the Company will pay to the holders of Series A Convertible Preferred Stock a cash payment equal to 0.0333% of the purchase price of their respective shares for each business day of the failure. There is no maximum potential consideration to be transferred. The Company is required to file the registration statement no later than thirty days after the consummation of the Private Placement and agreed to use reasonable best efforts to cause such Registration Statement to become effective within one hundred and fifty (150) days after the closing of the Private Placement, or one hundred eighty (180) days if the Registration Statement is subject to a full review by the SEC. The Company is also required to use its reasonable best effort to maintain the Registration Statement effective for a period of twenty-four (24) months at the Company’s expense.
The investors in the Private Placement also entered into a lock up agreement pursuant to which they agreed not to sell their shares until our common stock begins to be listed or quoted on the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after which their shares will automatically be released from the lock up every 30 days on a pro rata over a nine month period beginning on the date that is 30 days after listing or quotation of the shares.
In connection with the Private Placement, Kwong Kai Shun, the Company’s Chairman of the Board, Chief Executive Officer and Chief Financial Officer, entered into an agreement with the investors in the Private Placement pursuant to which Mr. Kwong agreed to place 2,326,000 shares of his company common stock in escrow for possible distribution to the investors (the “Escrow Shares”). Pursuant to the agreement, if the Company’s annual net income for 2006 or 2007 as set forth in its filings with the SEC is less than $6.3 million or $7.7 million, respectively, a portion if not all of the Escrow Shares will be transferred to the investors based upon the Company’s actual net income, if any, for such fiscal years. In addition, Mr. Kwong has agreed to purchase all shares of Series A Preferred Stock then held by such investors at a per-share purchase price of $1.29 if the Company’s common stock fails to be listed or quoted for trading on the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market or the New York Stock Exchange on or before June 30, 2007, a date that was subsequently extended. The number of shares Mr. Kwong will distribute to shareholders will be determined by the number of common stock that have not been sold by the investors multiplied by the shortfall in a valuation agreed upon by the parties. The agreed upon shortfall in valuation is calculated using the $1.29 purchase price per share of the common stock, the actual amount of net income for either 2006 or 2007 and a price earning ratio set at 5 for 2006 and 4 for 2007. In no circumstances will the shares distributed by Mr. Kwong exceed 2,326,000. Each shareholder will receive a pro rata amount of shares based on the number of the shares that they hold at the time of distribution. In the event that Mr. Kwong transfers shares to investors, it is anticipated that the transfer will be effected under an exemption from registration pursuant to the Securities Act of 1933, as amended.
23
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
17. Common stock and convertible preferred stock (continued)
If the Company pays a stock dividend on the shares of common stock, subdivide outstanding shares of common stock into a larger number of shares, combine, through a reverse stock split, outstanding shares of the common stock into a smaller number of shares or issues, in the event of a reclassification of shares of the common stock, any shares of capital stock, then the conversion price of the Series A Preferred Stock will be adjusted as follows: the conversion price will be multiplied by a fraction, of which (i) the numerator will be the number of shares of common stock outstanding immediately before one of the events described above and (ii) the denominator will be the number of shares of common stock outstanding immediately after such event.
Holder of the Series A Convertible Preferred Stock have the right to one vote per share of common stock issuable upon conversion of the shares underlying any shares of Preferred Stock outstanding as of the record date for purposes of determining which holders have the right to vote with respect to any matters brought to a vote before the Company’s holders of common stock.
In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A Convertible Preferred Stock are entitled to receive in preference to the holders of common stock an amount per share of $1.29 plus any accrued but unpaid dividends. If the Company’s assets are insufficient to pay the above amounts in full, then all of the Company’s assets will be ratably distributed among the holders of the Series A Convertible Preferred Stock in accordance with the respective amounts that would be payable on such shares if all amounts payable were paid in full.
There are no additional specific dividend rights or redemption rights of holders of the Series A Convertible Preferred Stock.
If the Company redeems or acquired any shares of the Series A Convertible Preferred Stock are converted, those shares will resume the status of authorized but unissued shares of preferred stock and will no longer be designated as Series A Convertible Preferred Stock.
As long as any shares of Series A Convertible Preferred Stock are outstanding, the Company cannot alter or adversely change the powers, preference or rights given to the Series A Convertible Preferred Stock holders, without the affirmative vote of those holders.
24
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
18. Pension plans
The Company participates in a defined contribution pension scheme under the Mandatory Provident Fund Schemes Ordinance “MPF Scheme” for all its eligible employees in Hong Kong.
The MPF Scheme is available to all employees aged 18 to 64 with at least 60 days of service in the employment in Hong Kong. Contributions are made by the Company’s subsidiary operating in Hong Kong at 5% of the participants’ relevant income with a ceiling of HK$20,000. The participants are entitled to 100% of the Company’s contributions together with accrued returns irrespective of their length of service with the Company, but the benefits are required by law to be preserved until the retirement age of 65. The only obligation of the Company with respect to MPF Scheme is to make the required contributions under the plan.
The assets of the schemes are controlled by trustees and held separately from those of the Company. Total pension cost was $20,074, $32,597, $13,627 and $22,619 for the three months and nine months ended September 30, 2007 and 2006, respectively.
19. Commitments and contingencies
Operating leases commitments
The Company leases office premises under various non-cancelable operating lease agreements that expire at various dates through years 2007 to 2008, with an option to renew the lease. All leases are on a fixed repayment basis. None of the leases includes contingent rentals. Minimum future commitments under these agreements payable as of September 30, 2007 are as follows :-
Period ending September 30, | $ | |||
2008 | 79,636 | |||
2009 | 12,759 | |||
92,395 |
Rental expenses for the three months and nine months ended September 30, 2007 and 2006 were $16,142, $66,444, $7,225 and $57,527, respectively.
25
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
20. Segment Information
For management purposes, the Company is currently organized into two principal activities - sale of watch movements (components) and sale of completed watches. These principal activities are the basis on which the Company reports its primary segment information.
