[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*
ROBERT S. McCORMACK
ADAM P. STAPEN
JON STONBRAKER
DILL DILL CARR STONBRAKER & HUTCHINGS, P.C. PATRICK D. TOOLEY
*Also licensed in Nevada
April 28, 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 APRIL 7, 2006
FILE NO. 333-128302
Dear Mr. Shuman:
On behalf of Titanium Group Limited (the "Company"), Amendment No. 5 to the
registration statement on Form S-1 is being filed.
The comments of the Staff in its letter dated April 19, 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. PLEASE UPDATE THE FINANCIAL INFORMATION CONTAINED IN YOUR REGISTRATION
STATEMENT PURSUANT TO RULE 3-12 OF REGULATION S-X.
RESPONSE: The Company believes that the financial information contained
in the registration statement meets the requirements of Rule 3-12 of
Regulation S-X as it includes audited financial information as of and
for the year ended December 31, 2005.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, PAGE 11
2. WE NOTE YOUR REVISIONS IN RESPONSE TO OUR PRIOR COMMENT 5. EXPLAIN HOW
OVERDRAFTING THE COMPANY'S CHECKING ACCOUNT RATHER THAN USING ITS CASH
RESOURCES ENABLES YOU TO "BETTER TRACK
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
April 28, 2006
Page 2
THE PERFORMANCE" OF YOUR OPERATIONS. DISCLOSE WHY MANAGEMENT USES THIS
METHOD TO GENERATE CAPITAL RESOURCES. EXPLAIN MANAGEMENT'S LEVERAGE
STRATEGY, AS APPROPRIATE. ALSO, PLEASE GIVE APPROPRIATE CONSIDERATION
AS TO WHETHER RISK FACTOR TREATMENT TO THE RISK ASSOCIATED WITH THE
"BANKING FACILITIES ARRANGEMENT" IS APPROPRIATE, AND PROVIDE A
SUPPLEMENTAL ANALYSIS IN SUPPORT OF YOUR CONCLUSION. MIGHT YOUR
OPERATIONS BE DISRUPTED OR YOUR CAPITAL MANAGEMENT PROGRAM BE
DISRUPTED, IF THE LENDER REQUIRES REPAYMENT UNEXPECTEDLY, FOR EXAMPLE?
RESPONSE: The proceeds from the offering are deposited in a segregated
U.S. dollar account of the parent entity, Titanium Group Limited. By
keeping these funds separate from the operating account of the
subsidiary, Titanium Technology Limited, the Company can better track
revenues from operations, which are the only funds deposited into the
operating account.
Also, a significant portion of the offering proceeds was allocated for
expenses to be incurred in connection with the Company's plan of
becoming a public company. Most of these expenses will be paid to the
Company's professionals, several of which are located in the United
States. Many of the subscribers of the offering are located in the
United States. Had the offering proceeds been deposited into the
operating account, which is kept in Hong Kong dollars, the Company
would have had to convert U.S. funds into Hong Kong currency when the
offering proceeds were deposited and then convert funds back into U.S.
dollars when paying its professionals. By keeping the funds in the U.S.
dollar account, the Company saves expenses that it might otherwise
incur for the currency conversion.
Further, the Company has noted on page 17 that the overdraft situation
does not exist for any significant lengths of time. The Company
incurred US$2,845 (HK$22,188) of interest expense for the 2005 fiscal
year, and the weighted average rate charged during 2005 was 8.5% per
annum. The annual facility fee charged by the bank for 2005 was US$321
(HK$2,500) and is US$962 (HK$7,500) for 2006. The Company believes that
the benefit of being able to better monitor the performance of its
operating subsidiary outweighs these costs.
The Company has added a risk factor disclosing the fact that all of its
assets have been pledged to secure repayment of this arrangement with
the bank. As with any secured loan of this nature, the Company's
operations could be disrupted if the bank were to require repayment
unexpectedly. See page 7.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, PAGE 34
3. WE NOTE DISCLOSURE THAT THE TERMS OF SHAREHOLDERS' LOANS, WHICH ARE
UNSECURED, INTEREST-FREE AND NOT REPAYABLE WITHIN THE NEXT TWELVE
MONTHS, ARE NO LESS FAVORABLE THAN THOSE THAT COULD HAVE BEEN OBTAINED
FROM NON-AFFILIATES. PLEASE EXPLAIN THE BASIS FOR THESE CONCLUSIONS,
SPECIFICALLY, THE APPARENT CONCLUSION ASSUMPTION THAT LOANS TO
NON-AFFILIATED PARTIES COULD NOT HAVE BEEN OBTAINED WITH TERMS THAT
REQUIRED INTEREST PAYMENTS OR SPECIFIED A MATURITY DATE.
