Item
4.02. Non-Reliance on Previously Issued Financial Statements or a Related
Audit
Report or Completed Interim Review.
On
February 7, 2008, the management and Board of Directors of Asia Time
Corporation, a Delaware corporation (the “Company”) concluded that the Company’s
previously issued financial statements
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(i)
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as
of and for the three months ended March 31, 2007, as included in
the
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission (the “Commission”) on May 21, 2007, as amended by Amendment No.
1 to the Quarterly Report on Form 10-Q/A filed with the Commission
on
September 26, 2007 (the “March 31, 2007 Form
10-Q”);
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(ii)
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as
of and for the three months and six months ended June 30, 2007,
as
included in the Quarterly Report on Form 10-Q filed with the Commission
on
August 20, 2007 (the “June 30, 2007 Form 10-Q”);
and
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(iii)
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as
of and for the three months and nine months ended September 30,
2007, as
included in the Quarterly Report on Form 10-Q filed with the Commission
on
November 19, 2007 (the “September 30, 2007 Form 10-Q” and collectively
with the March 31, 2007 Form 10-Q and June 30, 2007 Form 10-Q,
the
“Reports”)
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should
no
longer be relied upon as a result of the Company’s determination that it
misapplied accounting principles generally accepted in the United States
of
America during each of the periods presented in the Reports with respect
to the
accounting for stock-based compensation (the “Restatement”).
On
January 23, 2007 and February 9, 2007, the Company conducted a first and
second
closing, respectively, of a private placement pursuant to which we sold a
total
of 2,250,348 shares of Series A Convertible Preferred Stock for an aggregate
gross proceeds of $2,902,946 (the “Private Placement”). 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
dated
January 23, 2007 (the “Escrow Agreement”) with the investors in the Private
Placement pursuant to which Mr. Kwong agreed to place 2,326,000 shares of
his
common stock in escrow for possible distribution to the investors (the "Escrow
Shares"). Pursuant to the Escrow Agreement, if the Company's net income for
2006
or 2007 (subject to specified adjustments) as set forth in its filings with
the
SEC is less than $6,300,000 or $7,700,000, 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. The number of
shares
that Mr. Kwong will distribute to shareholders will be determined by the
number
of shares 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
(subject to specified adjustments) and a price earnings ratio set at 5 for
2006
and 4 for 2007. In no circumstances will Mr. Kwong be required to distribute
in
excess of 2,326,000 shares.
The
Company did not account for the Escrow Shares in any manner in the financial
statement presented in the Reports. The Company has now concluded that the
Escrow Shares should have been accounted for as the equivalent of a
performance-based compensatory stock plan between Mr. Kwong and the Company.
The
Company will account for the Escrow Shares as the equivalent of a
performance-based compensatory stock plan between the Company and Mr. Kwong.
Accordingly, the Company determined the fair value of the stock-based
compensation related to the Escrow Shares by employing a binomial tree model,
which is commonly used to value performance-based equity compensation packages.
The valuation model uses a volatility factor of 57%, a risk-free interest
rate
of 5.7%, and weekly steps to incorporate various possible scenarios for net
income and common stock price. The probability at each quarter-end represents
the probability of achieving the annual 2006 and 2007 net income targets
specified in the Escrow Agreement. This quarterly probability is a time-weighted
average of the implicit probabilities of achieving each net income target.
The
probabilities are calculated using multi-period scenario analyses through
a
backward induction tree, which generates an aggregate fair value for the
Escrow
Shares of $2,433,650. The inputs to the valuation mode are based on actual
quarterly net income and estimates made by the Company that the required
annual
net income would be equaled or exceeded.
As
the
performance conditions under this compensatory stock plan relate to the
attainment of specific defined net income milestones for both 2006 and 2007,
the
Company has determined that the appropriate period over which to recognize
the
charge to operations for the aggregate fair value of this compensatory stock
plan of $2,433,650 is the 11-month period from February 2007 through December
2007, which is the period of vesting (which is equivalent to the period of
benefit), since this is the period in which the Escrow Shares are subject
to the
Escrow
Agreement.
The
Company has allocated the $2,433,650 based on the quarterly weighted average
of
the implicit probabilities of achieving each net income target as
follows:
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Three
Months Ended
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Cumulative
Probability Factor at Quarter-End
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Amount
Charged to Operations
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March
31, 2007
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66.22
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%
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$
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1,611,563
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June
30, 2007
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67.89
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%
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40,642
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September
30, 2007
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76.12
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%
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200,289
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Total
through September 30, 2007
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$
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1,852,494
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Approximately
66% of the aggregate fair value of $2,433,650 will be charged to operations
during the three months ended March 31, 2007 because at March 31, 2007 it
appeared probable (but not certain) that the Company would meet or exceed
the
required net income for 2006, and net income for the three months ended March
31, 2007 was within expectations. For the three months ended June 30, 2007,
net
income was below the expected growth rate and annualized quarterly net income
was below the amount required to reach the 2007 required net income, as a
result
of which the probability factor at June 30, 2007 increased only slightly.
For
the three months ended September 30, 2007, net income had recovered to expected
growth rates, as a result of which the probability factor at September 30,
2007
had increased to approximately 76% that the Company would reach the 2007
required income.
The
Company met the 2006 net income requirement of $6,300,000. However, at September
30, 2007, it was still possible that the 2007 net income requirement would
not
be met. As the Company closes 2007 and completes its audit, the final expense
related to this matter for 2007 will be determined and recorded. Based on
2007
final net income (as defined), the Escrow Shares will either be partially
or
fully returned to Mr. Kwong or partially or fully distributed to the investors
in the Private Placement when the results for 2007 are known. The Company
expects to record a charge to operations of $581,156 during the three months
ended December 31, 2007 with respect to the Escrow Shares.
The
Company’s Board of Directors and management conducted a review of the Company’s
accounting treatment of the matters relating to the Restatement with assistance
from outside financial consultants, and during this process, management reviewed
the facts and circumstances and concluded that it misapplied accounting
principles generally accepted in the United States of America. As discussed
above, the result of the discussions and analysis lead to the conclusion
that
the Company would need to correct errors with respect to the matters relating
to
the Restatement. The Board of Directors and authorized officers of the Company
discussed this matter and conclusion with the Company's independent public
accounting firm (Dominic K. F. Chan & Co.) and it was concluded that the
Company's previously issued financial statements described above could not
be
relied upon and needed to be restated.
The
Company has completed the Restatements with respect to the financial statements
as previously issued in the Reports and expects to file them with the SEC
shortly.