Three months ended | Watch | Completed | ||||||||
September 30, 2007 | Movements | Watches | Total | |||||||
$ | $ | $ | ||||||||
Sales | 18,366,450 | 4,606,195 | 22,972,645 | |||||||
Cost of sales | (15,636,299 | ) | (2,462,887 | ) | (18,099,186 | ) | ||||
Segment result | 2,730,151 | 2,143,308 | 4,873,459 |
Three months ended | Watch | Completed | ||||||||
September 30, 2006 | Movements | Watches | Total | |||||||
$ | $ | $ | ||||||||
Sales | 17,340,582 | 2,306,627 | 19,647,209 | |||||||
Cost of sales | (15,491,510 | ) | (1,238,542 | ) | (16,730,052 | ) | ||||
Segment result | 1,849,072 | 1,068,085 | 2,917,157 |
Nine months ended | Watch | Completed | ||||||||
September 30, 2007 | Movements | Watches | Total | |||||||
$ | $ | $ | ||||||||
Sales | 56,600,993 | 8,359,231 | 64,960,224 | |||||||
Cost of sales | (50,171,327 | ) | (4,472,729 | ) | (54,644,056 | ) | ||||
Segment result | 6,429,666 | 3,886,502 | 10,316,168 |
Nine months ended | Watch | Completed | ||||||||
September 30, 2006 | Movements | Watches | Total | |||||||
$ | $ | $ | ||||||||
Sales | 55,217,795 | 7,656,600 | 62,874,395 | |||||||
Cost of sales | (52,489,144 | ) | (4,021,802 | ) | (56,510,946 | ) | ||||
Segment result | 2,728,651 | 3,634,798 | 6,363,449 |
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ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
20. Segment Information (continued)
The Company’s operations are conducted primarily in Hong Kong and China and the Company’s sales, gross profit and total assets attributable to other geographical areas are less than 10% of the Company’s corresponding consolidated totals for the three months and nine months ended September 30, 2007 and 2006. Consequently, no segment information by geographical areas is presented.
21. Subsequent Events
On November 13, 2007, the Company closed a financing transaction under Regulation S with ABN AMRO Bank N.V. (the “Subscriber”) issuing (i) US $8,000,000 Variable Rate Convertible Bonds due 2012 (the “Bonds”) and (ii) warrants to purchase 600,000 shares of common stock of the Company expiring 2010 (the “Warrants”). The financing transaction was completed in accordance with a subscription agreement entered into by the Company and the Subscriber dated October 31, 2007.
US $8,000,000 Variable Rate Convertible Bonds
The Bonds were issued further to a trust deed between the Company and The Bank of New York, London Branch, dated November 13, 2007 (the “Trust Deed”) and are represented by the global certificate in the form as set forth in the Trust Deed. The Bonds are subject to a paying and conversion agency agreement between the Company, The Bank of New York, and The Bank of New York, London Branch. The Bonds were subscribed at a price equal to 97% of their principal amount, which is the issue price of 100% less a 3% commission to the Subscriber. The Terms and Conditions of the Bonds (the “Terms”) contained in the Trust Deed, set forth, among other things, the following terms:
· | The Bonds bear cash interest from November 13, 2007 at the rate of 6% per annum for the first year after November 13, 2007 and 3% per annum thereafter, of the principal amount of the Bonds. |
· | Each Bond is convertible at the option of the holder at any time on and after 365 days after the date the Company’s shares of common stock commence trading on the American Stock Exchange or any alternative stock exchange (the “Listing Date”) into shares of common stock of the Company at an initial per share conversion price (“Conversion Price”) equal to the price per share at which shares are sold in the Company’s proposed initial public offering on the American Stock Exchange (“AMEX”) with minimum gross proceeds of US$2,000,000. If no initial public offering has occurred prior to conversion, the Conversion Price will be US$2.00, subject to adjustment according to the Terms of the Bonds. No Bonds may be converted after the close of business on November 13, 2012, or if such Bond is called for redemption before the maturity date, then up to the close of business on a date no later than seven business days prior to the date fixed for redemption thereof. |
27
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
21. | Subsequent Events (continued) |
· | The number of shares of the Company’s common stock to be issued on conversion of the Bonds will be determined by dividing the principal amount of each Bond to be converted by the Conversion Price in effect at the conversion date. The Conversion Price is subject to adjustment in certain events, including the Company’s issuance of additional shares of common stock or rights to purchase common stock at a per share or per share exercise or conversion price, respectively, at less than the applicable Conversion Price of the Bonds. If for the period of 20 consecutive trading days immediately prior to November 13, 2009 or September 29, 2012, the Conversion Price for the Bonds is higher than the average closing price for the shares, then the Conversion Price will be reset to such average closing price; provided that, the conversion price will not be reset lower than 70% of the then existing conversion price. In addition, the Trust Deed provides that the Conversion Price of the Bonds cannot be adjusted to lower than $0.25 per share of common stock (as adjusted for stock splits, stock dividends, spin-offs, rights offerings, recapitalizations and similar events). |
· | If on or before November 13, 2008, (i) the Company common stock is not listed on AMEX or the New York Stock Exchange or NASDAQ or (ii) the Bonds, Warrants, and shares underlying the Bonds and Warrants are not registered with the Securities and Exchange Commission (the “SEC”), the holder of the Bonds can require the Company to redeem the Bonds at 106.09% of their principal amount. Also, at any time after November 13, 2010, the holders of the Bonds can require the Company to redeem the Bonds at 126.51% of their principal amount. The Company is required to redeem any outstanding Bonds at 150.87% of its principal amount on November 13, 2012. |
Warrants to Purchase 600,000 Shares of Common Stock
The Warrants, which are evidenced by a warrant instrument entered into by and between the Company and the Subscriber, dated November 13, 2007 (the “Warrant Instrument”), are subject to the terms of a warrant agency agreement by and among the Company, The Bank of New York and The Bank of New York, London Branch, dated November 13, 2007 (the “Warrant Agency Agreement”).
Pursuant to the terms and conditions of the Warrant Instrument and Warrant Agency Agreement, the Warrants are exercisable at $0.0001 per share and terminate on November 13, 2010. The Company has agreed to list the shares underlying the Warrants on AMEX, or any alternative stock exchange by November 13, 2008. In addition, the Company has agreed to register the shares of common stock underlying the Warrants with the SEC on or prior to November 13, 2008 and will keep the registration effective until 30 days after the Warrants terminate.