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
April 28, 2006
Page 3
RESPONSE: The statement was made in connection with loans FROM
shareholders, and not loans TO shareholders. In actuality, these
unsecured, interest-free loans from shareholders were on more favorable
terms to the Company than what could have been obtained from
non-affiliates. Certainly, they are on terms no less favorable.
FINANCIAL STATEMENTS - YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
PRIOR COMMENT 13 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
PAGE F-1
4. 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 NUMBER 13 WE MAY BE UNABLE TO COMPLETE OUR REVIEW AND
ACCEPT THE REPORT OF ZHONG YI UNTIL THE FIRM HAS COMPLETED THE
CREDENTIALING PROCESS.
RESPONSE: The Company has been advised that Zhong Yi has completed the
credentialing process with the Office of Chief Accountant.
CONSOLIDATED BALANCE SHEETS, PP. F-2 AND F-3
5. WE NOTE FROM YOUR BALANCE SHEET THAT THE COMPANY REPORTED A BANK
OVERDRAFT OF U.S.$193,187 AS OF DECEMBER 31, 2005. TELL US AND REVISE
TO DISCLOSE THE MATERIAL TERMS OF YOUR ARRANGEMENT WITH THE FINANCIAL
INSTITUTION WHICH PROVIDES FOR BANK OVERDRAFTS (I.E., FEES, INTEREST
RATE, OVERDRAFT LIMIT, PAYMENT TERMS). FURTHER EXPLAIN TO US THE
BUSINESS REASONS FOR THE BANK OVERDRAFT CONSIDERING THE COMPANY
REPORTED U.S.$317,010 OF CASH AND CASH EQUIVALENTS AS OF DECEMBER 31,
2005.
RESPONSE: Please see new note 19 to the notes to the financial
statements. Reference is also made to the response to comment 2 above.
PRIOR COMMENT NO. 14 - REVENUE RECOGNITION, PAGE F-11
6. WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT NUMBER 14. PLEASE CLARIFY/
EXPLAIN THE FOLLOWING:
o YOU INDICATE IN YOUR RESPONSE THAT VSOE FOR PROFESSIONAL
SERVICES (SYSTEM DESIGN, SYSTEM INTEGRATION, INSTALLATION, TESTING
AND TRAINING) IS THE PRICE THAT THE COMPANY WOULD CHARGE IF THESE
SERVICES WERE SOLD SEPARATELY. CONFIRM, IF TRUE, THAT YOU HAVE
SOLD PROFESSIONAL SERVICES SEPARATELY (ON A STAND ALONE BASIS, NOT
WITHIN A MULTIPLE ELEMENT ARRANGEMENT) TO ESTABLISH VSOE AND THE
NATURE AND TERMS OF THE TRANSACTION THAT INCLUDED THESE SEPARATE
SALES OF SERVICES. IF YOU HAVE NOT SOLD THESE SERVICES SEPARATELY
AND HAVE NOT ESTABLISHED VSOE, EXPLAIN HOW YOU RECOGNIZE REVENUE
FOR MULTIPLE ELEMENT ARRANGEMENTS THAT INCLUDE THESE SERVICES.
RESPONSE: The Company confirms that it has sold professional
services separately, thereby enabling it to establish VSOE. In
those instances, the Company charged its clients by using an
hourly rate for its personnel assigned to the job for the clients.
The
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
April 28, 2006
Page 4
Company had been asked to analyze and evaluate the clients'
security systems and make recommendations to the clients.
o YOU INDICATE THAT VSOE FOR MAINTENANCE SERVICES IS ESTABLISHED AS
THE PRICE THE COMPANY WOULD CHARGE IF THE SAME SERVICES WERE SOLD
SEPARATELY. CONFIRM, IF TRUE, THAT THE COMPANY HAS SOLD
MAINTENANCE SERVICES SEPARATELY AND THE NATURE AND TERMS OF THE
TRANSACTION THAT INCLUDED THE SEPARATE SALE OF THESE SERVICES. IF
YOU HAVE NOT SOLD THESE SERVICES SEPARATELY AND HAVE NOT
ESTABLISHED VSOE, EXPLAIN HOW YOU RECOGNIZE REVENUE FOR MULTIPLE
ELEMENT ARRANGEMENTS THAT INCLUDE THESE SERVICES.
