UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ____________________
Commission file number 0-52415
TITANIUM GROUP LIMITED
(Exact name of registrant as specified in its charter)
British Virgin Islands (State or other jurisdiction of incorporation or organization) | Not Applicable (IRS Employer Identification No.) |
4/F, BOCG Insurance Tower
134-136 Des Voeux Road Central, Hong Kong
(Address of principal executive offices)(Zip Code)
(852) 3427 3177
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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. [X]Yes[ ]No
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. (Check one):
Large accelerated filer[ ] Accelerated filer[ ] 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 [X] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
50,000,000 shares of Common Stock, $0.01 par value, as of September 30, 2007
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Currency expressed in Hong Kong Dollars (“HK$”), except for number of shares)
September 30, | December 31, | |||||||||||
2007 | 2007 | 2006 | ||||||||||
US$ | HK$ | HK$ | ||||||||||
ASSETS | (unaudited) | (unaudited) | (audited) | |||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 332,793 | $ | 2,595,785 | $ | 1,164,528 | ||||||
Accounts receivable, net | 907,338 | 7,077,236 | 4,728,648 | |||||||||
Inventories | 21,588 | 168,388 | 71,156 | |||||||||
Deposits and other receivables | 111,130 | 866,820 | 342,347 | |||||||||
Deferred tax assets | 47,470 | 370,264 | 300,401 | |||||||||
Income tax recoverable | 15,844 | 123,581 | 118,442 | |||||||||
Total current assets | 1,436,163 | 11,202,074 | 6,725,522 | |||||||||
Plant and equipment | ||||||||||||
Cost | 872,464 | 6,805,219 | 3,941,297 | |||||||||
Less: accumulated depreciation | (217,350 | ) | (1,695,330 | ) | (996,233 | ) | ||||||
655,114 | 5,109,889 | 2,945,064 | ||||||||||
Intangible assets, net | 373,055 | 2,909,827 | 2,642,055 | |||||||||
TOTAL ASSETS | $ | 2,464,332 | $ | 19,221,790 | $ | 12,312,641 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Bank overdraft | $ | 81,055 | $ | 632,229 | $ | 1,712,024 | ||||||
Accounts payable and accrued liabilities | 694,409 | 5,416,381 | 3,302,651 | |||||||||
Short-term bank loan | 13,409 | 104,591 | - | |||||||||
Deferred revenue | - | - | 291,084 | |||||||||
Total current liabilities | 788,873 | 6,153,201 | 5,305,759 | |||||||||
Long-term liabilities | ||||||||||||
Convertible debenture | 1,334,186 | 10,406,652 | - | |||||||||
Total liabilities | 2,123,059 | 16,559,853 | 5,305,759 | |||||||||
Minority interest in net loss of consolidated subsidiaries | - | - | (67,159 | ) | ||||||||
Stockholders’ equity: | ||||||||||||
Common stock, US$0.01 (HK$0.078) par value, 100,000,000 shares authorized, 50,000,000 shares issued and outstanding | 500,000 | 3,900,000 | 3,900,000 | |||||||||
Additional paid-in capital | 718,324 | 5,602,930 | 4,675,206 | |||||||||
Accumulated deficit | (876,759 | ) | (6,838,724 | ) | (1,506,811 | ) | ||||||
Accumulated other comprehensive (loss) income | (292 | ) | (2,269 | ) | 5,646 | |||||||
Total stockholders’ equity | 341,273 | 2,661,937 | 7,074,041 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,464,332 | $ | 19,221,790 | $ | 12,312,641 |
See accompanying notes to condensed consolidated financial statements.
2
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in Hong Kong Dollars (“HK$”), except for number of shares)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
2007 | 2007 | 2006 | 2007 | 2007 | 2006 | |||||||||||||||||||
US$ | HK$ | HK$ | US$ | HK$ | HK$ | |||||||||||||||||||
REVENUE | ||||||||||||||||||||||||
Projects | ||||||||||||||||||||||||
Products | $ | 306,613 | $ | 2,391,577 | $ | 3,329,777 | $ | 750,925 | $ | 5,857,213 | $ | 11,195,158 | ||||||||||||
Services | 122,778 | 957,672 | 675,588 | 367,595 | 2,867,242 | 3,994,571 | ||||||||||||||||||
429,391 | 3,349,249 | 4,005,365 | 1,118,520 | 8,724,455 | 15,189,729 | |||||||||||||||||||
Maintenance | ||||||||||||||||||||||||
Services | 616 | 4,804 | - | 26,848 | 209,413 | 465,140 | ||||||||||||||||||
Total revenue | 430,007 | 3,354,053 | 4,005,365 | 1,145,368 | 8,933,868 | 15,654,869 | ||||||||||||||||||
COST OF REVENUE | ||||||||||||||||||||||||
Projects | ||||||||||||||||||||||||
Cost of products sold | 215,708 | 1,682,525 | 2,430,956 | 454,259 | 3,543,222 | 7,336,549 | ||||||||||||||||||
Cost of services | 30,768 | 239,989 | 410,917 | 140,553 | 1,096,313 | 2,415,008 | ||||||||||||||||||
246,476 | 1,922,514 | 2,841,873 | 594,812 | 4,639,535 | 9,751,557 | |||||||||||||||||||
Maintenance | ||||||||||||||||||||||||
Cost of services | 90 | 700 | - | 3,295 | 25,700 | 55,800 | ||||||||||||||||||
Total cost of sales | 246,566 | 1,923,214 | 2,841,873 | 598,107 | 4,665,235 | 9,807,357 | ||||||||||||||||||
GROSS PROFIT | 183,441 | 1,430,839 | 1,163,492 | 547,261 | 4,268,633 | 5,847,512 | ||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||
Selling, general and administrative expenses | 353,530 | 2,757,538 | 1,199,600 | 950,972 | 7,417,584 | 5,098,945 | ||||||||||||||||||
Research & development costs | - | - | 292,949 | - | - | 750,000 | ||||||||||||||||||
Stock based compensation | 7,376 | 57,530 | 1,331,717 | 118,939 | 927,724 | 1,331,717 | ||||||||||||||||||
Total operating expenses | 360,906 | 2,815,068 | 2,824,266 | 1,069,911 | 8,345,308 | 7,180,662 | ||||||||||||||||||
LOSS FROM OPERATIONS | (177,465 | ) | (1,384,229 | ) | (1,660,774 | ) | (522,650 | ) | (4,076,675 | ) | (1,333,150 | ) | ||||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||
Government grant income | - | - | - | 3,085 | 24,066 | 23,733 | ||||||||||||||||||
