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 87% of our revenue 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. As a part and included in our sale of watch movements, we provide
a
variety of value-added services, including automated inventory management
services, integration, design and development, management, and support
services.
Recent
Events
January
2007 Private Placement
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”). 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.
In
connection with the Private Placement, Kwong Kai Shun, our Chairman of the
Board, Chief Executive Officer and Chief Financial Officer, entered into
an
agreement (the “Escrow Agreement”) with the investors pursuant to which he
agreed to purchase all of the shares of Series A Preferred Stock then held
by
such investors at a per share purchase price of $1.29 if our 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, which has been subsequently extended to March 31, 2008.
In
addition, 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 our net income for 2006 or 2007, subject
to
specified adjustments, as set forth in our 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 our actual net income,
if
any, for such fiscal years. We have accounted for the Escrow Shares as the
equivalent of a performance-based compensatory stock plan between Mr. Kwong
and
us. Accordingly, for the three months and nine months ended September 30,
2007,
we recorded a charge to operations of $200,289 and $1,852,494, respectively,
to
recognize the grant date fair value of stock-based compensation in conjunction
with the Escrow Shares, and during the three months ended December 31, 2007,
we
expect to recognize a final charge to operations of $581,156 with respect
to the
Escrow Shares.
November
2007 Issuance of Bonds and Bond Warrants
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 our common 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.
|
·
|
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 for Bonds, Warrants, and Underlying Shares
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 t
he
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.
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 $6,107,299 to the beneficial conversion feature of the Bonds and
$1,652,701 to the Bonds Warrants, which will be 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 $4,069,600. 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.
January
2008 Investor Relations Agreement
In
addition, on January 16, 2008, we entered into a consulting agreement with
Public Equity Group Inc. Pursuant to the agreement, Public Equity Group will
provide us with business consulting and investor relation services, oversee
of
all of our investor public relation and related service providers, and monitor
our investor relation meetings with brokerage firms and brokers to develop
support for our stock and research coverage, in addition to strategic advice
and
other customary investor relation services. The agreement has a term of one
year, unless terminated earlier with 60-days prior written notice. As
consideration for entering in the agreement and compensation for Public Equity
Group’s services under the agreement, we will issue 200,000 shares of our common
stock to Public Equity Group Inc. if and when our registration statement,
of
which this prospectus is a part, is declared effective by the Securities
and
Exchange Commission. In connection with anticipated issuance of 200,000 shares
of common stock, we expect to recognize a one-time charge to operations in
the
first quarter of 2008 in an amount equal to approximately $700,000, which
is
derived from valuing each share at $3.50, the mid-range offering price of
the
public offering that we intend to conduct in February 2008.
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 $6.2 million, a 2.5% and 71.5% increase,
respectively, as compared to $55.2 million in revenue and $3.6 million in
gross
profit for the nine months ended September 30, 2006. The gross profit margin
increased to 11.0% for the nine months ended September 30, 2007 from 6.6%
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.
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.
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
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. We have vendor arrangements on the purchase
of
watch movements providing for price reduction paid in the form of additional
watch movements. The percentage of additional movements to be received by
us
from these vendors is estimated and inventory costs are reduced to reflect
the
effect of these additional movements on the actual cost of the items in
inventory. During the nine months ended September 30, 2007 and 2006, we did
not
make any allowance for slow-moving or defective inventories.
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.
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
Sales
of
goods represent the invoiced value of goods, net of sales returns, trade
discounts and allowances. We recognize revenue when the goods are delivered
and
the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists,
and the sales price is fixed or determinable. We provide pre- and post- sales
service to our customers related to inventory management information in order
to
facilitate and manage sales to customers. Our integration, design and
development and management services provide customers with watch design
assistance, components outsourcing or other project support, and are generally
completed prior to a sale and do not continue post-delivery. There is no
requirement that these services be provided for a sale to take place, nor
is
there any objective or reliable evidence of a separate fair value, or if
no
longer offered or ceased to be offered would a right of return be created
for
the goods sold. We believe these services are part of the sales process and
are
not a customer deliverable, and are therefore charged to selling expense
or cost
of sales, as appropriate.
