[LETTERHEAD OF DILL DILL CARR STONBRAKER & HUTCHINGS]
CHRISTOPHER W. CARR
DANIEL W. CARR
JOHN J. COATES
KEVIN M. COATES
H. ALAN DILL
ROBERT A. DILL
455 SHERMAN STREET, SUITE 300 THOMAS M. DUNN
DENVER, COLORADO 80203 JOHN A. HUTCHINGS
PHONE: 303-777-3737 STEPHEN M. LEE
FAX: 303-777-3823 FAY M. MATSUKAGE*
ADAM P. STAPEN
JON STONBRAKER
CRAIG A. STONER
DILL DILL CARR STONBRAKER & HUTCHINGS, P.C. PATRICK D. TOOLEY
*Also licensed in Nevada
March 8, 2006
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
Mail Stop 4561
100 F Street, N.E.
Washington, D.C. 20549
RE: TITANIUM GROUP LIMITED
REGISTRATION STATEMENT ON FORM S-1
AMENDMENT FILED ON JANUARY 26, 2006
FILE NO. 333-128302
Dear Mr. Shuman:
On behalf of Titanium Group Limited (the "Company"), Amendment No. 3 to the
registration statement on Form S-1 is being filed.
The comments of the Staff in its letter dated February 13, 2006, have been
addressed in this filing pursuant to your request. The comments are set forth
below, together with the Company's responses, which refer to the EDGAR page,
which contains revised disclosure.
To assist the staff in its review of this Amendment, we are sending two hard
copies of this letter, together with two hard copies of the Amendment, marked to
show all of the changes.
GENERAL
1. WE REISSUE OUR PRIOR COMMENT 2. PLEASE SPECIFICALLY DISCLOSE THE
FACTUAL BASIS FOR AND THE CONTEXT OF ALL YOUR BELIEFS, UNDERSTANDINGS,
ESTIMATES, AND OPINIONS. THIS PARTICULARLY PERTAINS TO YOUR DISCLOSURE
OF ALL PROJECTIONS, STATISTICS, AND ASSERTIONS. UNLESS YOU CAN
SUBSTANTIATE ON A REASONABLE BASIS ALL OF THE PROJECTIONS, STATISTICS
AND ASSERTIONS THAT YOU CITE, PLEASE REMOVE THEM. TO THE EXTENT YOU
RELY ON INDUSTRY ANALYSES, PLEASE DISCLOSE WHETHER THE SOURCE IS
PUBLICLY AVAILABLE. IF THE SOURCE IS NOT AVAILABLE FOR NO OR NOMINAL
CHARGE, THEN THE COMPANY MUST ADOPT THE INFORMATION AS THE COMPANY'S
OWN OR PROVIDE A CONSENT FOR ITS USE. ALSO, SUPPLEMENTALLY PROVIDE THE
STAFF WITH COPIES OF ALL SOURCES UTILIZED FOR YOUR DISCLOSURE OF
STATISTICS. SOME EXAMPLES INCLUDE THE FOLLOWING. THIS IS NOT AN
EXHAUSTIVE LIST.
o THE STATEMENTS IN THE FIRST PARAGRAPH ON PAGE 13 RELATING TO YOUR
"INTERNAL RESEARCH";
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 2
o THE STATEMENTS IN THE PARAGRAPH STARTING "ALTHOUGH DIFFERENT
BIOMETRICS . . ." ON PAGE 18;
o THE STATEMENTS IN THE PARAGRAPH IMMEDIATELY PRECEDING THE
"TI-FACE" SUBSECTION ON PAGE 19;
RESPONSE: The Company has reviewed the statements throughout the
document and revised the statements, as they cannot be supported with
independent studies or analyses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, PAGE 11
2. PLEASE EXPAND THE FIFTH PARAGRAPH TO PROVIDE A QUANTITATIVE AND
QUALITATIVE CONTEXT FOR YOUR PRODUCT PERFORMANCE CLAIMS AS TO A "VERY
LOW ACCEPTANCE RATE" AND "A VERY HIGH VERIFICATION RATE". IN THE
COMPETITION SUBSECTION OF "BUSINESS", INDICATE HOW THE PERFORMANCE OF
THE COMPANY'S PRODUCTS COMPARES TO THE OFFERINGS OF ITS COMPETITORS.
RESPONSE: This statement has been revised, as the product performance
claims are based only on the Company's own internal testing. Such
results would not be meaningful unless compared to the test results of
competitors' products. The Company is unable to obtain test result of
competitors' products conducted by any independent sources. Therefore
the statement referred to in this comment has been revised.
