UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-52415
TITANIUM GROUP LIMITED
(Exact name of registrant as specified in its charter)
BRITISH VIRGIN ISLANDS NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4/F, BOCG INSURANCE TOWER, 134-136 DES VOEUX ROAD CENTRAL, HONG KONG
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (852) 3427 3177
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]Yes [X]No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ]Yes [X]No
NOTE - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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 Act). [ ]Yes [X]No
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: NONE (THE REGISTRANT'S COMMON STOCK DID NOT COMMENCE TRADING UNTIL JULY
10, 2006.)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 50,000,000 AS OF MARCH 22, 2007
Documents incorporated by reference: NONE
PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
We were incorporated on May 17, 2004 as an international business
company pursuant to the International Business Companies Act of the British
Virgin Islands ("BVI"). On June 22, 2005, we acquired all of the entire issued
share capital of Titanium Technology Limited, a company incorporated in Hong
Kong on February 14, 2001 with limited liability ("Titanium Technology"). On
September 20, 2002, Titanium Technology and EAE Productions (HK) Limited, a
company incorporated in Hong Kong on October 8, 1997, established Titanium
Technology (Shenzhen) Co., Ltd., a wholly foreign owned enterprise in China, to
conduct research and development operations. Beginning in the third quarter of
2004, it began to conduct business operations in China. EAE Productions (HK)
Limited owns 8% of Titanium Technology (Shenzhen) Co., Ltd. and is owned by
persons who indirectly are shareholders.
We established a BVI company to hold Titanium Technology, as we
believed that it would be easier to attract investment capital into a BVI
company rather than a Hong Kong company. Most of our investors in our recently
completed private placement are United States citizens. We believe that a having
a corporate jurisdiction located in closer proximity to the United States made
the investors feel more at ease than one located in Asia. BVI was selected as a
compromise, as its laws, which are under the British system, are similar to
those of Hong Kong. While the BVI entity is the parent company, our accounting
history is that of Titanium Technology and therefore our operations go back to
2001 when Titanium Technology began operations.
Titanium Technology is engaged in developing products utilizing
biometrics technologies, licensing of technologies, professional services, and
project contracting. Based in Hong Kong with a research and development center
in Shenzhen, China, and a sales representative office in the United States,
Titanium Technology has built a network of over 40 IT practitioners and
researchers, enabling us to provide proprietary biometrics products and
professional services. We have developed and sold Automatic Face Recognition
Systems, or AFRS, and other biometric and security solutions to governments, law
enforcement agencies, gaming companies, and other organizations in China and
other parts of Asia. Our AFRS products enable customers to capture human face
images electronically, encode facial image into searchable files (faceprint),
and precisely compare a set of faces to a database containing potentially
thousands of faces in seconds.
Although different biometrics, e.g. finger scan, may be widely employed
in similar applications, we believe that face recognition has several advantages
over the existing alternatives. First, there is no direct contact between the
device and users, and hence the problems of cleanliness and wear on the
equipment are greatly reduced. Second, the core component is a digital (Charge
Coupled Device (CCD)/Complementary Metal-Oxide-Semiconductor (CMOS) camera,
which is relatively low in production cost. Last but not least, we believe that
users have less concern on privacy issues with regard to facial pictures and the
market acceptance is much higher, since photographs of facial images for
identification are commonly used, such as in passports, driver's licenses, and
other forms of identification cards.
For over five years, we have researched, developed, and marketed face
biometrics technologies that incorporate advanced concepts in neural networks,
artificial intelligence, image processing, pattern recognition, data mining, and
massively parallel computing. Our researchers have taken recognition algorithms
and, using advanced methods of software engineering, turned core mathematical
modules into practical applications. Titanium Technology supports the latest
standards in face biometrics and we are
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focused on enabling our customers to expand the capabilities of their systems as
their biometric needs evolve.