Deferred
income tax
Deferred
income tax is provided in full, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However, if the
deferred income tax arises from initial recognition of an asset or liability
in
a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or loss, it is
not
accounted for. Deferred income tax is determined using tax rates (and laws)
that
have been enacted or substantially enacted by the balance sheet date and
are
expected to apply when the related deferred income tax assets is realized
or the
deferred income tax liability is settled.
Stock-based
compensation
Effective
January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”), a revision to SFAS No. 123, “Accounting for Stock-Based
Compensation”. SFAS 123R requires that we measure the cost of employee services
received in exchange for equity awards based on the grant date fair value
of the
awards, with the cost to be recognized as compensation expense in our financial
statements over the vesting period of the awards. Accordingly, we recognize
compensation cost for equity-based compensation for all new or modified grants
issued after December 31, 2005. We account for stock option and warrant grants
issued and vesting to non-employees in accordance with EITF 96-18, “Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services”, and EITF 00-18, “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted
to
Other Than Employees”, whereas the value of the stock compensation is based upon
the measurement date as determined at either (a) the date at which a performance
commitment is reached or (b) at the date at which the necessary performance
to
earn the equity instruments is complete.
We
did
not recognize any stock-based compensation during the three months or nine
months ended September 30, 2006. During the three months and nine months
ended
September 30, 2007, we recorded $200,289 and $1,852,494, respectively, as
a
charge to operations to recognize the grant date fair value of stock-based
compensation in conjunction with the Escrow Agreement, as described above,
and
during the three months ended December 31, 2007, we expect to recognize a
final
charge to operations of $581,156 with respect to the Escrow
Agreement.
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
|
|
|
80.1
|
%
|
|
88.2
|
%
|
|
84.4
|
%
|
|
88.4
|
%
|
Gross
profit
|
|
|
19.9
|
%
|
|
11.8
|
%
|
|
15.6
|
%
|
|
11.6
|
%
|
Other
income - Note 4
|
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
Depreciation
|
|
|
0.3
|
%
|
|
0.4
|
%
|
|
0.3
|
%
|
|
0.4
|
%
|
Administrative
and other operating
expenses,
including stock-based
compensation
|
|
|
3.0
|
%
|
|
1.8
|
%
|
|
5.1
|
%
|
|
1.5
|
%
|
Income
from operations
|
|
|
16.8
|
%
|
|
9.8
|
%
|
|
10.4
|
%
|
|
9.9
|
%
|
Fees
and costs related to reverse merger
|
|
|
-
|
|
|
-
|
|
|
1.1
|
%
|
|
-
|
|
Other
income - Note 4
|
|
|
0.2
|
%
|
|
0.3
|
%
|
|
0.2
|
%
|
|
0.3
|
%
|
Interest
expenses - Note 5
|
|
|
1.4
|
%
|
|
1.4
|
%
|
|
1.3
|
%
|
|
1.2
|
%
|
Income
before taxes
|
|
|
15.6
|
%
|
|
8.7
|
%
|
|
8.2
|
%
|
|
9.0
|
%
|
Income
taxes - Note 6
|
|
|
3.0
|
%
|
|
1.6
|
%
|
|
2.2
|
%
|
|
1.6
|
%
|
Net
income
|
|
|
12.6
|
%
|
|
7.1
|
%
|
|
6.0
|
%
|
|
7.4
|
%
|
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
$19.6 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 $18.4 million, or
80.1%
of net sales, as compared to $17.3 million, or 88.2% 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 resulting from an increase of sales in the third quarter
of
2007.