3. IN THE RESULTS OF OPERATIONS DISCUSSION, YOU SOMETIMES REFER TO TWO OR
MORE FACTORS OR EVENTS THAT CONTRIBUTED TO A MATERIAL CHANGE THAT IS
DISCUSSED. WHERE A CHANGE FROM ONE PERIOD TO THE NEXT IS THE RESULT OF
TWO OR MORE FACTORS OR EVENTS, PLEASE STATE THE AMOUNT OF THE CHANGES
THAT WAS ATTRIBUTABLE TO EACH SEPARATE FACTOR OR EVENT. FOR EXAMPLE,
WHAT PORTION OF THE INCREASED SG&A EXPENSES IN 2004 WAS DUE TO
INCREASES IN THE NUMBER OF EMPLOYEES, AND WHAT PORTION WAS DUE TO
ESTABLISHING A NEW RESEARCH CENTER.
RESPONSE: Complied. Wherever possible, the Results of Operations
discussion has been revised to quantify the amount of change that is
attributable to various factors. See pages 15 and 16.
4. IN DISCUSSING THE CHANGES IN REVENUES FROM ONE PERIOD TO THE NEXT,
PLEASE INDICATE THE EXTENT TO WHICH CHANGES IN YOUR REVENUES WERE
ATTRIBUTABLE TO CHANGES IN PRICES CHARGED FOR PRODUCTS OR SERVICES, AS
OPPOSED TO VOLUMES OF PRODUCTS OR SERVICES PROVIDED IN EACH PERIOD. IF
PRICES FOR YOUR PRODUCTS AND SERVICES WERE CONSTANT IN 2004 AND 2005,
PLEASE SO STATE.
RESPONSE: Complied. The Results of Operations discussion has been
revised to state that the Company's prices for products were constant
in 2004 and 2005, but the pricing for products was lower in 2003. See
pages 15 and 16.
PRIOR COMMENT NO. 11 LIQUIDITY AND CAPITAL RESOURCES
5. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 11 AND YOUR REVISED
DISCUSSION OF SHAREHOLDER LOANS IMPACTING YOUR 2003 OPERATING
ACTIVITIES. AS REQUESTED IN OUR PRIOR
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 3
COMMENT, EXPLAIN WHY SHAREHOLDER LOANS ARE INCLUDED IN OPERATING
ACTIVITIES AS OPPOSED TO FINANCING ACTIVITIES AND HOW THIS PRESENTATION
COMPLIES WITH SFAS 95. IN YOUR RESPONSE CLEARLY ADDRESS THE PROVISIONS
OF SFAS 95 THAT PERMIT CLASSIFICATION OF A LOAN AS AN OPERATING
ACTIVITY. IN ADDITION PROVIDE THIS INFORMATION IN YOUR RESPONSE, AS
OPPOSED TO REFERRING TO REVISIONS IN YOUR FILING AND REVISE YOUR FILING
AS NEEDED.
RESPONSE: The Statement of Cash Flows has been corrected, as
shareholder loans should not have been included in operating
activities. See page F-7.
6. WE NOTE THAT YOU USE THE TERM "BURN RATE" IN YOUR DISCUSSION OF
LIQUIDITY AND CAPITAL RESOURCES. TELL US HOW YOU CONSIDERED ITEM 10(E)
OF REGULATION S-K REGARDING NON-GAAP MEASURES AS IT RELATES TO YOUR USE
OF THE TERM "BURN RATE". FURTHER TELL US WHETHER "BURN" RATE IS A
MEASURE OF LIQUIDITY OR PERFORMANCE AND HOW THIS METRIC IS COMPUTED.
RESPONSE: Instead of using the term "burn rate," the discussion refers
to the term "fixed overhead." See page 18.
7. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 16, SPECIFICALLY, THAT YOU
HAVE LIMITED YOUR DISCLOSURE RELATING TO THE IDENTITY OF CUSTOMERS WHO
HAVE PURCHASED LARGE SYSTEMS BECAUSE OF PRIVACY CONCERNS. PLEASE BE
ADVISED THAT YOUR MAJOR CUSTOMERS, SPECIFICALLY THOSE THAT ACCOUNT FOR
10% OR MORE OF YOUR CONSOLIDATED REVENUES, MUST BE IDENTIFIED PURSUANT
TO ITEM 101(C) OF REGULATION S-K. REVISE OR ADVISE.
RESPONSE: Those customers that account for 10% or more of the Company's
consolidated revenues are identified in "Business - Customers". See
page 26.