In the beginning of 2002, we developed our core component for face
recognition, called "Ti-Face". To date, Ti-Face Software Development Kit ("SDK")
has been adopted to develop custom-made applications for governments,
universities, and institutions in the greater-China region. Examples include the
Hong Kong government, Hong Kong Polytechnic University, Institution of Vocation
Education (Hong Kong), Chinese Academy of Science (PRC), and Tsing Hua
University (PRC).
In 2003, we successfully registered a patent about "Apparatus and
Method for Recognizing Images" in Hong Kong Special Administrative Region
("HKSAR"). Also in 2003, our face recognition product, ProAccess FaceOK(TM),
computer logical access control software, was launched. This product was then
awarded the "Best of Comdex Finalist 2003" in Las Vegas in November of the same
year. Comdex, an acronym for Computer Dealer's Exhibition, was a computer and
information technology exposition held in Las Vegas, Nevada, each year from 1979
to 2003. It was one of the largest computer trade shows in the world. ProAccess
FaceOK was also awarded several local (the IT Excellence Award in Hong Kong) and
regional (the Asia Pacific ICT Award) recognitions. The IT Excellence Awards is
a professional initiative of the Hong Kong Computer Society. Established in
1998, the award scheme is an annual event that recognizes excellent IT
applications and innovative IT technologies. The Asia Pacific ICT Awards
(APICTA) is an international awards program initiated by the Multimedia
Development Corporation of Malaysia to increase ICT (Information and
Communication Technology) awareness in the community and assist in bridging the
Digital Divide. Participants of the Awards Program comprise members of the
APICTA Network, which include Australia, Brunei, Hong Kong, India, Indonesia,
Korea, Macau, Malaysia, Myanmar, Philippines, Singapore, Sri Lanka, Thailand,
Vietnam and China. Nominees to the different awards are presented to APICTA by
the respective economy coordinator and assessed by a panel of judges
representing every member-economy. Titanium was presented the Merit Award in
Security category with the ProAccess FaceOK product in 2004.
In 2004, we launched our intelligent surveillance product, ProFacer,
and promoted it into casino and financial institution markets. We also set up
distribution networks in mainland China, Australia, and Japan. Titanium
Technology has delivered biometrics security products, consulting services, and
systems integration services to various government offices, financial
institutions, universities, telecommunication companies, and international
corporations. In 2006, we were named to the Deloitte "Technology Fast 50 in
China," placing 28th out of 50 and the Deloitte "Technology Fast 500 in Asia
Pacific," placing 182nd out of 500 with growth of 234% over a three-year period.
This annual award honors the fastest growing technology companies in the region,
based on percentage of revenue growth over a three-year period. This annual
competition is a Deloitte initiative at a regional and global level, which aims
to draw attention to fast-growing companies and bring attention to companies
that are just establishing themselves. Moreover, we have also been named as one
of six finalists out of a record 224 Asian entries in the Global Entrepolis
Award presented by THE WALL STREET JOURNAL ASIA in association with the Economic
Development Board of Singapore.
TI-FACE
Ti-Face is the core face recognition engine that we have developed and
implemented. A proprietary algorithm, named Dynamic Local Feature Analysis
(DLFA), was invented to utilize the specific features for identification instead
of the entire representation of the face. This technology is capable of
selecting specific areas of the face, such as the eyes or mouth, which in turn
are used as distinguishable features for recognition. Embedded with the Ti-Face
module, a system can select sets of blocks, or features, in each face that
differ from other faces in a data repository with an outstanding processing
speed.
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Based on this innovative face recognition technology, our research and
development group modularized and realized this concept into the Ti-Face
Software Development Kit (SDK) in 2002. This SDK is not only our core technology
but serves as the blueprint for further extending our security access control
applications for various situations.