Gross
profit for the three months ended September 30, 2007 was $4.6 million, or
19.9%
of net sales, compared to $2.3 million, or 11.8% 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 reduction in cost of sales due to the impact
of
rebate receivables, 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 7.2% for the three months ended September
30,
2006 as compared to 13.2% 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.
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.
Administrative
and other operating expenses were $690,514, or 3.0% 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 the recognition of $200,289 of stock-based
compensation during the three months ended September 30, 2007 related to
the
Escrow Shares provided by our CEO, Kwong Kai Shun, which are subject to the
achievement of defined annual net income for 2006 and 2007 pursuant to the
Private Placement agreement entered into with our investors. We met the 2006
net
income requirement. We expect to recognize a final charge to operations for
stock-based compensation related to the Escrow Shares of $581,156 at December
31, 2007. The increase was also attributable to the increase in professional
fees related to reporting requirements as a public company and additional
employees and upgraded staff benefits in the comparable period in 2007.
Management considers these expenses as a percentage of net sales to be a
key
performance indicator in managing our business.
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 $697,737, or 3.0%
of
net sales, as compared to $304,821, or 1.6% of net sales for the three months
ended September 30, 2006. The increase in income taxes is primarily due to
an
increase in the operating margin to 16.5% for the three months ended September
30, 2007 compared to an operating margin of 8.7% for the three months ended
September 30, 2006.
Net
income for the three months ended September 30, 2007 (net of the charge for
stock-based compensation of $200,289) was $2.9 million, or 12.6% of net sales,
as compared to $1.4 million, or 7.1% of 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 $54.8 million, or
84.4%
of net sales, as compared to $55.6 million, or 88.4% 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 $10.1 million, or
15.6%
of net sales, compared to $7.3 million, or 11.6% 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 reduction in cost of sales due to rebate
receivables, 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 6.6% for the nine
months ended September 30, 2006 as compared to 11.0% 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.
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.
Administrative
and other operating expenses were $3.3 million, or 5.1% of net sales, for
the
nine months ended September 30, 2007, as compared to $971,717, or 1.5% of
net
sales, for the comparable period in 2006. The increase in amount and as a
percentage of net sales was primarily due to the recognition of $1,852,494
of
stock-based compensation during the three months ended September 30, 2007
related to the Escrow Shares provided by our CEO, Kwong Kai Shun, which are
subject to the achievement of defined annual net income for 2006 and 2007
pursuant to the Private Placement agreement entered into with our investors.
We
met the 2006 net income requirement. We expect to recognize a final charge
to
operations for stock-based compensation related to the Escrow Shares of $581,156
at December 31, 2007. The increase was also attributable to the increase
in
professional fees related to reporting requirements as a public company and
additional employees and upgraded staff benefits in the comparable period
in
2007. Management considers these expenses as a percentage of net sales to
be a
key performance indicator in managing our business.
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 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 $1.4 million, or
2.2% of
net sales, as compared to $1.0 million for the nine months ended September
30,
2006, or 1.6% of net sales. The increase in income taxes is primarily due
to an
increase in the operating margin to 11.1% for the nine months ended September
30, 2007 compared to an operating margin of 9.0% for the nine months ended
September 30, 2006.
Net
income for the nine months ended September 30, 2007 (net of the charge for
stock-based compensation of $1,852,494 and fees and costs related to the
reverse
merger of $736,197) was $3.9 million, or 6.0% of net sales, as compared to
$4.6
million, or 7.4% of net sales for the comparable period in 2006.
Off-Balance
Sheet Arrangements
Other
than the Escrow Agreement and Escrow Shares, as described above, we do not
have
any off-balance sheet debt, nor do we have any transactions, arrangements
or
relationships with any special purpose entities.
Contractual
Obligations
Other
than those commitments and obligations being entered into in the normal course
of business, we do not have any additional, material capital commitments
and
obligations due to other parties.
Inflation
and Seasonality
Inflation
and seasonality have not had a significant impact on our operations during
the
last two fiscal years.