BUSINESS, PAGE 18
8. PROVIDE QUANTITATIVE CONTEXT FOR YOUR CLAIM IN THE THIRD PARAGRAPH THAT
YOU ARE A LEADING PROVIDER OF AUTOMATIC FACE RECOGNITION SYSTEMS. IN
PARTICULAR, HOW DID YOUR REVENUES FOR THE MOST RECENT PERIOD COMPARE TO
THE REVENUES OF THE LARGER COMPANIES THAT ARE YOUR COMPETITORS. CLARIFY
WHY YOU BELIEVE THAT SUPPLYING SYSTEMS TO GOVERNMENTS, LAW ENFORCEMENT
ORGANIZATIONS, GAMING COMPANIES AND OTHER ORGANIZATIONS SUPPORTS YOUR
CONCLUSION THAT YOU ARE A "LEADING PROVIDER".
RESPONSE: The Company cannot obtain revenue figures from its
competitors. Accordingly, the sentence has been revised to state only
that the Company has sold systems to governments, law enforcement
organizations, gaming companies and other organizations. See pages 19
and 20.
EXECUTIVE COMPENSATION, PAGE 31
9. PLEASE UPDATE THE EXECUTIVE COMPENSATION DISCLOSURE TO PROVIDE
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2005, THE MOST "RECENT
FISCAL YEAR" AS THAT TERM IS USED IN ITEM 402 OF REGULATION S-K. IF
BONUS AMOUNTS FOR THE PRIOR YEAR HAVE NOT YET BEEN DETERMINED, THIS
SHOULD
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 4
BE NOTED IN A FOOTNOTE TOGETHER WITH DISCLOSURE REGARDING THE DATE THE
BONUS WILL BE DETERMINED, ANY FORMULA OR CRITERIA THAT WILL BE USED AND
ANY OTHER PERTINENT INFORMATION. REFER TO INTERP. 8B OF TELEPHONE
INTERP. MANUAL (JULY 1997).
RESPONSE: The table appearing on page 31 and 32 has been updated to
include information for the year ended December 31, 2005.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, PAGE 33
10. WE NOTE THAT YOU ONLY LIST GOLDEN MASS AND ITS CONTROL PERSONS, MESSRS.
CHEUNG AND TANG. WE WOULD NOT OBJECT TO OMISSION OF TABULAR INFORMATION
ON ANY OTHER EXECUTIVE OFFICERS NAMED IN THE SUMMARY COMPENSATION
TABLE, AS WELL AS ANY DIRECTORS, SO LONG AS YOU INCLUDE A STATEMENT
THAT, EXCEPT AS SET FORTH IN THE TABLE, NONE OF THE PERSONS WITHIN
THOSE CATEGORIES BENEFICIALLY OWNED ANY SHARES OF THE COMPANY'S COMMON
STOCK.
RESPONSE: The Company has determined to leave the table as is.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, PAGE 34
11. PLEASE EXPAND THE TEXT CONCERNING THE SALES TO ERICORPS TO DISCUSS MORE
CLEARLY AND SPECIFICALLY HOW THE PRICES AND OTHER TERMS OF THE RELATED
PARTY TRANSACTION COMPARE TO THE PRICES AND TERMS OF CORRESPONDING
TRANSACTIONS DURING EACH PERIOD WITH NON-AFFILIATED ENTITIES. ALTHOUGH
WE NOTE THAT YOU STATE THAT THE TERMS ARE "SIMILAR", YOU SHOULD
INDICATE WHETHER THE TERMS OF THE RELATED PARTY TRANSACTION ARE NO LESS
FAVORABLE THAN THE TERMS OF TRANSACTIONS WITH NON-AFFILIATES. TO THE
EXTENT THERE ARE VARIANCES IN THE TERMS OR SOME OF THE TERMS OF THE
RELATED PARTY TRANSACTION MAY BE VIEWED AS LESS FAVORABLE TO THE
COMPANY, DESCRIBE THE NATURE OF THESE VARIANCES.
RESPONSE: This disclosure has been revised to state that the terms to
Ericorps are the same as those provided to non-affiliated distributors.
See page 34.
12. WITH RESPECT TO THE LOANS FROM RELATED PARTIES, PLEASE DISCLOSE THE
AMOUNTS RECEIVED FROM AND REPAID TO EACH RELATED PARTY. IN THIS
RESPECT, IT APPEARS THAT YOU DISCUSS THE LOANS FROM JOHNNY NG AND BILLY
TANG IN THE AGGREGATE, RATHER THAN ON AN INDIVIDUAL BASIS. PROVIDE
SIMILAR DETAILS WITH RESPECT TO THE "SHAREHOLDER LOANS" THAT ALSO
APPEAR TO BE DISCUSSED IN AN AGGREGATED FASHION. DID THE COMPANY ENTER
INTO PROMISSORY NOTES OR OTHER WRITTEN DOCUMENTATION WITH RESPECT TO
THESE AND OTHER RELATED PARTY TRANSACTIONS REQUIRED TO BE DISCLOSED IN
THIS SECTION? IF SO, THE WRITTEN AGREEMENTS SHOULD BE FILED AS
EXHIBITS.