Registration Rights
On November 13, 2007, the Company and the Subscriber also entered into a registration rights agreement pursuant to which the Company agreed to register the Bonds and Warrants, and the shares of common stock underlying the Bonds and Warrants (the “Registrable Securities”). The Company agreed to prepare and file with the SEC, no later than 90 days after the Listing Date, a Registration Statement on Form S-1 (the “Registration Statement”) to register the Registrable Securities and, as promptly as possible, and in any event no later than 365 days after the Listing Date, cause that Registration Statement, as amended, to become effective. In addition, the Company agreed to list all Registrable Securities covered by the Registration Statement on each securities exchange on which similar securities issued by the Company are then listed. The registration rights agreement does not provide for liquidated or specified damages in the event the Company does not timely register the Registrable Securities.
28
ASIA TIME CORPORATION
(Formerly SRKP 9, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Stated in US Dollars)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
21. | Subsequent Events (continued) |
Accounting for Bonds and Warrants
At November 13, 2007, the date of issuance, the Company determined the fair value of the Bonds to be $4,214,240 net of discounts for the Warrants and conversion feature values. The Warrants and the beneficial conversion feature were valued at$1,892,880 and $1,652,880, respectively, which were determined for the Warrants using under the Black-Scholes valuation method using the relative fair value method and for the beneficial conversion feature using a price of $3.50 per share based on the mid-point of the expected public offering price . The value of the Warrants and beneficial conversion feature are subject to adjustment based on the actual public offering price when the Company completes its offering. These amounts will be included in additional paid in capital respectively in accordance with guidance of APB 14 and EITF No. 98-5. Accordingly, the Bond discount will be recorded as interest expense, using the interest method over the 5 years term of the debt.
As indicated above, the Company will redeem each bond at 150.87% of its principal amount on November 13, 2012 (the maturity date). Based on this commitment, the Company has determined the total redemption premium to be $4,069,680, which is an addition to the original face value of the Bonds of $8,000,000. This redemption premium will be amortized to interest expense over the term of the Bonds by the interest method.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this quarterly report. This report contains forward-looking statements. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this quarterly report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
Overview
We are a distributor of watch movements components used in the manufacture and assembly of watches to a wide variety of timepiece manufacturers. There are two categories of watch movements, quartz and mechanical. The main parts of an analog quartz watch movement are the battery; the oscillator, a piece of quartz that vibrates in response to the electric current; the integrated circuit, which divides the oscillations into seconds; the stepping motor, which drives the gear train; and the gear train itself, which makes the watch’s hands move. A digital watch movement has the same timing components as an analog quartz movement but has no stepping motor or gear train. To a lesser extent we also distribute complete analog-quartz and automatic watches with pricing between $20.00 to $50.00. Manufacturing for these watches is currently outsourced to third party factories in China.
Our core customer base consists primarily of large wholesalers, online retailers and small and medium-sized watch manufacturers that produce watches primarily for sale to customers in Hong Kong and China. To a lesser extent, we design watches for manufacturers and exporters of watches and manufacture and distribute complete watches primarily to online retailers and internet marketers.
We are mainly engaged in watch movement distribution business in Hong Kong and China which accounted for approximately 90% of our revenue for the year ended December 31, 2006 and for the nine months ended September 30, 2007. We have distribution centers and strategically located sales offices throughout Hong Kong and the People’s Republic of China (“China” or “PRC”). We distribute more than 350 products from over 30 vendors, including such market leaders as Citizen Group, Seiko Corporation and ETA SA Manufacture Horlogere Suisse, to a base of over 300 customers primarily through our direct sales force. To enhance our ability to distribute watch movements we provide a variety of value-added services, including automated inventory management services; integration, design and development, management, and extended and post-sale support services.
Recent Events
On November 13, 2007, we closed a financing transaction under Regulation S with ABN AMRO Bank N.V. (the “Subscriber”) issuing (i) US $8,000,000 Variable Rate Convertible Bonds due 2012 (the “Bonds”) and (ii) warrants to purchase 600,000 shares of our common stock expiring 2010 (the “Warrants”). The financing transaction was completed in accordance with a subscription agreement entered into by us and the Subscriber dated October 31, 2007.
US $8,000,000 Variable Rate Convertible Bonds
The Bonds were issued further to a trust deed between us and The Bank of New York, London Branch, dated November 13, 2007 (the “Trust Deed”) and are represented by the global certificate in the form as set forth in the Trust Deed. The Bonds are subject to a paying and conversion agency agreement between us, The Bank of New York, and The Bank of New York, London Branch. The Bonds were subscribed at a price equal to 97% of their principal amount, which is the issue price of 100% less a 3% commission to the Subscriber. The Terms and Conditions of the Bonds (the “Terms”) contained in the Trust Deed, set forth, among other things, the following terms:
· | Interest. The Bonds bear cash interest from November 13, 2007 at the rate of 6% per annum for the first year after November 13, 2007 and 3% per annum thereafter, of the principal amount of the Bonds. |
· | Conversion. Each Bond is convertible at the option of the holder at any time on and after 365 days after the date our shares of common stock commence trading on the American Stock Exchange or any alternative stock exchange (the “Listing Date”) into shares of common our stock at an initial per share conversion price (“Conversion Price”) equal to the price per share at which shares are sold in our proposed initial public offering on the American Stock Exchange (“AMEX”) with minimum gross proceeds of US$2,000,000. If no initial public offering has occurred prior to conversion, the Conversion Price will be US$2.00, subject to adjustment according to the Terms of the Bonds. No Bonds may be converted after the close of business on November 13, 2012, or if such Bond is called for redemption before the maturity date, then up to the close of business on a date no later than seven business days prior to the date fixed for redemption thereof. |
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· | Conversion Price Adjustments. The number of shares of our common stock to be issued on conversion of the Bonds will be determined by dividing the principal amount of each Bond to be converted by the Conversion Price in effect at the conversion date. The Conversion Price is subject to adjustment in certain events, including our issuance of additional shares of common stock or rights to purchase common stock at a per share or per share exercise or conversion price, respectively, at less than the applicable Conversion Price of the Bonds. If for the period of 20 consecutive trading days immediately prior to November 13, 2009 or September 29, 2012, the Conversion Price for the Bonds is higher than the average closing price for our shares, then the Conversion Price will be reset to such average closing price; provided that, the Conversion Price will not be reset lower than 70% of the then existing Conversion Price. In addition, the Trust Deed provides that the Conversion Price of the Bonds cannot be adjusted to lower than $0.25 per share of common stock (as adjusted for stock splits, stock dividends, spin-offs, rights offerings, recapitalizations and similar events). |
· | Mandatory Redemptions. If on or before November 13, 2008, (i) our common stock is not listed on AMEX or the New York Stock Exchange or NASDAQ or (ii) the Bonds, Warrants, and shares underlying the Bonds and Warrants are not registered with the Securities and Exchange Commission (the “SEC”), the holder of the Bonds can require us to redeem the Bonds at 106.09% of their principal amount. Also, at any time after November 13, 2010, the holders of the Bonds can require us to redeem the Bonds at 126.51% of their principal amount. We are required to redeem any outstanding Bonds at 150.87% of its principal amount on November 13, 2012. |
Warrants to Purchase 600,000 Shares of Common Stock
The Warrants, which are evidenced by a warrant instrument entered into by and between us and the Subscriber, dated November 13, 2007 (the “Warrant Instrument”), are subject to the terms of a warrant agency agreement by and among us, The Bank of New York and The Bank of New York, London Branch, dated November 13, 2007 (the “Warrant Agency Agreement”).