New
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS No. 155”), and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 155 simplifies the accounting for certain derivatives
embedded in other financial instruments by allowing them to be accounted
for as
a whole if the holder elects to account for the whole instrument on a fair
value
basis. SFAS No. 155 also clarifies and amends certain other provisions of
SFAS
No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event occurring
in
fiscal years beginning after September 15, 2006. Earlier adoption is permitted,
provided we have not yet issued financial statements, including for interim
periods, for that fiscal year. We do not believe the adoption of SFAS No.
155
will have a material impact on our consolidated financial position or results
of
operations.
The
FASB
released SFAS No. 156, “Accounting for Servicing of Financial Assets,” to
simplify accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156
permits an entity to choose either the amortization method or the fair value
measurement method for measuring each class of separately recognized servicing
assets and servicing liabilities after they have been initially measured
at fair
value. SFAS No. 156 applies to all separately recognized servicing assets
and
liabilities acquired or issued after the beginning of an entity’s fiscal year
that begins after September 15, 2006. SFAS No. 156 will be effective for
us as
of December 31, 2006, the beginning of our 2007 fiscal year. We do not believe
the adoption of SFAS No. 156 will have a material impact on our consolidated
financial position or results of operations.
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. We are currently evaluating the
effect
of FIN 48 on our financial statements and do not believe the adoption of
FIN No.
48 will have a material impact on our consolidated financial position or
results
of operations.
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 our 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.
The
FASB
released SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106,
and
132(R),” which requires an employer to recognize the over funded or under funded
status of defined benefit and other postretirement plans as an asset or
liability in its statement of financial position and to recognize changes
in
that funded status in the year in which the changes occur through an adjustment
to comprehensive income. This statement also requires an employer to measure
the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. We are required to initially recognize
the
funded status of our defined benefit and other postretirement plans as of
December 31, 2006, and to provide the required disclosures in our 2006 annual
report on Form 10-KSB. The adoption of SFAS No. 158 has no material effect
on
our 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 chosen not to adopt this statement early. 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.
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.
Pursuant
to Subscription Agreements entered into with the investors in the Private
Placement, each share of the Series A Convertible Preferred Stock is convertible
into shares of common stock at a conversion price equal to the per share
purchase price. However, if we, at any time prior to the first trading day
on
which our common stock is quoted on the American Stock Exchange, Nasdaq Capital
Market, Nasdaq Global Market or New York Stock Exchange (each a “Trading
Market”) sell or issue 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 us are at least $1.0 million, then the
aforementioned conversion price shall be reduced to such effective price.
Each
share of the Series A Convertible Preferred Stock shall automatically convert
into shares of common stock if (i) the closing price of our 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. Upon liquidation, the
holders of the Series A Convertible Preferred Stock shall receive $1.29 per
share of the Series A Convertible Preferred Stock then held prior to any
other
distribution or payment made to holders of the common stock.
We
agreed
to file, and did 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.
On
November 13, 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.
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
$275,517 and an adjustment related to stock-based compensation to our CEO,
Kwong
Kai Shun of $1.9 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 30 days and 26 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.
For
fiscal year 2006, 2005 and 2004, our inventory turnover was 10.8, 10.8 and
13.2
times, respectively. During 2004, our stock level was kept at a relatively
low
level to improve cash flow however, we also risked stock shortage. In 2005
and
2006 we increased our stock level and, thus, the turnover ratio to a more
optimal level of 10.8. We expect the turnover ratio will further decrease
in
2007 as the order delivery cycle time of our supplies has shortened, possibly
allowing us to keep a lower stock level with a decreased risk of stock
shortages. The average days outstanding of our accounts receivable at December
31, 2006 were 29 days, as compared to 24 days and 10.8 days at December 31,
2005
and 2004. The increase in accounts receivable was due to the change in credit
policy since 2005 where credit terms of up to 30 days were given to customers
who had good credit history in order to improve our profit margin and
competitiveness.
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.