RESPONSE: Prior to the Company's private placement in 2005, it was a
closely-held business, with Golden Mass Technologies Ltd. as the
controlling shareholder. Through other entities, Johnny Ng has 51%
ownership of Golden Mass and Humphrey Cheung and Billy Tang each own
19%. As disclosed in "Management - Officers, Directors and Key
Employees," Messrs. Ng, Cheung and Tang have founded and operated other
businesses with each other and are close business partners. Due to this
relationship, they have had a
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 5
practice of settling their collective outstanding amounts due to and
from the Company as one group. Also, because the Company was a
closely-held business until the quarter ended September 30, 2005, there
were no promissory notes to document these related party transactions.
Once the Company obtained outside investors, net amounts due from
related parties were offset against amounts due to related parties and
the surplus, together with the outstanding amount owed under
shareholders' loans, were contributed to the capital of the Company.
Further, the Company has adopted a policy of prohibiting advances to
related parties.
13. WE NOTE THE PAYMENTS TO MR. HUMPHREY CHEUNG. AS REQUIRED BY ITEM 404 OF
REGULATION S-K, ALL RELATED PARTY TRANSACTIONS INVOLVING IN EXCESS OF
$60 THOUSAND MUST BE DESCRIBED IN REASONABLE DETAIL. PLEASE DISCLOSE
HOW MR. CHEUNG INTENDS TO PAY THE AMOUNTS DUE AND WHETHER THE PAYMENTS
ARE SUBJECT TO INTEREST.
RESPONSE: As disclosed in the prospectus, the amounts advanced to
Humphrey Cheung were offset against amounts owed to the other related
parties pursuant to their agreement. As of December 31, 2005, there
were no amounts due from Humphrey Cheung or any other related party.
Further, the Company has adopted a policy to prohibit this practice.
The Company did not charge interest on the advances made to Mr. Cheung,
as they had been made to facilitate the operation of the Company's PRC
subsidiary.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - NINE MONTHS ENDED
SEPTEMBER 30, 2005 AND 2004
PRIOR COMMENT NO. 41 - NOTE 3. AMOUNT DUE FROM RELATED PARTIES, PAGE F-4
14. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 41. YOUR RESPONSE APPEARS
TO BE INCONSISTENT WITH YOUR RESPONSE TO COMMENT NO. 55 IN OUR LETTER
DATED DECEMBER 9, 2005, IN WHICH YOU INDICATE THAT IT TAKES A
CONSIDERABLE AMOUNT OF TIME TO TRANSFER CASH THROUGH NORMAL BANKING
CHANNELS AND THAT YOU SAVE APPROXIMATELY FIVE BUSINESS DAYS BY
TRANSFERRING CASH TO A DIRECTOR. RECONCILE THESE TWO RESPONSES
CONSIDERING IT DOES NOT APPEAR FROM YOUR RESPONSE TO PRIOR COMMENT 41
THAT THE DIRECTOR IMMEDIATELY DEPOSITS FUNDS HE RECEIVES IN HIS NAME
DIRECTLY INTO THE BANK ACCOUNT OF YOUR SUBSIDIARY. FURTHER TELL US HOW
FUNDS ARE TRANSFERRED TO THE DIRECTOR, PRESUMABLY LOCATED IN CHINA, AND
IF DONE THROUGH A BANK TRANSFER, CLARIFY WHY THIS TAKES LESS TIME THEN
A TRANSFER DIRECTLY TO THE BANK ACCOUNT OF YOUR SUBSIDIARY. ALSO TELL
US WHETHER THERE IS A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE
DIRECTOR RELATING TO THESE TRANSFERS, AND IF SO, PROVIDE US THE TERMS
OF THE AGREEMENT.
RESPONSE: See the responses to comments 12 and 13 above.
FINANCIAL STATEMENTS - YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 6
PRIOR COMMENT NO. 42 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
PAGE FF-1
15. WE UNDERSTAND FROM YOUR RESPONSE THAT ZHONG YI IS INVOLVED IN THE
CREDENTIALING PROCESS WITH THE OFFICE OF THE CHIEF ACCOUNTANT. PLEASE
ADVISE US WHEN ZHONG YI HAS COMPLETED THIS PROCESS. AS NOTED IN OUR
PRIOR COMMENT NO. 42 WE MAY BE UNABLE TO COMPLETE OUR REVIEW AND ACCEPT
THE REPORT OF ZHONG YI UNTIL THE FIRM HAS COMPLETED THE CREDENTIALING
PROCESS.