Interest income | 2,216 | 17,281 | 350 | 6,733 | 52,517 | 21,980 | ||||||||||||||||||
Interest expense | (119,693 | ) | (933,603 | ) | (19,832 | ) | (179,703 | ) | (1,401,684 | ) | (47,988 | ) | ||||||||||||
Total other expense | (117,477 | ) | (916,322 | ) | (19,482 | ) | (169,885 | ) | (1,325,101 | ) | (2,275 | ) | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in Hong Kong Dollars (“HK$”), except for number of shares)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
2007 | 2007 | 2006 | 2007 | 2007 | 2006 | |||||||||||||||||||
US$ | HK$ | HK$ | US$ | HK$ | HK$ | |||||||||||||||||||
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST | (294,942 | ) | (2,300,551 | ) | (1,680,256 | ) | (692,535 | ) | (5,401,776 | ) | (1,335,425 | ) | ||||||||||||
Income tax benefit | 3,159 | 24,636 | 65,519 | 8,957 | 69,863 | 6,898 | ||||||||||||||||||
LOSS BEFORE MINORITY INTEREST | (291,783 | ) | (2,275,915 | ) | (1,614,737 | ) | (683,578 | ) | (5,331,913 | ) | (1,328,527 | ) | ||||||||||||
Minority interest | - | - | 27,437 | - | - | - | ||||||||||||||||||
NET LOSS | (291,783 | ) | (2,275,915 | ) | (1,587,300 | ) | (683,578 | ) | (5,331,913 | ) | (1,328,527 | ) | ||||||||||||
(0 | ) | (0 | ) | |||||||||||||||||||||
Net loss per share | ||||||||||||||||||||||||
Basic and diluted | (0.006 | ) | (0.046 | ) | (0.032 | ) | (0.014 | ) | (0.107 | ) | (0.027 | ) | ||||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||||||
Basic and fully diluted | 50,000,000 | 50,000,000 | 50,000,000 | 50,000,000 | 50,000,000 | 50,000,000 | ||||||||||||||||||
NET LOSS | (291,783 | ) | (2,275,915 | ) | (1,587,300 | ) | (683,578 | ) | (5,331,913 | ) | (1,328,527 | ) | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation gain (loss) | - | - | 98 | (1,015 | ) | (7,915 | ) | 6,373 | ||||||||||||||||
COMPREHENSIVE LOSS | $ | (291,783 | ) | $ | (2,275,915 | ) | $ | (1,587,202 | ) | $ | (684,593 | ) | $ | (5,339,828 | ) | $ | (1,322,154 | ) | ||||||
See accompanying notes to condensed consolidated financial statements.
4
TITANIUM GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Currency expressed in Hong Kong Dollars (“HK$”))
(Unaudited)
Nine months ended September 30, | ||||||||||||
2007 | 2007 | 2006 | ||||||||||
US$ | HK$ | HK$ | ||||||||||
Cash flow from operating activities: | ||||||||||||
Net loss | $ | (683,578 | ) | $ | (5,331,913 | ) | $ | (1,328,527 | ) | |||
Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||||||
Depreciation and amortization | 172,948 | 1,348,996 | 479,523 | |||||||||
Amortization of discount and interest on convertible debenture | 109,186 | 851,652 | - | |||||||||
Allowances for doubtful accounts | 166,629 | 1,299,708 | - | |||||||||
Stock-based compensation | 118,939 | 927,724 | 1,331,717 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (467,730 | ) | (3,648,296 | ) | 701,235 | |||||||
Inventories | (12,466 | ) | (97,232 | ) | 57,571 | |||||||
Deposits and other receivables | (58,630 | ) | (457,314 | ) | (1,143,251 | ) | ||||||
Deferred tax assets | (8,957 | ) | (69,863 | ) | - | |||||||
Accounts payable and accrued liabilities | 270,991 | 2,113,730 | 2,107,943 | |||||||||
Other tax payable | (37,318 | ) | (291,084 | ) | 199,057 | |||||||
Income taxes payable | (659 | ) | (5,139 | ) | (324,823 | ) | ||||||
Net cash (used in) provided by operating activities | (430,645 | ) | (3,359,031 | ) | 2,080,445 | |||||||
Cash flows from investing activities: | ||||||||||||
Purchase of plant and equipment | (366,913 | ) | (2,861,923 | ) | (2,678,171 | ) | ||||||
Capitalization of software development costs | (117,906 | ) | (919,670 | ) | (1,138,181 | ) | ||||||
Net cash used in investing activities | (484,819 | ) | (3,781,593 | ) | (3,816,352 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from short-term bank loan | 40,385 | 315,000 | - | |||||||||
Repayments of short-term bank loan | (26,976 | ) | (210,409 | ) | - | |||||||
Proceeds from convertible debenture, net of expenses | 1,225,000 | 9,555,000 | - | |||||||||
Net decrease in bank overdraft | (138,435 | ) | (1,079,795 | ) | (64,079 | ) | ||||||
Net cash provided by (used in) financing activities | 1,099,974 | 8,579,796 | (64,079 | ) | ||||||||
Foreign currency translation adjustment | (1,015 | ) | (7,915 | ) | 6,373 | |||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 183,495 | 1,431,257 | (1,793,613 | ) | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 149,298 | 1,164,528 | 2,472,677 | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 332,793 | $ | 2,595,785 | $ | 679,064 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||
Interest paid | $ | 10,506 | $ | 81,948 | $ | 28,156 | ||||||
Income taxes paid | $ | - | $ | - | $ | 17,500 |
See accompanying notes to condensed consolidated financial statements
5
TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
NOTE 1 - GENERAL
Titanium Group Limited (the “Company” or “TTNUF”) was incorporated as an International Business Company with limited liability in the British Virgin Islands (“BVI”) under the International Business Companies Act (“IBC Act”) of the British Virgin Islands on May 17, 2004 and subsequently reregistered under the BVI Business Companies Act (“BVIBC Act”) on January 1, 2007 when the IBC Act was repealed and replaced with the BVIBC Act. The Company, through its subsidiary companies, Titanium Technology Limited and Titanium Technology (Shenzhen) Co., Ltd., mainly focus in the development of advanced biometric technology and installation and implement of advanced facial based biometric identification and security projects for law enforcement, mass transportation, and other government and private sector customers.