TI-FACE SDK 3.0 FOR WINDOWS. Features included in Ti-Face SDK 3.0 are
face detection, high speed face tracking, matching and authentication, detecting
motion or changes in a scene, extracting imagery from a video or live-stream,
comparing and matching non-facial images, and performing both "one-to-one"
verification and "one-to-many" identification. Independent developers can use
Ti-Face SDK as a tool to build custom applications based on our proprietary face
detection and recognition technology. Examples of applications include physical
access control solutions that can integrate with reporting modules and alarm
systems, logical access control solutions that can integrate with existing
authentication systems and replace the use of passwords, and ticketing systems
that can insure that a single ticket is not being shared by multiple customers.
Furthermore, by integrating our face recognition engine into third-party
solutions and applications, end users can obtain a solution that is customized
to fulfill their specific requirements. We intend to develop additional modules
on face recognition. By combining several modules, greater security and more
accurate identification methods can be obtained. Furthermore, a multimodal
biometric system can be easily integrated into an application to greatly enhance
security, privacy and user convenience.
PRODUCTS
Powered by our innovative face recognition technology, our core
products can be grouped into two categories: PROACCESS and PROFACER. The
ProAccess series fulfills the fundamental security and trust needs of the
information world by logical and physical access control. The ProFacer series
provides an ultimate solution for intelligent surveillance.
PROACCESS. Applying our Ti-Face technology, the first series of
products, called ProAccess, were launched in the middle of 2003. The ProAccess
suite is a high-performance, secure, user-friendly solution to enhance the
authentication method of physical doors, personal computers, and mobile phones
by advanced face recognition technology.
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PRODUCT APPLICATION STATUS
- --------------------------------------------------------------------------------------------------------------------
ProAccess FaceOK Access to computers Launched in third quarter of 2003;
over 18,000 licenses sold to
customers.
- --------------------------------------------------------------------------------------------------------------------
ProAccess FaceGuard Facility entry First versions completed in third
quarter of 2005 and being
marketed; over 200 systems
installed.
- --------------------------------------------------------------------------------------------------------------------
ProAccess FaceAttend Time attendance recorder First versions completed third
quarter of 2005 and being
marketed; approximately 50
systems installed.
- --------------------------------------------------------------------------------------------------------------------
ProAccess FaceMobile Mobile computing such as PDA This product is under development.
devices and mobile phones
- --------------------------------------------------------------------------------------------------------------------
PROACCESS FACEOK (PROFESSIONAL & ENTERPRISE). ProAccess FaceOK was
designed to fulfill the fundamental security and trust needs of the information
world. Users can sign-on to their computers
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through face recognition, which ensures a high degree of security against
unauthorized access, especially when compared to authentication methods such as
unsecured simple text input and unreliable memories. In addition, ProAccess
FaceOK offers features such as audit trail, face learning, active user
monitoring, and web-based single sign-on services integrated with directory
services.
Audit Trail is enabled to capture all unauthorized login attempts (with
images of trespassers and hackers) and store that information in a log file. The
Face Learning function allows the user to learn the latest face whenever a login
occurs. Natural facial progression does not compromise system accuracy. Active
Monitoring monitors the environment actively to ensure continuous access
control. The system proactively locks itself out when the authorized user is not
detected. Hidden Encryption encrypts a file and masks it with an image file type
so that only authorized users can retrieve its true content, while it appears as
a normal file to others. Furthermore, users can logon to different Directory
Services with the use of FaceOK. Those directories can be Novell eDirectory,
Microsoft Active Directory, NT Domain, NDS, iPlanet and other LDAP compliant
directories. We also have a module that focuses on web Single-sign on
technology, which is integrated in FaceOK.
Considering our variety of clients, our FaceOK is released into two
editions, Professional edition and Enterprise edition. Enterprise edition is
suited for the corporate buyers (such as MTRC, Mass Transit Railway Corp) and
government agencies (Department of Health and Immigration Department of the Hong
Kong Government), whereas Professional edition is designed for the small office
and home office or small to medium-sized enterprises. The product is currently
available in four language versions: English, traditional Chinese, simplified
Chinese, and Japanese.