RESPONSE: We understand the Zhong Yi has recently received a letter
from the Office of the Chief Accountant and that the credentialing
process is ongoing. We have noted your prior comment.
PRIOR COMMENT NO 43 - CONSOLIDATED STATEMENTS OF INCOME, PAGE F-2 AND FF-4
16. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 43 AND REVISED PRESENTATION
OF REVENUES AND COST OF SALES IN YOUR CONSOLIDATED STATEMENTS OF
INCOME. TELL US WHY NO, OR NOMINAL AMOUNTS, ARE ASSOCIATED WITH COST OF
MAINTENANCE REVENUES.
RESPONSE: The cost of maintenance revenues is now reflected separately
from Selling, general and administrative expenses. See page F-4 and
Note 4 of the Notes to the financial statements on page F-20.
PRIOR COMMENT NO 44 - NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE
FF-11
17. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 44 AND REVISED DISCLOSURES
IN NOTE 1 AND 12 OF YOUR AUDITED FINANCIAL STATEMENTS. CONSIDER CROSS
REFERENCING YOUR DISCLOSURES IN NOTE 12 ("OPERATING RISK") TO NOTE 1,
IN WHICH YOU DISCLOSE SIGNIFICANT CUSTOMERS AND SIGNIFICANT REVENUES
GENERATED IN ONE COUNTRY.
RESPONSE: The notes to the financial statements have been revised to
disclose "Concentrations and Risks" together in one note, Note 17,
which appears on pages F-27 and F-28.
PRIOR COMMENT NO. 45 - REVENUE RECOGNITION, PAGE FF-12
18. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NO. 45 AND REFERENCE TO
REVISED DISCLOSURES IN NOTE 2, WHICH INCLUDE A DESCRIPTION OF PRODUCTS
AND SERVICES THAT RECOGNIZE REVENUE PURSUANT TO SFAS 13 AND SOP 97-2.
PROVIDE THE INFORMATION ABOUT YOUR ACCOUNTING FOR THESE PRODUCTS AND
SERVICES:
PROVIDE THE INFORMATION AND ANALYSIS REQUESTED ABOVE IN YOUR RESPONSE
LETTER AS OPPOSED TO REFERRING TO YOUR REVISED DISCLOSURES AND ALSO
REVISE YOUR DISCLOSURES AS NECESSARY. PLEASE BE AS DETAILED AS
NECESSARY TO PROVIDE A THOROUGH UNDERSTANDING OF YOUR REVENUE
RECOGNITION FOR PRODUCTS AND SERVICES.
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 7
RESPONSE: To facilitate your review of the Company's response, the
response to the specific item is set forth immediately after that item:
o YOUR ANALYSIS OF DETERMINING UNITS OF ACCOUNT PURSUANT TO EITF
00-21 FOR MULTIPLE ELEMENT ARRANGEMENTS, THE ACCOUNTING
LITERATURE THAT APPLIES TO RECOGNIZING REVENUES FOR THOSE
UNITS OF ACCOUNT AND THE TIMING OF DELIVERY FOR EACH UNIT OF
ACCOUNT;
Product arrangements comprising multiple deliverables
including software, hardware, professional services, and
maintenance are generally classified into one of the following
categories:
FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS
THAT DO NOT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION
OF THE COMPANY'S SOFTWARE Revenue associated with these
arrangements, exclusive of amounts allocated to maintenance,
for which the Company has 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.
FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS
THAT REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE
COMPANY'S 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.
o THE TERMS OF YOUR ARRANGEMENTS AND RELATED REVENUE RECOGNITION
FOR PRODUCTS SUBJECT TO SFAS 13 AS NOTED IN YOUR DISCLOSURE,
INCLUDING THE CLASSIFICATION OF THE LEASES, HOW YOU DETERMINE
INTEREST RATES, RESIDUAL VALUES AND OTHER SIGNIFICANT
ASSUMPTIONS AND FACTORS RELATING TO YOUR LEASE ACCOUNTING;
o WHY SYSTEM DESIGN, IMPLEMENTATION AND TRAINING WOULD BE
SUBJECT TO SFAS 13 CONSIDERING THE SCOPE OF THIS LITERATURE
INCLUDES PROPERTY AND EQUIPMENT. WE REFER YOU TO EITF 01-8 AND
PARAGRAPH 1 OF SFAS 13;
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 8
o WHY YOU HAVE NOT PROVIDED ANY OF THE DISCLOSURES PURSUANT TO
SFAS 13;
Reference to accounting pronouncement SFAS 13 "Accounting for
Leases" was made incorrectly. SFAS 13 is not applicable to the
Company and such reference has been deleted from the notes to
the financial statements.