Pursuant to the terms and conditions of the Warrant Instrument and Warrant Agency Agreement, the Warrants are exercisable at $0.0001 per share and terminate on November 13, 2010. We have agreed to list the shares underlying the Warrants on AMEX, or any alternative stock exchange by November 13, 2008. In addition, we have agreed to register the shares of common stock underlying the Warrants with the SEC on or prior to November 13, 2008 and will keep the registration effective until 30 days after the Warrants terminate.
Registration Rights
On November 13, 2007, we and the Subscriber also entered into a registration rights agreement pursuant to which we agreed to register the Bonds and Warrants, and the shares of common stock underlying the Bonds and Warrants (the “Registrable Securities”). We agreed to prepare and file with the SEC, no later than 90 days after the Listing Date, a Registration Statement on Form S-1 (the “Registration Statement”) to register the Registrable Securities and, as promptly as possible, and in any event no later than 365 days after the Listing Date, cause that Registration Statement, as amended, to become effective. In addition, we agreed to list all Registrable Securities covered by the Registration Statement on each securities exchange on which similar securities issued by us are then listed. The registration rights agreement does not provide for liquidated or specified damages in the event we do not timely register the Registrable Securities.
Accounting for the Bond and Warrant Transaction
The terms of Bonds include conversion features allowing the holders to convert the Bonds into shares of our common stock. Certain of those conversion features that allow for the reduction in conversion price upon the occurrence of stated events constitute a “beneficial conversion feature” for accounting purposes. In addition, we may be required to repurchase the Bonds at the request of the holders if certain events occur or do not occur, as set forth in the Bond trust deed. Upon the occurrence of any of the events that trigger a mandatory redemption, as described above, and we are requested by the holders to repurchase all or a portion of the Bonds, we will be required to pay cash to redeem all or a portion of the Bonds.
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The accounting treatment related to the beneficial conversion and mandatory redemption features of the Bonds and the value of the Bond Warrants will have an adverse impact on our results of operations for the term of the Bonds. The application of Generally Accepted Accounting Principles required us to allocate $1,652,880 to the beneficial conversion feature of the Bonds and $1,892,880 to the Bonds Warrants, which have been reflected in our financial statements as an interest discount. Also, we have determined that the total redemption premium associated with the mandatory redemption feature of the Bonds is $4,069,680. All of the aforementioned amounts associated with the beneficial conversion and mandatory redemption feature of the Bonds and the value of the Bond Warrants are being amortized as additional interest expense over the term of the Bonds. This accounting will result in an increase in interest expense in all reporting periods during the term of the Bonds, and, as a result, reduce our net income accordingly.
In addition, if we are required to redeem all or any portion of the Bonds, this may have a material adverse effect on our liquidity and cash resources, and may impair our ability to continue to operate. If we are required to repurchase all or a portion of the Bonds and do not have sufficient cash to make the repurchase, we may be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price.
Corporate Structure
We were incorporated in the State of Delaware on January 3, 2006. We were originally organized as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On January 23, 2007, we closed a share exchange transaction (“Share Exchange”) pursuant to which we (i) issued 19,454,420 shares of our common stock to acquire 100% equity ownership of Times Manufacture & E-Commerce Corporation Limited, a British Virgin Islands corporation (“Times Manufacture”), which has eight wholly-owned subsidiaries, (ii) assumed the operations of Times Manufacture and its subsidiaries, and (iii) changed our name from SRKP 9, Inc. to Asia Time Corporation. Times Manufacture also paid an aggregate of $350,000 to the stockholders of SRKP 9, Inc. Times Manufacture was founded in January 2002 and is based in Hong Kong.
In 2005, we re-aligned the structure and business functions of our subsidiaries to clearly define the scopes our business objectives in order to strengthen our ability to effectively conduct our business operations. Billion Win International Enterprise Limited, or Billion Win, is our central sourcing component. Billion Win, which is held indirectly through Times Manufacture, procures and imports watch movements and distributes them to suppliers, volume users in China, and two of our subsidiaries, Goldcome Industrial Limited, or Goldcome, and Citibond Industrial Limited, or Citibond. Goldcome mainly focuses it distributions to wholesalers and large manufacturers and Citibond focuses on distributions to small to medium size manufacturers. Megamooch International Limited is a complete watch distributor and exporter targeting overseas buyers. Another two subsidiaries, TME Enterprise Ltd. and Citibond Design Ltd., are responsible for complete watch design for manufacturers and exporters and handles large volume watch movement transactions between buyers and sellers solely on a commission basis. Megamooch Online Ltd. operations are focused on complete watch marketing and distribution, with manufacturing being outsourced, and it concentrates on overseas markets.
Watch Movement Segment
Presently, Hong Kong does not generally have watch movement manufacturing. Watch movements are largely imported from Japan and Switzerland. The revenue for the watch movement segment of our business for the nine months ended September 30, 2007 was $56.6 million, with a gross profit $6.4 million, a 2.5% and 135.3% increase, respectively, as compared to $55.2 million in revenue and $2.7 million in gross profit for the nine months ended September 30, 2006. The gross profit margin increased to 11.4% for the nine months ended September 30, 2007 from 4.9% for the same period in 2006, primarily due to more diversified products being promoted to customers and higher selling prices as a result of extended credit terms to our customers. We provide a wide product spectrum of products carrying major brands as well as middle-low end China movements. We believe carrying a wide product spectrum enables us to provide a convenient one-stop provider for our customers, which may result in higher sales per customer. We began to target small to medium manufacturers in mid-2005 and our customer base has expanded to more than 300 watch manufacturers. In addition, we have extended our credit period from an average to 30 days to 60 days to major customers that have maintained a history of timely settlement of receivables. We believe that this extension lead to an increase of purchase orders from those customers. We review the credit status of each customer and periodically adjust the credit period to specific customers in an attempt to maximize business with each customer without suffering significant credit risk.