PROACCESS FACEGUARD. Conventional access control systems relying on
cards, keys or codes are vulnerable to those wishing to gain unauthorized entry
to a facility. The card, key or code may be lost, stolen or illegally copied.
Once an intruder has gained access to a building using a stolen entry device,
there is often little evidence to help in apprehending or prosecuting the
culprit. Personal property, office equipment and intellectual property are all
at risk. "FaceGuard" has been designed to not only provide secure access to
buildings, but to also detect and identify anyone attempting to gain access
without authorization.
ProAccess FaceGuard is a biometric physical access control system,
which identifies an individual's identity from their facial characteristics by
comparison with recorded data, and enables keyless entry based not on what the
entrant has or knows, but based on the identity of the entrant. In contrast to
conventional automatic systems, which only check for possession of a valid card,
pass or PIN number, this digital image analysis system recognizes individual
people and turns away those who try to enter using borrowed or stolen IDs. The
proprietary algorithm utilized in the software is designed in such a way that
the software is not fooled by life-size photos, and will only admit living,
breathing humans with faces it "recognizes". Therefore, the technology allows
access that we believe is convenient, personal, private, and extremely secure.
ProAccess FaceGuard is empowered by Ti-Face. It can be operated in both
online and offline mode. The templates of the authorized user list can be stored
in a server or in the internal memory of the device. Although ProAccess
FaceGuard may be networked in an enterprise environment, it is a stand-alone
device that can be operated independently. The installation is simple and,
except for the electric lock, there is no hidden cost in the installation.
ProAccess FaceGuard is primarily being used by commercial customers for
physical access controls to areas such as office premises, data centers, and
server rooms.
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PROACCESS FACEATTEND. ProAccess FaceAttend is a stand-alone, face
recognition- based time attendance recorder. It is suitable for medium and large
offices, branches, factories, or other sites. ProAccess FaceAttend provides an
accurate data collection solution by ensuring that employees must be present in
order to record their attendance. It brings the flexibility of a full-function
time and attendance terminal together with the sophistication of identification
technology. Using face biometric technology, FaceAttend terminals scan
employees' faces to identify them from a huge database each time they punch or
clock-in. No fingerprints or palm prints are utilized.
ProAccess FaceAttend can be installed at convenient locations
throughout a facility to make it easy for employees to clock in. Punching or
clocking in is performed using biometric face scans, and the resulting
transactions are periodically uploaded to a host PC running the automated
timekeeping system. It eliminates "buddy-punching," the practice of employees
punching in or out for other employees who are not present at work.
We believe that use of ProAccess FaceAttend eases concerns and boosts
security by ensuring that the people on-site actually belong there. Attendance
of each employee is printed on the attendance report. The attendance report is
particularly useful for payroll purposes. Wages and salaries can be paid
according to the employee's worked hours, overtime etc. Given the continual
growth of China as a worldwide manufacturing base, and specifically the fact
that the Southern part of China houses the largest network of factories in Asia,
based on gross domestic product statistics, we believe that we have a
significant marketing opportunity in this region and perhaps a distinct
advantage of physical and cultural proximity. To date, purchasers have installed
this product primarily in factories for time attendance purposes.
PROACCESS FACEMOBILE. ProAccess FaceMobile is the security solution
using biometric technology for the mobile computing market. As the mobile
ownership becomes more universal and third generation mobiles become more
popular, we are keen to introduce advanced biometric security solution to this
market.
This technology uses the camera equipped in the mobile phone to perform
the logon process. As a result, no additional hardware cost is incurred on the
capturing device. Utilizing our face recognition technology, mobile users do not
require special knowledge to use it. Users simply look at the camera embedded in
their phone, automatically triggering and processing authentication for the
logon process. The FaceMobile supports two different system architectures. The
difference between the two architectures (user authenticated on the device and
on the operator) is the location where authentication is processed.