o WHETHER ALL REVENUE RELATING TO UNITS OF ACCOUNT SUBJECT TO
SOP 97-2 ARE DEFERRED UNTIL THE LAST DELIVERABLE IS ACCEPTED
BY THE CUSTOMER;
See the explanation set forth above with respect to the
question about multiple element arrangements. Revenue is
recognized or deferred according to the interpretation in each
of the three products revenue categories.
o TELL US THE STANDARD TERMS OF YOUR SOFTWARE LICENSE
ARRANGEMENTS;
Sales of the Company's products include a license to use the
software in perpetuity so long as the software is installed on
the hardware for which it was originally intended.
o CONSIDERING YOUR DISCLOSURE THAT REVENUE IS DEFERRED UNTIL A
USER ACCEPTANCE CERTIFICATE IS OBTAINED (I.E., AFTER SYSTEM
DESIGN AND IMPLEMENTATION), TELL US WHY NO DETERRED REVENUE IS
REPORTED IN YOUR BALANCE SHEETS;
The Company had some deferred revenue at December 31, 2003
that was included in Accounts payable. The deferred revenue is
now in a separate line item on the balance sheet.
o EXPLAIN THE DIFFERENCE BETWEEN SERVICES/UPGRADES/PRODUCTS
UNDER POST CONTRACT CUSTOMER SUPPORT ARRANGEMENTS THAT ARE
PROVIDED FREE OF CHARGE FOR THE FIRST TWELVE MONTHS AND THOSE
PROVIDED UNDER "DEFINITE MAINTENANCE CONTRACTS";
The major difference between the "free" post-contract customer
support ("PCS") arrangement and "definite maintenance
contract" is that the free PCS is for all customers for the
first twelve-month period, while the definite maintenance
contract is not free and the terms and scope of services are
as agreed upon between the Company and its particular
customer.
o TELL US HOW YOU HAVE CONSIDERED PARAGRAPH 56 OF SOP 97-2 IN
EVALUATING WHETHER YOU ARE PROVIDING IMPLIED PCS UNDER THE
TERMS OF YOUR CONTRACTS. IN THIS REGARD CONFIRM THAT IF AN
UNSPECIFIED UPGRADE OR OTHER PRODUCTS AND SERVICES WERE
PROVIDED TO CUSTOMERS IN THE SECOND YEAR OF THEIR CONTRACT
THAT YOU WOULD NOT PROVIDE THOSE SAME UPGRADES AND SERVICES TO
CUSTOMERS THAT WERE IN THE FIRST TWELVE MONTHS OF THEIR
CONTRACT;
Generally the Company will provide both product warranty and
PCS to its customers for a period of twelve months, free of
charge, and thereafter enter into a definite
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 9
maintenance contract at the discretion of the customer. The
Company confirms that it does not provide any unspecified
upgrade or other products and services to its customers in the
second year, unless the customer has a definite maintenance
contract with the Company.
o TELL US WHETHER YOU EVER SELL SOFTWARE WITHOUT PROVIDING
CUSTOMIZATION, DESIGN AND IMPLEMENTATION SERVICES, AND IF SO,
HOW YOU DETERMINE VSOE WHEN SOFTWARE IS SOLD WITH PCS.
Occasionally, the Company sells software without providing
customization, design and implementation services. In those
cases, revenue, exclusive of amounts allocated to maintenance,
for which the Company has vendor-specific object 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.
PRIOR COMMENT NO. 48
19. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 48. AS REQUESTED IN OUR
PRIOR COMMENT, TELL US WHETHER YOU GRANT PCS TO RESELLERS, AND IF SO,
HOW YOU ALLOCATE THE ARRANGEMENT FEE TO PCS AND OTHER ELEMENTS. WE
REFER YOU TO PARAGRAPH 62 OF SOP 97-2.
RESPONSE: As discussed in Note 18 of the Notes to the financial
statements, the Company provides both product warranties and
post-contract customer support ("PCS") to its customers and resellers
for a period of twelve months, free of charge. Thereafter, at the
discretion of the customers, the Company will enter into definite
maintenance contracts. PCS consists of the provision of a technical
support telephone hotline for the customers. As customers seldom use
this hotline, the Company does not assign any specific personnel to
staff the hotline. As a result, the cost of the PCS during the free
support period is insignificant and no reserve for the cost of PCS is
required.
PRIOR COMMENT NO. 50 - RESEARCH AND DEVELOPMENT COSTS, PAGE FF-14
20. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 50. IT APPEARS FROM YOUR
RESPONSE THAT ALL RESEARCH AND DEVELOPMENT COSTS RELATING TO PRODUCTS
LAUNCHED IN 2004 AND 2005 WERE CAPITALIZED. CONSIDERING THIS, CONFIRM
THAT PROACCESS FACEOK, PROACCESS FACEGUARD, PROFACER IDVR, PROFACER
WATCHGUARD AND PROACCESS FACEATTEND REACHED TECHNOLOGICAL FEASIBILITY,
AS DEFINED IN SFAS 86, PRIOR TO 2004.