RESPONSE: The Company confirms that it has sold maintenance
services separately. In these cases, maintenance services were
provided after the free twelve-month period. The Company gave
customers a maintenance contract for a fixed annual fee. The
Company determined the fee by applying a percentage (ranging from
15% to 20% depending of the mix of software and hardware) to the
total cost of the project charged to the customer. For example, if
the total project was originally $10,000, the annual maintenance
fee charged by the Company might be $1,500. Customers requesting
this type of arrangement are normally larger corporations that are
upgrading their computer systems and require the Company to
standby to assist.
o WE NOTE THE COMPANY CONSIDERED EITF 03-5 AND DETERMINED THAT
SOFTWARE IS MORE THAN INCIDENTAL TO THE PRODUCTS OR SERVICES AS A
WHOLE AND THEREFORE SOP 97-2 IS APPLIED TO ALL ELEMENTS IN
MULTIPLE ELEMENT ARRANGEMENTS. TELL US WHETHER SOFTWARE IS
ESSENTIAL TO THE FUNCTIONALITY OF HARDWARE AND RELATED EQUIPMENT
INCLUDED IN MULTIPLE ELEMENT ARRANGEMENTS AND THE FACTORS YOU
CONSIDERED IN YOUR ASSESSMENT. IF SOFTWARE IS NOT ESSENTIAL TO
OTHER ELEMENTS OF YOUR ARRANGEMENTS, SUCH AS HARDWARE, RELATED
EQUIPMENT, OR INSTALLATION SERVICES, TELL US WHY YOU APPLY THE
PROVISIONS OF SOP 97-2 TO ALL THESE ELEMENTS. FURTHER IF YOU
DETERMINE THAT SOP 97-2 DOES NOT APPLY TO ALL THE ELEMENTS IN YOUR
ARRANGEMENTS TELL US HOW YOU DETERMINED THE UNITS OF ACCOUNT
PURSUANT TO EITF 00-21. SPECIFICALLY ADDRESS YOUR CONSIDERATION OF
PARAGRAPHS 4 AND 9 OF EITF 00-21.
RESPONSE: Initially, the Company considered the software to be
essential to the functionality of the hardware and related
equipment included in multiple element arrangements under the
assumption that "functionality" applied to the intended use of the
product and its components by the customer. Upon additional
consideration of EITF 03-5, it is evident that the hardware
supplied with the Company's products are PC-based computers and
generic camera equipment, which have multiple uses other than in
conjunction with the Company's software. Therefore, the hardware
portion of the sales contracts does not appear to be subject to
the provisions of SOP 97-2. Although it would appear that the
hardware components and the software/installation and testing
components of the products would be considered separate units of
accounting pursuant to EITF 00-21 in that the hardware components
would have value to the customer on a stand alone basis as
described in paragraph 9 thereof, the Company believes that no
allocation of contract consideration would be necessary to
accurately recognize contract revenue since both of these units of
accounting are normally delivered simultaneously, as
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
April 28, 2006
Page 5
described below. PCS might also be considered separately; however,
costs associated with PCS have been immaterial.
o YOU INDICATE THAT THE TOTAL TIME FOR DELIVERY AND INSTALLATION OF
HARDWARE AND SOFTWARE IS USUALLY 3 TO 5 DAYS. TELL US WHETHER
SYSTEM INTEGRATION AND TRAINING SERVICES ARE ALSO DELIVERED WITHIN
THIS 3 TO 5 DAY PERIOD AND IF NOT TELL US THE TIMING FOR
DELIVERING THESE SERVICES AND THE LITERATURE YOU APPLY FOR
RECOGNIZING REVENUE. IN YOUR RESPONSE SPECIFICALLY ADDRESS THE
PERIOD OVER WHICH ALL SERVICES ARE COMPLETED FROM THE DATE OF
DELIVERY OF SOFTWARE AND HARDWARE.
RESPONSE: The Company confirms that system integration and
training services are also delivered within the 3 to 5-day
installation period.
o PROVIDE AN EXAMPLE OF THE ELEMENTS IN A MULTIPLE ELEMENT
ARRANGEMENT, THE PERIOD OVER WHICH THOSE ELEMENTS ARE DELIVERED,
HOW YOU ALLOCATE THE ARRANGEMENT FEE TO EACH ELEMENT AND WHEN YOU
RECOGNIZE REVENUE FOR EACH ELEMENT.