The accompanying financial statements present the financial position and results of operations of the Company and its subsidiary companies, Titanium Technology Limited, Titanium Technology (Shenzhen) Co., Ltd. and Titanium RFID Limited (collectively known as the “Group”). The Group’s functional currency is the Hong Kong dollar.
NOTE 2 – BASIS OF PRESENTATION OF SECOND QUARTER PERIOD
The accompanying unaudited interim condensed consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and the requirements of Regulation S-X. They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the periods ended September 30, 2007 and 2006 presented are not necessarily indicative of the results to be expected for the year. These financial statements should be read in conjunction with the annual financial statements presented in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006.
NOTE 3 – GOING CONCERN UNCERTAINTIES
These condensed consolidated financial statements have been prepared assuming that the Group will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
For the nine months ended September 30, 2007, the Group had incurred a net loss of HK$5,331,913 and as of September 30, 2007, had an accumulated deficit of HK$6,838,724. Additionally, the Group has incurred losses over the past several years. Management has taken certain action and continues to implement changes designed to improve the Group’s financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including rapid promotion and marketing the new products in the People’s Republic of China (the “PRC”). Management believes that these actions will enable the Group to improve future profitability and cash flow in its continuing operations through September 30, 2008. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Group’s ability to continue as a going concern.
6
TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
NOTE 4 – RECENT PRONOUNCEMENTS
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have an effect on the results of operations or financial condition. The Company did not have any unrecognized tax benefits as of September 30, 2007.
On February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to FASB No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS 159 is effective as of the beginning of the 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 (i) makes that choice in the first 120 days of that year, (ii) has not yet issued financial statements for any interim period of such year, and (iii) elects to apply the provisions of FASB 157. Management is currently evaluating the impact of SFAS 159, if any, on the Company’s financial statements.
NOTE 5 – PER SHARE INFORMATION
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For the period ended September 30, 2007, outstanding warrants to purchase 3,000,000 shares of common stock of the Company which were issued in connection with the prior sale of common stock were not considered to have a dilutive effect since the exercise price of the warrants exceeded the average market price of the common stock for that period.
During the nine months ended September 30, 2007, the Company did not grant any stock options to employees, directors and consultants. The effect of outstanding stock options which could result in the issuance of 4,635,000 shares of common stock as of September 30, 2007 is anti-dilutive. As a result, diluted loss per share data does not include the assumed exercise of outstanding stock options and has been presented jointly with basic loss per share.
7
TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
NOTE 6 – INCOME TAXES
The Group accounts for income taxes in interim periods as required by Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and as interpreted by FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods”. The Group has determined an estimated annual effective tax rate. The rate will be revised, if necessary, as of the end of each successive interim period during the Group’s fiscal year to the Group’s best current estimate.
The estimated annual effective tax rate is applied to the year-to-date ordinary income (or loss) at the end of the interim period.
As of September 30, 2007, the Group and its subsidiaries incurred net operating losses of approximately HK$5,401,776 for income tax purposes and no provision for income taxes is necessary.
The Group recognized a deferred tax asset of approximately HK$370,264 as of September 30, 2007, primarily relating to net operating loss carry forwards of approximately HK$6,830,000. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Group considers projected future taxable income and tax planning strategies in making this assessment. At present, the Group does not have a history of income to conclude that it is more likely than not that the Group will be able to realize all of its tax benefits. Therefore, a valuation allowance of HK$370,264 was established for the full value of the deferred tax asset. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance net of appropriate reserves. Should the Group continue to be profitable in future periods with supportable trend, the valuation allowance will be reversed accordingly.
NOTE 7 – STOCK BASED COMPENSATION
On November 22, 2005, the Company approved a Stock Option Plan (the “Plan”) under which directors, officers, employees and consultants of the Company are eligible to receive grants of options for the Company’s common stock. The plan has a life of ten (10) years and expires on November 22, 2015. A maximum of 5,000,000 common shares have been reserved under the Plan. Each stock option entitles its holder to purchase one common share of the Company. Options would be granted for a term not exceeding ten (10) years from the date of grant. The board of directors will determine the exercise price for each option at the time the options are granted. The exercise price for shares will be no less than 100% of the fair value of the common stock at the date such options are granted. The board will also determine when options become exercisable.
On July 1, 2006, the Board of Directors authorized the granting of 1,435,000 options to the employees and 3,200,000 options to directors, officers and consultants of the Company, respectively, with an exercise price of US$0.20 (HK$1.56) per share, being the market price at the time of the grant. These options vest at different periods from 6 months to 12 months from the date of grant depending upon the optionee and all of these options have a life of five (5) years from the grant date.
8
TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
No. of options | Weighted average exercise price | |||||||||
Options outstanding as of December 31, 2006 | 4,635,000 | US$ 0.20 | ||||||||
Granted | - | - | ||||||||
Forfeited | - | - | ||||||||
Options outstanding as of September 30, 2007 | 4,635,000 | US$ 0.20 | ||||||||
Options exercisable as of September 30, 2007 | 4,635,000 | US$ 0.20 |
Range of exercise prices | No. of option outstanding | Weighted average remaining contractual life | Weighted average exercise price | Number of option exercisable | Weighted average exercise price | |||||
US$ 0.20 – 0.50 | 4,635,000 | 2.13 | 0.20 | 4,635,000 | 0.20 |
As of September 30, 2007, there was no unrecognized compensation cost related to nonvested stock options. The grant date fair value of stock options vested during the nine months ended September 30, 2007 is US$0.20 (HK$1.56) per share. All stock option awards vested during the nine months ended September 30, 2007.