Complete Watch Segment
Revenue of our complete watch segment was $8.4 million for the nine months ended September 30, 2007, a 9.2% increase compared to the same period in 2006 in which revenue was $7.7 million. This segment contributed approximately 12.9% of our revenue for the nine months ended September 30, 2007, as compared to 12.2% of revenue for the period ended September 30, 2006. Our main market positioning in China is on the middle-class adult, daily, sporty and classy design.
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Critical Accounting Policies and Estimates
Financial Reporting Release No. 60 recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. The Securities and Exchange Commission (“SEC”) defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates on historical experience, actuarial valuations and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements. The accounting principles we utilized in preparing our consolidated financial statements conform in all material respects to generally accepted accounting principles in the United States of America.
Accounting for the impairment of long-lived assets
The long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell.
Inventories
Our inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. It excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
We evaluate our inventories for excess, obsolescence or other factors rendering inventories as unsellable at normal gross profit margins. Write-downs are recorded so that inventories reflect the approximate market value and take into account our contractual provisions with our suppliers governing price protections and stock rotations. Due to the large number of transactions and complexity of managing the process around price protections and stock rotations, estimates are made regarding the valuation of inventory at market value.
In addition, assumptions about future demand, market conditions and decisions to discontinue certain product lines can impact the decision to write-down inventories. If assumptions about future demand change and/or actual market conditions are different than those projected by management, additional write-downs of inventories may be required. In any case, actual results may be different than those estimated.
Trade receivables
Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the income statement.
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Foreign currency translation
Our consolidated financial statements are presented in United States dollars. Our functional currency is the Hong Kong Dollar (HKD). Our consolidated financial statements are translated into United States dollars from HKD at period-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
Revenue recognition
Revenue is recognized according to the terms of the sale arrangement, which is customarily when the customer receives title to the goods, generally upon delivery. Revenue is recorded on a gross basis, since we are responsible for fulfillment, including the acceptability of the products ordered by the customer. Management believes that adequate controls are in place to ensure compliance with sale arrangements, a substantial history of such performance has been established, and historical returns and allowances have not been significant. Our revenue recognition policy is with respect to the following two product categories: watch movements and completed watches. Our sales arrangements do not have multiple-deliverable arrangements as described in EITF 00-21.
Deferred income tax
We account for income tax using an asset and liability approach and allow for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for 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. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to realize its benefits, or that future realization is uncertain.
Recent accounting pronouncements
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. We are currently evaluating the effect, if any, of SFAS 157 on its financial statements. Although we will continue to evaluate the provisions of SFAS No.157, management currently does not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.
On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of SFAS No. 115.” The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS. No.157. We have not chosen to early adopt this statement. Although we will continue to evaluate the provisions of SFAS No.159, management currently does not believe the adoption of SFAS No. 159 will have a material impact on our consolidated financial statements.
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Results of Operations
The following table sets forth certain items in our statement of operations as a percentage of net sales for the periods shown:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
Cost of sales | 78.8 | % | 85.1 | % | 84.1 | % | 89.9 | % | |||||
Gross profit | 21.2 | % | 14.9 | % | 15.9 | % | 10.1 | % | |||||
Other income | 0.2 | % | 0.2 | % | 0.2 | % | 0.2 | % | |||||
Depreciation | 0.3 | % | 0.4 | % | 0.3 | % | 0.4 | % | |||||
Administrative and other operation expenses | 2.1 | % | 1.8 | % | 2.2 | % | 1.6 | % | |||||
Income from operations | 19.0 | % | 12.9 | % | 13.6 | % | 8.3 | % | |||||
Fees and costs related to reverse merger | - | - | 1.1 | % | - | ||||||||
Other income | 0.2 | % | 0.3 | % | 0.2 | % | 0.3 | % | |||||
Interest expense | 1.4 | % | 1.4 | % | 1.3 | % | 1.2 | % | |||||
Income before taxes | 17.8 | % | 11.8 | % | 11.4 | % | 7.4 | % | |||||
Income taxation | 3.3 | % | 2.1 | % | 2.3 | % | 1.3 | % | |||||
Net income | 14.5 | % | 9.7 | % | 9.1 | % | 6.1 | % |
Comparison of the three months ended September 30, 2007 with the three months ended September 30, 2006
Net sales for the three months ended September 30, 2007 was $23.0 million as compared to $19.7 million for the comparable period in 2006, an increase of $3.3 million, or 16.9%. This increase was primarily due to an increase in the sales of both completed watches and watch movements. Net sales of movements was $18.4 million for the three months ended September 30, 2007, accounting for approximately 79.9% of our total sales for the period, an increase of 5.9% as compared to $17.3 million for the comparable period in 2006. The increase was primarily attributable to an increase in volume of movements, which increased from 24.4 million pieces to 26.1 million pieces in the comparable three month period in 2006 and 2007, respectively. The increase in the volume of movements was primarily due to the increase in sale of high-end items. Sales of completed watches for the three months ended September 30, 2007, was $4.6 million as compared to $2.3 million for the comparable period in 2006, an increase of 99.7%. The increase was due to an increase in sales volume from 0.26 million pieces to 0.54 million pieces in the comparable periods in 2007 and 2006, respectively. The increase in volume of completed watches was primarily due to our new product launch from during the third quarter.
Cost of sales for the three months ended September 30, 2007 was $18.1 million, or 78.8% of net sales, as compared to $16.7 million, or 85.1% of net sales, for the same period in 2006. The decrease in cost of sales as a percentage of net sales was largely attributable to the improved economies of scale and an increase in rebate receivables of $1.0 million for the three months ended September 30, 2007. The increase in rebate receivables was primarily due to the increase of sales in the third quarter of 2007.