RESPONSE: The Company provides the following example: a sale of
ProFacer iDVR (US$3,150) with the functionality to record and
detect human faces from a video source and pass the captured
faceprints to ProFacer identity. This project would consist of the
following stages:
DAY ALLOCATION OF VALUE OF
CONTRACT
Concluding a sales contract 1 0%
Delivery of hardware and software 6 80%
Installation of hardware and software 7 10%
Training 7 10%
Testing and hardware acceptance acknowledgment 10 0%
A typical installation includes the following elements of
hardware, software and reference materials:
o Hardware - Includes a server, LCD display, IR camera,
circuit board, filter, adapter, and dongles.
o Software - This is Titanium's proprietary ProFacer
software
o Reference materials - Includes a set of the installation
guide and operating manual provided to customers at the
time of training.
Because of the short period of time involved in the whole process,
the Company normally recognizes the revenue on the day of delivery
of the hardware. However, management closely reviews the Company's
sales at each quarter-end and each year-end to determine if any
amount of revenue deferral is required in accordance with the
stated accounting policy. Thus far, there have been no contracts
in process at year-end. Accordingly, the reported revenue for the
Company has not been affected by the application of this
accounting policy.
Mark P. Shuman
Branch Chief
Securities and Exchange Commission
April 28, 2006
Page 6
PRIOR COMMENT NO. 15
7. WE NOTE YOUR RESPONSE THAT THE COMPANY DETERMINED IT DID NOT HAVE ANY
HISTORICAL PATTERNS OF PROVIDING ITS CUSTOMERS WITH SERVICES OR ANY
UPGRADE SERVICES ASSOCIATED WITH PCS AND CONSIDERED THAT IT WAS NOT
NECESSARY TO ALLOCATE A FEE TO PCS. YOUR RESPONSE APPEARS TO BE
INCONSISTENT WITH CERTAIN INFORMATION RELATING TO MAINTENANCE SERVICES
INCLUDED IN YOUR RESPONSES TO COMMENTS NUMBER 14 AND 16. IN COMMENTS
NUMBER 14 AND 16 YOU INDICATE THAT MAINTENANCE SERVICES INCLUDE
SOFTWARE UPDATES (AS DISCLOSED IN ITEM NUMBER 3 OF THE COMPANY'S
REVENUE RECOGNITION POLICY), THAT MAINTENANCE SERVICES ARE PROVIDED FOR
A ONE-YEAR PERIOD DURING THE FIRST YEAR AND THAT THESE SERVICES ARE THE
SAME AS POST-CONTRACT CUSTOMER SUPPORT. CONSIDERING YOUR RESPONSE THAT
MAINTENANCE SERVICES AND PCS ARE THE SAME AND THAT MAINTENANCE SERVICES
INCLUDE SOFTWARE UPDATES, TELL US WHY YOU ARE NOT ALLOCATING ANY OF THE
MULTIPLE ELEMENT ARRANGEMENT TO "FREE PCS", WHEN IT CLEARLY APPEARS IT
ENTITLES YOUR CUSTOMERS TO SOFTWARE UPDATES. IN ADDITION, CLARIFY ANY
INCONSISTENCIES BETWEEN YOUR RESPONSE TO COMMENT NUMBER 15 AND YOUR
RESPONSES TO COMMENTS NUMBER 14 AND 16 RELATING TO MAINTENANCE
SERVICES, FREE PCS AND THE NATURE OF THESE ARRANGEMENTS AND THE PERIOD
OVER WHICH THESE SERVICES ARE DELIVERED.
RESPONSE: The Company has revised language in its footnote regarding
revenue recognition on page F-11 to clarify that post-contract support
("PCS") is not the same as maintenance services. Software upgrades are
not included in PCS. Software upgrades would only be included in annual
maintenance contracts.
Please note that one of the selling shareholders, Catherine Leung, purchased all
of the shares and warrants owned by another selling shareholder, Edward H.
Price, Inc. PS Plan, in a private transaction not involving the Company.
Accordingly, Edward H. Price, Inc. PS Plan is no longer included in the Selling
Shareholders table and the number of shares owned by and being registered for
Catherine Leung has been revised.
Please contact the undersigned with any additional questions or comments you may
have.
Sincerely,
/s/ FAT M. MATSUKAGE
Fay M. Matsukage
Enclosures
Cc: Titanium Group Limited
Zhong Yi (Hong Kong) C.P.A Company Limited