The Company adopted SFAS No. 123R, “Stock-Based Payment” using the Black-Scholes Option Pricing Model to estimate the fair value of options. The weighted average fair value of options granted during the nine months ended September 30, 2007 was US$0.10 (HK$0.78) per share. Weighted average assumptions used in the valuation for the nine months ended September 30, 2007 are summarized below:
Risk free interest rate (%) | 5.04 | |
Dividend yield (%) | 0 | |
Expected life of option grants (years) | 2.13 | |
Expected volatility of option grants (%) | 88.8 |
The Company charged HK$57,530 (US$7,376) and HK$927,724 (US$118,939) of stock-based compensation to operations for the three and nine months ended September 30, 2007 by applying the fair value method in accordance with SFAS No. 123R.
NOTE 8 – SHORT-TERM BANK LOAN
The short-term bank loan is unsecured, payable to financial institutions, which is guaranteed by the directors, with effective interest rate at 6.75% per annum payable monthly, with principal due January 22, 2008.
9
TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
NOTE 9 – CONVERTIBLE DEBENTURE
Details of the convertible debenture outstanding are as follows:
As of | ||||
September 30, 2007 | ||||
HK$ | ||||
Outstanding principal | $ | 11,310,000 | ||
Less: financing costs | (1,582,546 | ) | ||
Less: discounts | (5,207,982 | ) | ||
4,519,472 | ||||
Convertible debenture, net of discounts | ||||
Warrants liability | 5,887,180 | |||
Net carrying value of convertible debenture | $ | 10,406,652 |
On April 3, 2007, the Company entered into a Securities Purchase Agreement (the “Agreement”) with several accredited investors (the “Investors”). In accordance with the Agreement, the Investors agreed to purchase in the aggregate, HK$11,310,000 (US$1,450,000) principal amount of Series A 8% Senior Convertible Debentures (the “Debentures”). In addition, the Investors received five-year warrants that allow the Investors to purchase 4,833,333 shares of common stock at US$0.50 per share.
The Company paid a placement fee of HK$1,131,000 (US$145,000) and issued placement agent warrants entitling the holders to purchase an aggregate of 483,333 shares at US$0.315 per share for a period of seven years.
Proceeds of the financing are used for working capital and for the further development of the Company’s proprietary technology.
The Company has agreed to file a registration statement with the Securities and Exchange Commission in order to register the resale of the shares issuable upon conversion of the Debentures and the shares issuable upon exercise of the warrants that were issued to the Investors and the placement agent.
The Debentures have the following material terms:
• | Interest at 8% per annum, payable quarterly on January 1, April 1, July 1 and October 1 beginning July 1, 2007 in cash or in shares at the option of the Company, with the shares to be registered pursuant to an effective registration statement and priced at the lesser of (a) US$0.30 or (b) 90% of the volume-weighted average price for the 10 consecutive trading days immediately prior to payment; |
• | Maturity date of 36 months; |
• | Convertible at any time by the holders into shares of the Company’s common stock at a price equal to US$0.30; |
• | Convertible at the option of the Company as long as there is an effective registration statement covering the shares underlying the Debentures and the closing bid price of the Company’s common stock is at least US$0.75 per share; |
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TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
• | Redeemable at the option of Titanium at 120% of face value, as long as there is an effective registration statement covering the shares underlying the Debentures; and |
• | Anti-dilution protections to allow adjustments to the conversion price of the Debentures in the event Titanium sells or issues shares at a price less than the conversion price of the Debentures. |
On April 3, 2007, the Company received HK$9,555,000 (US$1,225,000), net of expenses of HK$1,755,000 (US$225,000) after all the closing conditions were satisfied. In lieu of interest, the Debentures provided for an original issue discount equal to HK$5,775,510 (US$740,450) that is to be amortized to non-cash interest expense using the effective interest rate method over the three-year life of the Debentures. For the three and nine months ended September 30, 2007, the Company recognized approximately HK$451,442 (US$57,877) and HK$851,652 (US$109,186) as interest expense from the amortization of the original issue discount.
NOTE 10 – SEGMENT INFORMATION
The Company considers its business activities to constitute one single segment. The Group’s chief operating decision makers use consolidated results to make operating and strategic decisions. The geographic distribution of the Group’s customers is:
l | Hong Kong, including the government and commercial sectors; and |
l | The PRC, mainly the government sector. |
An analysis of the Group’s long-lived assets and revenues by region are as follows:
As of | ||||||||
September 30, 2007 | December 31,2006 | |||||||
HK$ | HK$ | |||||||
Long-lived assets: | ||||||||
- Hong Kong | $ | 7,971,117 | $ | 5,534,209 | ||||
- The PRC | 48,599 | 52,910 | ||||||
$ | 8,019,716 | $ | 5,587,119 |
Nine months ended September 30, | ||||||||
2007 | 2006 | |||||||
HK$ | HK$ | |||||||
Revenue: | ||||||||
- Hong Kong | $ | 8,897,900 | $ | 13,710,732 | ||||
- The PRC | 35,968 | 1,944,137 | ||||||
$ | 8,933,868 | $ | 15,654,869 |
11
TITANIUM GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Originally currency expressed in Hong Kong Dollars (“HK$”))
For The Nine Months Ended September 30, 2007
(Unaudited)
NOTE 11 – COMMITMENTS AND CONTINGENCIES
The Group leased two office premises in Hong Kong and the PRC under non-cancelable operating lease agreements for periods of two to three years, due June 30, 2008 and April 11, 2008, respectively. The annual aggregate lease payment is HK$454,778.