Gross profit for the three months ended September 30, 2007 was $4.9 million, or 21.2% of net sales, compared to $2.9 million, or 14.9% of net sales for the same period in 2006. The increase in our gross profit margin was primarily attributable to the increase in sales of higher-margin products as a result of diversification of products, a decrease in costs due to rebate receivables in the three months ended September 30, 2007, and improved economies of scale. Gross profit margins are usually a factor of product mix and demand for product. The gross profit margin of watch movements increased from 10.7% for the three months ended September 30, 2006 as compared to 14.9% of net sales for same period in 2007. The gross profit margin for completed watches for the three months ended September 30, 2007, which was 46.5% of net sales, as compared to 46.3% of net sales for the comparable period in 2006, as the product mix had no significant change.
Administrative and other operating expenses were $490,225, or 2.1% of net sales, for the three months ended September 30, 2007, as compared to $359,472, or 1.8% of net sales, for the comparable period in 2006. The increase in amount and as a percentage of net sales was primarily due to increased professional fees related to reporting requirements as a public company and additional employees and upgraded staff benefits. Management considers these expenses as a percentage of net sales to be a key performance indicator in managing our business.
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Other income from operations was $48,425, or 0.2% of net sales for the three months ended September 30, 2007, as compared to $41,724, or 0.2% of net sales for the three months ended September 30, 2006. The slight increase was primarily due to an increase in rental income, which was $15,757 for the three months ended September 30, 2007, partially offset by a decrease in income received from the license fees of intangible assets, which was $32,668 for the three months ended September 30, 2007, as compared to $41,724 for the same period in 2006.
Other income from non-operating activities was $39,555, or 0.2% of net sales, for the three months ended September 30, 2007, as compared to $55,342, or 0.3% of net sales, for the three months ended September 30, 2006. The decrease was primarily due to a decrease in bank interest income, which was $35,114 for the three months ended September 30, 2007, as compared to $47,246 for the same period in 2006 and a lack of other interest income in the comparable period in 2007.
Interest expense for the three months ended September 30, 2007 was $316,516, or 1.4% of net sales, as compared to $265,872, or 1.4% of net sales, in 2006 which was consistent in the comparable period.
Income taxes for the three months ended September 30, 2007 were $752,221, or 3.3% of net sales, as compared to $410,284 for the three months ended September 30, 2006, or 2.1% of net sales. The increase in income taxes is primarily due to an increase in the operating margin to 17.8% for the three months ended September 30, 2007 compared to an operating margin of 11.8% for the three months ended September 30, 2006.
Net income for the three months ended September 30, 2007 was $3.3 million, or 14.5% of net sales, as compared to $1.9 million, or 9.6% of the net sales for the comparable period in 2006.
Comparison of the nine months ended September 30, 2007 with the nine months ended September 30, 2006
Net sales for the nine months ended September 30, 2007 was $65.0 million as compared to $62.9 million for the comparable period in 2006, an increase of $2.1 million, or 3.3%. This increase was primarily due to an increase in sales of completed watches. Net sales of movements was $56.6 million for the nine months ended September 30, 2007, accounting for approximately 87.1% of our total sales for the period, an increase of 2.5% as compared to $55.2 million for the comparable period in 2006. The slight increase was primarily attributable to an increase in selling price, partially offset by a decrease in sales volume in the third quarter of 2007. The sales volume of movements decreased from 77.3 million pieces to 72.7 million pieces in the comparable nine month periods in 2006 and 2007, respectively. The decrease in the sales volume of movements is primarily due to the decrease in low-end items. Sales of completed watches for the nine months ended September 30, 2007, was $8.4 million as compared to $7.7 million for the comparable period in 2006, an increase of 9.2%. The increase was due to the increase in sales volume from 0.96 million pieces to 0.83 million pieces in the comparable periods in 2007 and 2006, respectively.
Cost of sales for the nine months ended September 30, 2007 was $54.6 million, or 84.1% of net sales, as compared to $56.5 million, or 89.9% of net sales, for the same period in 2006. The slight decrease in cost of sales as a percentage of net sales was largely attributable to the improved economies of scale.
Gross profit for the nine months ended September 30, 2007 was $10.3 million, or 15.9% of net sales, compared to $6.4 million, or 10.12% of net sales for the same period in 2006. The increase in our gross profit margin was primarily attributable to the increase in sales of higher-margin products as a result of diversification of products, a decrease in costs due to rebate receivables in the nine months ended September 30, 2007, and improved economies of scale. Gross profit margins are usually a factor of product mix and demand for product. The gross profit of watch movements as a percentage of net sales had increased from 4.9% for the nine months ended September 30, 2006 as compared to 11.4% of net sales for same period in 2007. The increase in gross profit margin was primarily due to an increase in sales of higher-margin items. There was a slight decrease of gross profit for completed watches for the nine months ended September 30, 2007, which was 46.5% of net sales as compared to 47.5% of net sales for the comparable period in 2006 as the product mix had no significant change.
Administrative and other operating expenses were $1.4 million, or 2.2% of net sales, for the nine months ended September 30, 2007, as compared to $971,717, or 1.6% of net sales, for the comparable period in 2006. The increase in amount and as a percentage of net sales was due to the increase in professional fees related to reporting requirements as a public company and additional employees and upgraded staff benefits. Management considers these expenses as a percentage of net sales to be a key performance indicator in managing our business.
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Fees and costs related to the reverse merger for the nine months ended September 30, 2007 were $736,197, which included the shell cost $317,000 paid to the shareholders of SRKP 9, Inc., the shell company. There were no such expenses in the same period in 2006.
Other income from operations was $145,203, or 0.2% of net sales for the nine months ended September 30, 2007, as compared to $125,504, or 0.2% of net sales for the same period in 2006. The increase was primarily due to an increase in rental income, which was $47,248 for the nine months ended September 30, 2007, partially offset by a decrease in income received from the license fees of intangible assets, which was $97,955 for the nine months ended September 30, 2007 comparable to $125,504 for the nine months ended September 30, 2006.
Other income from non-operating activities was $117,936, or 0.2% of net sales, for the nine months ended September 30, 2007, as compared to $165,638, or 0.3% of net sales, for the nine months ended September 30, 2006. The decrease was primarily due to a decrease in bank interest income, which was $112,020 for the nine months ended September 30, 2007, and $141,250 for the same period in 2006 and a lack of other interest income in the comparable period in 2007.
Interest expense for the nine months ended September 30, 2007 was $830,935, or 1.3% of net sales, as compared to $763,726, or 1.2% of net sales, in 2006 which was consistent in the comparable period.