RESPONSE: The Company confirms that ProAccess FaceOK, ProAccess
FaceGuard, ProFacer iDVR, ProFacer Watchguard and ProAccess FaceAttend
reached technological feasibility, as defined in SFAS 86, prior to
2004.
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 10
PRIOR COMMENT NO. 51 - RESEARCH AND DEVELOPMENT COSTS, PAGE FF-14
21. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 51. TELL US WHY THE
AUDITOR'S OPINION IS NOT DATED AFTER AUGUST 31, 2005 OR DUAL DATED,
CONSIDERING YOUR FINANCIALS STATEMENTS WERE RESTATED AFTER THAT DATE.
HAVE YOUR AUDITOR'S REVISE THE DATE OF THEIR OPINION DATE, AS
NECESSARY.
RESPONSE: The Company believes that the auditor's opinion was dual
dated and presented as: "August 31, 2005 (except for Note 13, as to
which the date is January 25, 2006)". This issue is now moot, as a new
audit report, bearing a date of March 1, 2006 is included in Amendment
No. 3.
PRIOR COMMENT NO. 52 - GRANT AND SUBSIDY INCOME, PAGE FF-11
22. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 52 AND THAT THE COMPANY APPLIED
SFAS 68 IN ACCOUNTING FOR GOVERNMENT GRANTS RECEIVED. TELL US WHY SFAS
68 APPLIES TO THE GOVERNMENT GRANTS YOU RECEIVED CONSIDERING PARAGRAPH
3 OF THAT STANDARD INDICATES "THIS STATEMENT DOES NOT ADDRESS REPORTING
OF GOVERNMENT-SPONSORED RESEARCH AND DEVELOPMENT." FURTHER TELL US WHY
YOU HAVE NOT APPLIED THE GUIDANCE IN PARAGRAPH 73 OF SOP 97-2, AS IT
RELATES TO ACCOUNTING FOR INCOME RECEIVED FROM A FUNDING PARTY. IN
ADDITION TELL US HOW YOU PROPOSE TO ACCOUNT FOR YOUR ARRANGEMENTS WITH
TSING HUA UNIVERSITY AND THE INSTITUTE.
RESPONSE: Note 2 of the Notes to the financial statements with respect
to "Intangible assets/Software development costs" has been revised to
comply with paragraph 73 of SOP 97-2. The 2003 and 2004 financial
statements were restated to reflect the crediting of grant income to
the software development costs prior to capitalization.
Amounts expended by the Company as its share of expenses under the
agreements with Tsing Hua University and the Institute will be
reflected as research and development expenses.
PRIOR COMMENT NO. 55 - NOTE 8. INCOME TAXES, PAGE FF-17
23. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 55 AND YOUR ANALYSIS OF THE
IMPACT OF NOT RECORDING DEFERRED TAXES. IN YOUR ANALYSIS THE IMPACT ON
2003 INCOME OF NOT RECORDING DEFERRED TAXES IS 30% WHICH APPEARS TO BE
MATERIAL. ALTHOUGH SAB TOPIC 1 M INDICATES THAT QUALITATIVE FACTORS
SHOULD BE CONSIDERED WHEN MISSTATEMENTS ARE QUANTITATIVELY SMALL IT
DOES NOT SUGGEST THAT THE QUALITATIVE FACTORS SHOULD BE CONSIDERED WHEN
ITEMS ARE QUANTITATIVELY MATERIAL. TELL US WHY THIS AMOUNT IS NOT
QUANTITATIVELY MATERIAL TO YOUR FINANCIAL STATEMENTS.
RESPONSE: As disclosed in Note 3 to the Notes to the financial
statements, the 2003 and 2004 statements have been restated to record
deferred taxation.
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 11
PRIOR COMMENT NO. 56
24. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 56. IT IS NOT EVIDENT FROM
YOUR RESPONSE WHICH ITEMS INCLUDED IN YOUR ANALYSIS ARE TEMPORARY
TIMING DIFFERENCES AND PERMANENT TIMING DIFFERENCES AND HOW YOUR
DISCLOSURES COMPLY WITH ITEM 4-08(H) OF REGULATION S-X. TELL US WHICH
ITEMS IN YOUR ANALYSIS ARE TEMPORARY TIMING DIFFERENCES AND DESCRIBE
WHAT IS INCLUDED IN "OTHERS." PROVIDE US WITH THE ACCOUNTING ENTRIES TO
RECORD DEFERRED TAX ASSETS AND LIABILITIES AND REVISE YOUR ANALYSIS
PRESENTED IN RESPONSE TO OUR PRIOR COMMENT NO. 55 TO INCLUDE ALL
TEMPORARY TIMING DIFFERENCES IN ADDITION TO THE AMOUNT PROVIDED FOR
DEPRECIATION. ALSO, TELL US WHY THE AMOUNT OF THE VALUATION ALLOWANCE,
WHICH YOU REFER TO IN YOUR RESPONSE, IS NOT DISCLOSED ALONG WITH THE
RELATED NET OPERATING LOSS CARRY FORWARDS. WE MAY HAVE FURTHER COMMENTS
BASED ON YOUR RESPONSE.