NOTE 12 – SUBSEQUENT EVENT
In October 2007, the Company signed a letter of intent to discuss the possible acquisition of 51% or more of the issued and outstanding common stock of China Medical Systems Inc., which manufactures, develops and sells three-dimensional medical imaging-based software products. The parties have set a date of December 31, 2007 by which to enter into a definitive agreement. If they fail to do so, the letter of intent will terminate.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
As Titanium Technology is a software development company, it earns revenues primarily through license sales of its products, which utilize the proprietary technology it develops. Development of the technology requires a significant outlay of cash before a viable product is developed that utilizes the technology. After development of a product, even more cash is required to market the product before any revenues are realized. Accordingly, the challenge that faces many software development companies is being able to obtain enough cash to fund research and development and marketing expenses and sustain the company until revenues are generated. Such funds are needed fairly quickly after products are developed, as the environment in which the products are used is constantly changing. Companies face the risk of discovering that their products do not meet the needs of the potential customers or are technologically outdated after a marketing campaign is launched. If that happens, the research and development costs are never recouped.
Titanium Technology has been able to generate revenues rather early in the company’s development, which have funded research and development expenses, as well as selling, general and administrative expenses.
While we have been able to develop proprietary products mainly based on proceeds from sales revenues and from subsidy income received from the Hong Kong government, we believe that external funding from investors can stimulate and accelerate product development and marketing for a number of reasons. First, the company has now achieved a certain amount of recognition in the biometrics industry, especially in Hong Kong and the surrounding region. It has also established several important marketing channels, most notably a sole distributor in Japan who brought along opportunities and major customers such as the NTT Group. Second, there is increased awareness in the personal security area in which biometric technologies are some of the most commonly used applications. We expect the global market size to grow due to concerns about identity theft and security. Third, we have developed a technology within the past year that we believe can be utilized in a one-to-many application. Based on this developed technology, management believes that the company should try to market its products and services in areas outside of Asia and compete in a larger market.
We raised net proceeds of US$517,425 (HK$4,035,915) through a private placement of securities during the third quarter of 2005. These proceeds were used to provide the funds necessary to implement the next step in our business plan, which was becoming a publicly-held company in the United States. Our common stock commenced trading on the OTC Bulletin Board in July 2006 under the symbol “TTNUF.” Funds were used for legal, accounting, and corporate consulting services and working capital. We believe that by becoming a publicly-held company, we will enhance the visibility of our products and services and our ability to obtain additional financing in the future.
We obtained financing resulting in net proceeds of US$1,225,000 (HK$9,555,000) in April 2007. These proceeds have been used for working capital and for the further development of our proprietary technology.
In September 2007, we set up a Hong Kong joint venture, Titanium RFID Limited, in which we hold a 51% interest. This joint venture will engage in the development and marketing of radio frequency identification (RFID) solutions to complement our core biometric technology.
In October 2007, we signed a letter of intent to discuss the possible acquisition of 51% or more of the issued and outstanding common stock of China Medical Systems Inc., which manufactures, develops and sells three-dimensional medical imaging-based software products. If completed, this acquisition
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could boost our research and development capability in the areas of image processing and pattern recognition, and also provide a sales channel into China’s healthcare and medical industry. We are in the process of conducting a due diligence review of China Medical’s operations and determining an appropriate structure for the proposed acquisition. If we do not enter into a definitive agreement by December 31, 2007, the letter of intent will terminate.
Critical Accounting Policies
Revenue recognition. We generate revenues principally from contracts for facial-based biometric identification and security projects, which typically include outside purchased workstations and live-scan devices, bundled with our proprietary software. In all cases, the customers are granted a license to use the software in perpetuity so long as the software is installed on the hardware for which it was originally intended. The contract price of our facial-based biometric identification and security projects generally includes twelve months of free post-contract customer support. We also generate revenues from services performed under fixed-price and time-and-material agreements. To a lesser extent, we also generate revenues from sales of our proprietary biometrics products and re-sales of products sourced from outside third parties. We classify the revenues generated by these activities as either project products revenue, project services revenue, or maintenance services revenue. Maintenance services are what the customer purchases if support and software upgrades are desired after the free twelve-month period.
We apply the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” For arrangements that require significant production, modification, or customization of software, we apply the provisions of Accounting Research Bulletin (“ARB”) No. 45, “Long-Term Construction-Type Contracts,” and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” We also consider the guidance of the Emerging Issues Task Force (EITF”) Topic 00-21, “Revenue Arrangements with Multiple Deliverables” with respect to the recognition of revenue from the sale of hardware components (separate accounting units) of a multiple deliverable arrangement. While these statements govern the basis for revenue recognition, significant judgment and the use of estimates are required in connection with the determination of the amount of product, maintenance and service revenue as well as the amount of deferred revenue to be recognized in each accounting period. Material differences may result in the amount and timing of our revenue for any period if actual results differ from management’s judgment or estimates.
PRODUCTS REVENUE. The timing of product revenue recognition is dependent on the nature of the product sold. Product arrangements comprising multiple deliverables including software, hardware, professional services, and maintenance are generally categorized into one of the following:
· | Facial-based biometric identification and security projects that do not require significant modification or customization of our software: Revenue associated with these arrangements, exclusive of amounts allocated to maintenance, for which we have vendor-specific objective evidence of fair value (“VSOE”), is recognized upon installation and receipt of written acceptance of the project by the customer when required by the provisions of the contract, provided that all other criteria for revenue recognition have been met. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the maintenance period. To date, we have not made an allocation of contract revenue to separate accounting units since all of the products have been delivered simultaneously and no deferral of revenue would result. |
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· | Facial-based biometric identification and security projects that require significant modification or customization of our software: Revenue associated with these arrangements is recognized using the percentage of completion method as described by SOP 81-1. The percentage of completion method reflects the portion of the anticipated contract revenue, excluding maintenance that has VSOE, which has been earned, equal to the ratio of labor effort expended to date to the anticipated final labor effort, based on current estimates of total labor effort necessary to complete the project. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the contractual maintenance period. |
· | Self-developed software products sales and re-sale of purchased third parties products: Revenue associated with the sale of these products, excluding maintenance when applicable, is recognized upon shipment to the customer. The amount of these revenues has historically not been significant. |
SERVICES REVENUE. Services revenue is primarily derived from computer engineering services, system design, consulting and integration and maintenance services that are not an element of an arrangement for the sale of products. These services are generally billed on a time and materials basis. The majority of our professional services are performed under time-and-materials arrangements. Revenue from such services is recognized as the services are provided.