Income taxes for the nine months ended September 30, 2007 were $1.5 million, or 2.3% of net sales, as compared to $829,593 for the nine months ended September 30, 2006, or 1.3% of net sales. The increase in income taxes is primarily due to an increase in the operating margin to 11.4% for the nine months ended September 30, 2007 compared to an operating margin of 7.4% for the nine months ended September 30, 2006.
Net income for the nine months ended September 30, 2007 was $5.9 million, or 9.1% of net sales, as compared to $3.8 million, or 6.1% of net sales for the comparable period in 2006.
Liquidity and Capital Resources
To provide liquidity and flexibility in funding our operations, we borrow amounts under bank facilities and other external sources of financing. As of September 30, 2007 we had general banking facilities amounted to $15.2 million for overdraft, letter of credit, trust receipt, invoice financing and export loans granted by nine banks. The amount increased by $2.0 million compared to $13.2 million as at September 30, 2006. Interest on the facilities ranged from minus 2.0 to 0.75% over the Bank’s Best Lending Rate of Hong Kong (Prime Rate) or Hong Kong Inter Bank Offered Rate (HIBOR). These banking facilities were secured by the leasehold properties, time deposits and held-to maturity investments of the group and personal guarantees executed by our Chairman of the Board.
On January 23, 2007, concurrently with the close of the Share Exchange, we conducted an initial closing of a private placement transaction pursuant to which we sold an aggregate of 1,749,028 shares of Series A Convertible Preferred Stock at $1.29 per share. On February 9, 2007, we conducted a second and final closing of the private placement pursuant to which we sold 501,320 shares of Series A Convertible Preferred Stock at $1.29 per share. Accordingly, a total of 2,250,348 shares of Series A Convertible Preferred Stock were sold in the private placement for an aggregate gross proceeds of $2,902,946 (the “Private Placement”). Of the gross proceeds, $50,000 is represented by a subscription receivable from one investor. WestPark Capital, Inc. (“WestPark”) acted as the placement agent for the Private Placement. For its services as placement agent, WestPark received an aggregate fee of approximately $261,265, which consisted of a commission equal to 9.0% of the gross proceeds from the financing. After commissions and expenses, we received net proceeds of approximately $2.3 million in the Private Placement.
On November 12, 2007, we completed a financing transaction pursuant to which we issued $8,000,000 Variable Rate Convertible Bonds that will be due in 2012. The Bonds were subscribed at a price equal to 97% of their principal amount, which is the issue price of 100% less a 3% commission to the Subscriber of the Bonds. The Bonds bear cash interest at the rate of 6% per annum for the first year after November 13, 2007 and 3% per annum thereafter, of the principal amount of the Bonds. Each Bond is convertible at the option of the holder at any time on and after a date that is 365 days after the date that our shares of common stock commence trading on the AMEX at an initial conversion price equal to the price per share at which shares are sold in our proposed initial public offering on AMEX with minimum gross proceeds of $2,000,000. If no initial public offering occurs prior to conversion, the conversion price per share will be $2.00, subject to adjustment in accordance with the terms and conditions of the Bonds. The conversion price is subject to adjustment in certain events, including our issuance of additional shares of common stock or rights to purchase common stock at a per share or per share exercise or conversion price, respectively, at less than the applicable per share conversion price of the Bonds. If for the period of 20 consecutive trading days immediately prior to November 13, 2009 or September 29, 2012, the conversion price for the Bonds is higher than the average closing price for the shares, then the conversion price will be reset to such average closing price; provided that, the conversion price will not be reset lower than 70% of the then existing conversion price. In addition, the Trust Deed provides that the conversion price of the Bonds cannot be adjusted to lower than $0.25 per share of common stock (as adjusted for stock splits, stock dividends, spin-offs, rights offerings, recapitalizations and similar events) except in certain instances. In connection with the issuance of the Bonds, we also issued to the Subscriber warrants to purchase 600,000 shares of our common stock. The warrants were subscribed at a price of $0.0001 per warrant, are exercisable at $0.0001 per share, and terminate on November 13, 2010.
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For the nine months ended September 30, 2007, net cash used by operating activities was approximately $3.7 million, as compared to net cash provided by operating activities of $423,364 for the comparable period in 2006. The increase in net cash used by operating activities was primarily attributable to an increase in accounts receivable of $7.3 million, an increase in prepaid expenses and other receivables of $4.3 million, partially offset by the decrease in inventories of $90,180 and an increase in net income of $5.9 million. The increase in accounts receivable was due to extended aging. The increase in prepaid expenses and other receivables was attributable to an increase in rebate receivables of $2.4 million and the deposit for a potential acquisition of plant facilities, but no acquisition has been completed as of the date of this report. The decrease in inventories was due to the decrease in inventories of completed watches. The increase in net income is due to the improved profit margin of movements segment as a result of improved economies of scale and increased selling price.
Net cash used in investing activities was $29,937 for the nine months ended September 30, 2007, compared to $1.2 million in the comparable period in 2006. The decrease in net cash used was primarily due to the decrease in expenditures for acquiring plant and equipment and no significant investment was made during the nine months ended September 30, 2007.
Net cash provided by financing activities was $3.6 million for the nine months ended September 30, 2007 and $176,304 for the comparable period in 2006. The increase in net cash provided by financing activities for the nine months ended September 30, 2007 was primarily attributable to the issuance of equity securities in a private placement in the amount of $2.6 million and an increase in net advances under short term bank borrowings of $3.2 million, partially offset by a repayment of short term bank loans of $4.0 million, and a lack of dividend payment for the nine months ended September 30, 2007.
For the nine months ended September 30, 2007 and the same period in 2006, our average inventory turnover was approximately 33 days and 28 days, respectively. The average days outstanding of our accounts receivable for the nine months ended September 30, 2007 was 50 days, as compared to 28 days for the same period in 2006. The increase in the average days outstanding of our accounts receivable was due to the change in our credit policy. Since January 2007, we have extended our credit terms from 30 days to 60 day to customers who have a good credit history in order to improve our profit margin and competitiveness. Inventory turnover and average days outstanding are key operating measures that management relies on to monitor our business.