RESPONSE: "Income not subject to tax," "Expenses not subject to tax,"
"Expenses not deductible for tax purposes," "Utilization of previous
unrecognized tax losses," "Tax losses for which no deferred tax asset
was recognized," and "others" in the reconciliation table related to
the permanent difference items, while "Tax allowances" relates to the
temporary difference. The accounting entry for the deferred tax
liability is a debit to statement of operations and a credit to the
balance sheet, while the entry for deferred tax assets is a debit to
the balance sheet and credit to the statement of operations. As there
no deferred tax assets have arisen, no valuation allowance is
considered necessary.
The Company has amended the disclosure in Note 13 of the Notes to
financial statements in an effort to present a clearer explanation to
the reader.
PRIOR COMMENT NO. 57 - NOTE 10. RELATED PARTY TRANSACTIONS, PAGE FF-19
25. WE NOTE YOU RESPONSE TO OUR PRIOR COMMENT 57. AS NOTED IN YOUR RESPONSE
THE AMOUNT OF REVENUE FROM SALES TO ERICORPS ARE SIGNIFICANT.
CONSIDERING THIS, REVISE YOUR BALANCE SHEET, INCOME SHEET, INCOME
STATEMENT, OR STATEMENT OF CASH FLOWS PURSUANT TO RULE 4-08 OF
REGULATION S-X TO DISCLOSE RELATED PARTY TRANSACTIONS. FURTHER REVISE
YOUR MD&A TO DISCUSS THE IMPACT OF RELATED PARTY TRANSACTIONS ON YOUR
RESULTS OF OPERATIONS AND LIQUIDITY.
RESPONSE: Complied. The disclosure of related party transactions
pursuant to Regulation S-X is included in the audited financial
statements. Reference to related party transactions has also been made
in MD&A. See pages 15 to 17.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
26. IN RESPONSE TO PRIOR COMMENT 27, YOU PROVIDE "FORM OF" AGREEMENTS AS
EXHIBITS 10.9 AND 10.10. IF AN AGREEMENT WITH A DISTRIBUTOR IS
MATERIAL, THEN THE AGREEMENT WITH THAT DISTRIBUTOR SHOULD BE FILED IN
THE FORM IT WAS EXECUTED. IF YOU SEEK TO REDUCE THE BURDENS ASSOCIATED
WITH FILING TWO OR MORE COPIES OF SUBSTANTIALLY IDENTICAL AGREEMENTS,
YOU MAY RELY ON INSTRUCTION 2
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
March 8, 2006
Page 12
YET THIS APPROACH REQUIRES THAT YOU IDENTIFY THE PLACES IN THE
AGREEMENT WHERE INFORMATION VARIES FROM ONE AGREEMENT TO THE NEXT AND
THEN PROVIDES THE INFORMATION THAT VARIES IN A SCHEDULE TO THE
AGREEMENT. OTHERWISE, PROVIDE THE APPROPRIATE DOCUMENTS OR PROVIDE US
WITH A REASONABLE BASIS FOR EXCLUDING THE EXECUTED DOCUMENTS.
RESPONSE: Complied. Two material distributor agreements are being filed
as Exhibits 10.11 and 10.12.
UNDERTAKINGS
27. PLEASE PROVIDE THE UNDERTAKINGS SET FORTH IN ITEM 512(A)(5) AND (A)(6)
OF REGULATION S-K, AS APPLICABLE.
RESPONSE: Complied. The undertaking set forth in Item 512(a)(5)(ii) has
been included. The undertakings in Item 512(a)(5)(i) were not
applicable, as the Company is not relying on Rule 430B. Also, the
undertakings of Item 512(a)(6) do not apply as this registration
statement does not involve an initial distribution of the Company's
securities. See pages II-3 and II-4.
Please contact the undersigned with any additional questions or comments you may
have.
Sincerely,
/s/ FAY M. MATSUKAGE
Fay M. Matsukage
Enclosures
Cc: Titanium Group Limited
Zhong Yi (Hong Kong) C.P.A Company Limited