MAINTENANCE SERVICES REVENUE. Maintenance revenue consists of fees for providing technical support and software updates, primarily to customers purchasing the primary products. We recognize all maintenance revenue ratably over the applicable maintenance period. We determine the amount of maintenance revenue to be deferred through reference to substantive maintenance renewal provisions contained in the arrangement.
INTEREST INCOME. Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
REVENUE RECOGNITION CRITERIA. We recognize revenue when persuasive evidence of an arrangement exists, the element has been delivered, the fee is fixed or determinable, collection of the resulting receivable is probable and VSOE of the fair value of any undelivered element exists. A discussion about these revenue recognition criteria and their applicability to our transactions follows:
· | Persuasive evidence of an arrangement: We use either contracts signed by both the customer and us or written purchase orders issued by the customer that legally bind us and the customer as evidence of an arrangement. |
· | Product delivery: We deem delivery to have occurred when the products are installed and, when required under the terms of the arrangement, when accepted by the customer. Delivery of other re-sale products are recognized as revenue when products are shipped and title and risk of ownership has passed to the buyer. |
· | Fixed or determinable fee: We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within our normal established practices. If the fee is not fixed or determinable, we recognize the revenue as amounts become due and payable. |
· | Collection is deemed probable: We conduct a credit review for all significant transactions at the time of the arrangement to determine the credit-worthiness of the customer. Collection is deemed probable if we expect that the customer will pay amounts under the arrangement as payments become due. |
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SALES TO AUTHORIZED DISTRIBUTORS. We also use authorized distributors to sell certain of our products and only the authorized distributors are allowed to resell those products. We require the authorized distributors to purchase the products and then sell through the authorized distributors’ own distribution channels to the end customers. From our perspective, the authorized distributors are the ordinary customers and the only preferential treatment to them is that the sales prices to distributors have been predetermined in accordance with the distribution agreements, and are approximately 30% to 40% off the recommended retail prices. Once the products are delivered and the distributor has accepted the products, we bill the distributor and the distributor is obligated to settle the bill accordingly within the credit period granted. There is no right of return or other incentives given to the distributors. We are not required to provide training to authorized distributors.
Research and development costs. Research costs are expensed as incurred. The major components of these research and development costs are the labor cost.
Intangible assets/Software development costs. Intangible assets consist primarily of capitalized software development costs. We review software development costs incurred in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” which requires that certain costs incurred in the development of computer software to be sold or leased be capitalized once technological feasibility is reached. The purchased software license costs, patent costs, and the capitalized software development costs are amortized over an estimated economic life of five years, which is consistent with the expected life of these assets.
We received government funding which was offset to software-development costs incurred prior to the beginning of the capitalization period. According to paragraph 73 of SOP 97-2, if capitalization of the software-development costs commences pursuant to SFAS No. 86, any income from the funding party under a funded software-development arrangement should be credited first to the development costs prior to capitalization.
Grant and subsidy income represents subsidy from the Government of the Hong Kong Special Administrative Region (“HKSAR”) for assisting us in the development of products of innovative nature. The products developed under this subsidy plan include ProAccess and ProFacer. Pursuant to the agreements made between us and HKSAR, HKSAR is required to provide funding to us for product development. The funding is made available to us in accordance with the milestones as established by us and is subject to a ceiling of US$256,410 (HK$2,000,000). We are not required to repay the Government grant, but we are required to contribute approximately 50% of the overall project cost in accordance with the grant agreement. Also, upon completion of the project, we have to tender to the Government its pro rata share of the residual funds remaining in the project account. In addition we are obligated to pay the Government a royalty fee of 5% on the gross revenue earned from any activities in connection with the project, up to an aggregate amount equal to the amount subsidized to us. We may have to pay the Government 10% of the gross proceeds of our 2005 private placement as part of the royalty payment obligation. We are entitled to retain ownership of the intellectual property resulting from the project.
Equity-based compensation. We adopted SFAS No. 123, “Accounting for Stock-Based Compensation” beginning at its inception. Effective from January 1, 2006, we adopted SFAS 123(R), which requires all share-based payments to employees and directors, including grants of employee stock options and restricted stock units, to be recognized in the financial statements based on their grant date fair values. The valuation provisions of SFAS 123(R) apply to new awards, to awards granted to employees and directors before the adoption of SFAS 123(R) whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled.
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Under SFAS 123(R), we applied the Black-Scholes valuation model in determining the fair value of options granted to employees and directors. Options are measured based on the fair market value of the underlying awards at the date of grant. We recognize the relevant share-based compensation expenses on a straight-line basis over the vesting period.
Under SFAS 123(R), the number of share-based awards for which the service is not expected to be rendered for the requisite period should be estimated, and the related compensation cost not recorded for that number of awards.
Foreign currency translation methodology. Our functional currency is the Hong Kong dollar because the majority of our revenues, capital expenditures, and operating and borrowing costs are either denominated in Hong Kong dollars or linked to the Hong Kong dollar exchange rate. Accordingly, transactions and balances not already measured in Hong Kong dollars, which are primarily transactions involving the United States dollar and the PRC Yuan, have been re-measured into Hong Kong dollars in accordance with the relevant provisions of Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” The object of this re-measurement process is to produce largely the same results that would have been reported if the accounting records had been kept in Hong Kong dollars. The exchange rate adopted throughout the consolidated financial statements where United States dollars are presented was US$1 for HK$7.8.
Cash, receivables, payable, and loans are considered monetary assets and liabilities and have been translated using the exchange rate as of the balance sheet dates. Non-monetary assets and liabilities, including non-current assets and shareholders’ equity, are stated at their actual dollars cost or are restated from their historic cost, by applying the historical exchange rate as monthly average exchange rates to underlying transactions.