In an attempt to reduce our reliance on third-party watch movement manufacturers, we have plans to manufacture our own brands of quartz movements and mechanical movements in-house. To manufacture our own brands of quartz and mechanical movements in-house, we would need to acquire watch movement facilities in China and invest in new equipment and research and development. We expect that up to $5.5 million will be required to obtain the equipment and facilities to manufacture branded proprietary watch movements. Our plan to acquire manufacturing facilities and equipment to manufacture our own brand of quartz and mechanical movements in-house will not take place until after the completion of our initial public offering, the proceeds of which will give us a portion of the required capital. We will be required to raise the appropriate amount of capital needed for our future operations from future equity sales or through debt financings. Failure to obtain funding when needed may force us to delay, reduce, or eliminate our plans to manufacture our own watch movement parts. We may not be able to obtain additional financial resources when necessary or on terms favorable to us, if at all, and any available additional financing may not be adequate. Moreover, new equity securities issued in financings, including any shares of Series A Convertible Preferred Stock or any new series of preferred stock authorized by our Board of Directors, may have greater rights, preferences or privileges than our existing common stock. To the extent stock is issued or options and warrants are exercised, holders of our common stock will experience further dilution.
Based on our current plans, we believe that cash on hand, cash flow from operations and funds available under our bank facilities will be sufficient to fund our capital needs for the next 12 months. However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we did not have sufficient available cash, we would have to seek additional debt or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Credit Risk. We are exposed to credit risk from our cash at bank, fixed deposits and contract receivables. The credit risk on cash at bank and fixed deposits is limited because the counterparts are recognized financial institutions. Contract receivables are subject to credit evaluations. As we are getting more new customers and offering credit terms, financial efficiency, we believe that cash flow and controlling bad debt and late payment become more and more important. We carry out thorough research through public filing records available on our new customers, coupled with the employment of business intelligence information provider, before extending any credit to new customers. Different levels of credit periods and credit limits are granted to different customers according to their size, financial position, business position and payment history, among other factors, in order to offer the right credit terms to our customers to enhance competitiveness yet manage the risk. We have not recorded bad debt since inception.
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Foreign Currency Risk. The functional currency of our company is the Hong Kong Dollar (HKD). In the future, we expect Renminbi (RMB) also to be a functional currency. Substantially all of our operations are conducted in the PRC. Our sales and purchases are conducted within the PRC in HKD and in the future will include RMB. Conversion of RMB into foreign currencies is regulated by the People’s Bank of China through a unified floating exchange rate system. Although the PRC government has stated its intention to support the value of the RMB, there can be no assurance that such exchange rate will not again become volatile or that the RMB will not devalue significantly against the U.S. Dollar. Exchange rate fluctuations may adversely affect the value, in U.S. Dollar terms, of our net assets and income derived from its operations in the PRC. In addition, the RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.
Country Risk. The substantial portion of our business, assets and operations are located and conducted in Hong Kong and China. While these economies have experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of Hong Kong and China, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations applicable to us. If there are any changes in any policies by the Chinese government and our business is negatively affected as a result, then our financial results, including our ability to generate revenues and profits, will also be negatively affected.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
As of September 30, 2007, our management, with the participation of our Chief Executive Officer, or “CEO,” and Chief Financial Officer, or “CFO,” performed an evaluation of the effectiveness and the operation of our disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2007.
(b) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d) under the Exchange Act that occurred during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 1A. RISK FACTORS
Other than the risk factors below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2006.
We recently completed a placement of convertible bonds that included a beneficial conversion feature and are mandatorily redeemable and 600,000 warrants exercisable at $0.0001 per share. The features of the bonds and the value of the warrants will have the effect of reducing our reported operating results during the term of the bonds.
In November 2007, we issued $8,000,000 Variable Rate Convertible Bonds due in 2012, or the Bonds. The terms of Bonds include conversion features allowing the holders to convert the Bonds into shares of our common stock. Certain of those conversion features that allow for the reduction in conversion price upon the occurrence of stated events constitute a “beneficial conversion feature” for accounting purposes. In addition, we may be required to repurchase the Bonds at the request of the holders if certain events occur or do not occur, as set forth in the Trust Deed. If our common stock ceases to be listed on AMEX or there is a change of control of the company as defined in the Trust Deed, each holder will have the right to require us to redeem all or part of that holder’s Bonds. If on or before November 13, 2008, the Bonds, Bond Warrants, and shares underlying the Bonds and Bond Warrants are not registered with the SEC, then holders of the Bonds can require us to redeem the Bonds at 106.09% of the principal amount of the Bonds. In addition, at any time after November 13, 2010, each holder can require us to redeem the Bonds at 126.51% of the principal amount of the Bonds and we are required to redeem any outstanding Bonds at 150.87% of its principal amount on November 13, 2012. If a triggering event occurs and we are requested by the holders to repurchase all or a portion of the Bonds, we will be required to pay cash to redeem all or a portion of the Bonds. Finally, in connection with the issuance of the Bonds, we issued the holder of the Bonds the Bond Warrants exercisable at a per share exercise price of $0.0001.
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The accounting treatment related to the beneficial conversion and mandatory redemption features of the Bonds and the value of the Bond Warrants will have an adverse impact on our results of operations for the term of the Bonds. The application of Generally Accepted Accounting Principles will require us to allocate $1,652,880, to the beneficial conversion feature of the Bonds and $1,892,880 to the Bonds Warrants, which will be reflected in our financial statements as an interest discount. In addition, we have determined that the total redemption premium associated with the mandatory redemption feature of the Bonds is $4,069,680. All of the aforementioned amounts associated with the beneficial conversion and mandatory redemption feature of the Bonds and the value of the Bond Warrants will be amortized as additional interest expense over the term of the Bonds. This accounting will result in an increase in interest expense in all reporting periods during the term of the Bonds, and, as a result, reduce our net income accordingly.
Mandatory redemption of the Bonds could have a material adverse effect on our liquidity and cash resources.
If we are required to redeem all or any portion of the Bonds, this may have a material adverse effect on our liquidity and cash resources, and may impair our ability to continue to operate. If we are required to repurchase all or a portion of the Bonds and do not have sufficient cash to make the repurchase, we may be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that we relinquish valuable rights.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 | Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ASIA TIME CORPORATION (Registrant) | ||
November 19, 2007 | By: | /s/ Kwong Kai Shun |
Kwong Kai Shun | ||
Chief Executive Officer, Chief Financial Officer and Chairman of the Board |
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