Results of Operations
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006. For the three months ended September 30, 2007, project revenues decreased by US$84,117 (HK$656,116) (16.4%) over the same period in 2006, mainly due to a decreased volume of business, as opposed to a decrease in prices. The decreased volume of business can be attributed to a delay in projects awarded from potential clients.
The gross margin on projects as a percentage of project revenues was 42.6% for the 2007 quarter, as compared to 29.0% for the 2006 quarter. The increase in gross profit percentage can be attributed to the decrease in cost of fulfilling the projects. Gross profit on projects increased in terms of dollars in 2007 by US$33,749 (HK$263,243) because of the increased cost efficiency of fulfilling the projects.
Selling, general, and administrative expenses increased by US$199,736 (HK$1,557,938) (129.9%) in 2007 as compared to 2006 due mainly to an increase in allowance for doubtful accounts of US$73,567 (HK$573,826), as some of our trade receivables exceeded 90 days. Salary and welfare increased by US$96,519 (HK$752,849) as compared to 2006 as we hired more personnel. In addition, depreciation and amortization increased by US$15,941 (HK$124,338) because of the leasehold improvements made in 2005 to our office facilities and the additions to capitalized software development costs in 2005
Primarily as a result of the increased in gross profit and the decreased in stock- based compensation cost of US$163,357 (HK$1,274,187), we incurred a decreased operating loss in 2007 of US$177,465 (HK$1,384,229) as compared to operating loss in 2006 of US$212,920 (HK$1,660,774).
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We had other expense in 2007 of US$117,477 (HK$916,322), which consisted primarily of interest expense, in contrast to other expense of US$2,498 (HK$19,482) in 2006. We had an income tax credit of US$3,159 (HK$24,636) for 2007, as compared to an expense of US$8,400 (HK$65,519) for 2006.
In summary, we generated 16.3% less revenues in the quarter ended September 30, 2007 and had a slight decrease in operating expenses, but a 4608% increase in interest expense has resulted in a net loss of US$291,783 (HK$2,275,915) as compared to net loss of US$203,500 (HK$1,587,300) for the comparable 2006 quarter.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006. For the nine months ended September 30, 2007, project revenues decreased by US$828,881 (HK$6,465,274) (42.6%) over the same period in 2006, mainly due to a decreased volume of business, as opposed to a decrease in prices. The decrease in volume can be attributed to our weakened cash position, which hampered our ability to fulfill contracts, plus the above-mentioned delay of projects awarded from potential clients.
The gross margin on projects as a percentage of project revenues was 46.8% for the 2007 period, as compared to 35.8% for the 2006 period. The increase in gross profit percentage can be attributed to the decrease in cost of fulfilling the projects. Gross profit on projects decreased in terms of dollars in 2007 by US$173,494 (HK$1,353,252) because of the decrease in sales.
Selling, general, and administrative expenses increased by US$297,261 (HK$2,318,639) (45.5%) in 2007 as compared to 2006 due mainly to an increase to allowance for doubtful accounts of US$166,629 (HK$1,299,708), as some of our trade receivables exceeded 90 days. Depreciation and amortization increased by US$66,726 (HK$520,460) because of the leasehold improvements made in 2005 to our office facilities and the additions to capitalized software development costs in 2005.
Primarily as a result the increased selling, general and administrative expenses, we incurred an operating loss in 2007 of US$522,650 (HK$4,076,675) as compared to operating loss in 2006 of US$170,917 (HK$1,333,150).
We had other expense in 2007 of US$169,885 (HK$1,325,101), which consisted primarily of interest expense, in contrast to other income of US$292 (HK$2,275) in 2006. We had an income tax credit of US$8,957 (HK$69,863) for 2007, as compared to US$884 (HK$6,898) for 2006.
In summary, we generated 42.9% less revenues for the nine months ended September 30, 2007, while our operating expenses and interest expense increased by 16.2% and 2821%, respectively, resulting in a net loss of US$683,578 (HK$5,331,913) as compared to net loss of US$170,324 (HK$1,328,527) for the comparable 2006 period.
Liquidity and Capital Resources
As of September 30, 2007. At September 30, 2007, we had working capital of US$647,290 (HK$5,048,873), as compared to US$182,021 (HK$1,419,763) at December 31, 2006. The increase was due primarily to the completion of a private placement of convertible debentures resulting in net proceeds of US$1,225,000 (HK$9,555,000). At September 30, 2007, we showed an increase in deposits and other receivables of US$67,240 (HK$524,473), a decrease in bank overdraft of US$138,435 (HK$1,079,795), and an increase in accounts payable of US$270,991 (HK$2,113,730).
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During the nine months ended September 30, 2007, our operating activities used cash of US$430,645 (HK$3,359,031), as compared to US$266,724 (HK$2,080,445) provided in 2006. We also used US$484,819 (HK$3,781,593) for investing activities in 2007, which were primarily for capitalized software development costs, as compared to US$489,276 (HK$3,816,352) used in 2006, primarily for additions to plant and equipment. Financing activities, which consisted primarily of net proceeds from our debenture offering and a short-term bank loan, provided cash of US$1,099,974 (HK$8,579,796) in 2007. In comparison, we used cash of US$8,215 (HK$64,079) to repay our bank overdraft in 2006.
To address our need for additional working capital, we completed a financing for gross proceeds of US$1,450,000 (HK$11,310,000) in early April 2007. We sold convertible debentures that accrue interest at 8% per annum. The interest is payable quarterly on January 1, April 1, July 1 and October 1 beginning July 1, 2007 in cash or in shares at our option, with the shares to be registered pursuant to an effective registration statement and priced at the lesser of (a) $0.30 or (b) 90% of the volume-weighted average price for the 10 consecutive trading days immediately prior to payment. The debentures have a maturity date of 36 months and are convertible at any time by the holders into shares of our common stock at a price equal to $0.30. The debentures are convertible at our option as long as there is an effective registration statement covering the shares underlying the debentures and the closing bid price of our common stock is at least $0.75 per share. The debentures are redeemable at our option at 120% of face value, as long as there is an effective registration statement covering the shares underlying the debentures. The debentures contain anti-dilution protections to allow adjustments to the conversion price of the debentures in the event we sell or issue shares at a price les than the conversion price of the debentures.
The purchasers of the debentures also received five-year warrants that allow the holders to purchase 4,833,333 shares of our common stock at $0.50 per share.
We paid a placement fee of $145,000 and issued placement agent warrants entitling the holders to purchase an aggregate of 483,333 shares at $0.315 per share for a period of seven years.
We have filed a registration statement to register the resale of the shares underlying the debentures issued to the investors. That registration statement was declared effective on November 1, 2007.
At September 30, 2007, our bank overdraft was US$81,055 (HK$632,229). We have a banking facilities arrangement with the bank where we maintain our checking account that allows us to overdraft our account up to US$256,410 (HK$2,000,000). Our officers and directors have provided their personal guarantees up to that amount for the banking facilities arrangement. Essentially this is a receivables revolving line of credit, as the borrowing base is based on a percentage of our eligible accounts receivable. The bank charges interest on the overdraft at the higher of 1.5% over the Hong Kong prime rate or 2% over the overnight HIBOR (Hong Kong Interbank Offered Rate). Generally, the overdraft situation does not exist for any significant length of time. The consequences of not paying according to the terms of our agreement with the bank are the same as for any other secured loan. The bank would be entitled to foreclose on the collateral and/or seek repayment from the guarantors.
In light of our working capital of US$647,290 (HK$5,048,873) at September 30, 2007, we believe that we have current and available capital resources sufficient to fund planned operations for the remainder of the current fiscal year. Our current fixed overhead is approximately $64,102 (HK$500,000) per month, without giving any effect to any revenues that we generate. Fixed overhead comprises salaries, office rent and maintenance, utilities, telephone, travel, office supplies, employee benefits, insurance and licenses, and professional fees. We believe we will be able to fund the expenditures described above with our existing cash flow, based upon the signed contracts for orders that we have. At
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September 30, 2007, our backlog of orders believed to be firm was approximately US$2,000,000 (HK$15,600,000), as compared to approximately US$2,000,000 (HK$15,600,000) at September 30, 2006. We expect that approximately US$1,000,000 (HK$7,800,000) will not be filled by the second half of 2007.
Forward-Looking Statements
This report includes “forward-looking statements.” All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue” or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove to have been correct.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates primarily to money market funds included in our investment portfolio. Investments in fixed rate earning instruments carry a degree of interest rate risk as their fair market value may be adversely impacted due to a rise in interest rates. As a result, our future investment income may fall short of expectations due to changes in interest rates. We do not use any hedging transactions or any financial instruments for trading purposes and we are not a party to any leveraged derivatives. Due to the nature of our investment portfolio, we believe that we are not subject to any material market risk exposure.
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures at the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceedings.
Item 1A. Risk Factors
There were no other material changes from the risk factors disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
None.
Item 3. Defaults Upon Senior Securities
None.
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
Regulation S-K Number | Exhibit |
3.1 | Memorandum of Association, as amended (1) |
3.2 | Articles of Association, as amended (1) |
4.1 | Form of Warrant (2) |
4.2 | Form of Subscription Agreement (2) |
10.1 | Employment agreement with Jason Ma dated January 1, 2005 (1) |
10.2 | Employment agreement with Humphrey Cheung dated January 1, 2005 (1) |
10.3 | Employment agreement with Billy Tang dated January 1, 2005 (1) |
10.4 | Office lease dated June 22, 2005 (1) |
10.5 | 2005 Stock Plan (2) |
10.6 | Technical Service Agreement with IBM China/Hong Kong Limited dated October 5, 2004 and Amendment to Supplier Agreement dated December 3, 2004 (2) |
10.7 | Technology Partnership and Research & Development Contract with China Scientific Automation Research Center dated June 15, 2005 (2) |
10.8 | Technology Research and Development Contract with Tsing Hua University dated November 4, 2005 (2) |
10.9 | Form of Distributor Agreement (3) |
10.10 | Form of Reseller Agreement (3) |
10.11 | Distributor Agreement with Elixir Group Limited dated January 1, 2004 (4) |
10.12 | Distributor Agreement with Smart Wireless Corporation dated February 1, 2005 (4) |
10.13 | Agreement with Shanghai Commercial Bank Ltd. dated February 7, 2006 (4) |
10.14 | Securities Purchase Agreement dated April 3, 2007 (5) |
21
Regulation S-K Number | Exhibit |
10.15 | Form of Debenture (5) |
10.16 | Registration Rights Agreement dated April 3, 2007 (5) |
10.17 | Form of Warrant (5) |
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer |
31.2 | Rule 13a-14(a) Certification of Principal Financial Officer |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Financial Officer |
_________________
(1) Incorporated by reference to the exhibits to the initial filing of the registration statement on Form S-1 (File No. 333-128302) on September 14, 2005.
(2) Incorporated by reference to the exhibits to Amendment No.1 to the registration statement on Form S-1 (File No. 333-128302) on December 9, 2005.
(3) Incorporated by reference to the exhibits to Amendment No. 2 to the registration statement on Form S-1 (File No. 333-128302) on January 26, 2006.
(4) Incorporated by reference to the exhibits to Amendment No. 3 to the registration statement on Form S-1 (File No. 333-128302) on March 8, 2006.
(5) Incorporated by reference to the exhibits to the registrant's current report on Form 8-K dated April 3, 2007 (File No. 0-52415), filed April 4, 2007.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TITANIUM GROUP LIMITED | |||
November 14, 2007 | By: | /s/ Dr. Kit Chong "Johnny" Ng | |
Dr. Kit Chong "Johnny" Ng | |||
Principal Financial Officer | |||
By: | /s/ Jason Ma | ||
Jason Ma | |||
Chief Executive Officer | |||