USER AUTHENTICATED ON THE DEVICE. In this architecture, the device
captures and authenticates the user by the same device. This architecture is
optimal for the following situations:
o The device may be operated offline;
o The device stores sensitive information locally; or
o The device has high processing power.
In general, this architecture is applicable in the PDA market.
USER AUTHENTICATED ON THE OPERATOR. This architecture supports the user
picture being captured by the device, and then the servers in the operator site
authenticate the user. This approach is designed for the following cases:
o Authentication is required only when the user accesses service
from the operator; or
o The device need not have very powerful processing power.
This approach can be a turn-key solution for current generation mobile
phones.
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In summary, features found in FaceMobile are described below:
o ENHANCED ACCESS CONTROL - As cameras are standard components
in third generation mobile phones, this application of face
recognition helps to greatly improve the access control of the
phone with limited increased in production cost. The improved
access control prevents unauthorized persons from making
calls, receiving calls and reading stored data within the
phone.
o M-COMMERCE SUPPORT - The continual improvement of computing
power of mobile devices, communication bandwidth, market
acceptance, etc., will allow the real-life application of
M-commerce in the near future. We believe that the use of
FaceMobile could provide the foundation for secure transactions
in the virtual credit card payment platform for major carriers
such as NTT Docomo and Credit Card companies.
PROFACER. ProFacer is a biometrically integrated surveillance system.
Titanium Technology employs a full range of technology to enhance and automate
existing surveillance techniques. Digital video recording technology, coupled
with our biometrics systems, enable automated real time face recognition.
Characteristic processes enabling ProFacer to function effectively are
detection, alignment, normalization, representation and matching:
o DETECTION - When the system is attached to a video surveillance
system, ProFacer recognition software searches the field of view
of a video camera for human faces. If there is a face in the
view, it is detected within a second.
o ALIGNMENT - Once a face is detected, the system determines the
head's position, size and pose. A face needs to be turned to an
appropriate angle toward the camera for the system to register
it.
o NORMALIZATION - The image of the head is scaled and rotated so
that it can be registered and mapped into an appropriate size
and pose. Normalization is performed regardless of the head's
location and distance from the camera. Light does not impact
the normalization process.
o REPRESENTATION - The system translates the facial data into a
binary string - "Faceprint". This coding process allows for
easier comparison of the newly acquired facial data to stored
facial data.
o MATCHING - The newly acquired facial data is compared to the
stored data and linked to at least one stored facial
representation. As comparisons are made, the system assigns a
value to the comparison. If a score is above a predetermined
threshold, a match is declared. The operator then views the
two photos that have been declared a match to be certain that
the computer is accurate.
- ----------------------------------------------------------------------------------------------------------------------
PRODUCT APPLICATION STATUS
- ----------------------------------------------------------------------------------------------------------------------
ProFacer iDVR DVR system with face capture Deployed in six branches of the
People's Bank of China
- ----------------------------------------------------------------------------------------------------------------------
ProFacer iWatchGuard Automatic full-time face recognition Deployed in four branches of the
People's Bank of China, a casino in
Macao, and NTT Group in Japan
- ----------------------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------------------
PRODUCT APPLICATION STATUS
- ----------------------------------------------------------------------------------------------------------------------
ProFacer iMugShot Image to image matching Deployed in an agency of the
Hong Kong government.
- ----------------------------------------------------------------------------------------------------------------------
ProFacer iDControl Live person to image matching Deployed in two government locations.
- ----------------------------------------------------------------------------------------------------------------------
PROFACER IDVR. Currently, Digital Video Recorders (DVRs) are popular in
public areas, offices and homes, with the belief that the cameras deter criminal
activity. However, with the public need for security rising, the sheer numbers
of DVRs pose problems. On top of traditional DVR systems, Titanium Technology
offers a proprietary real-time algorithm of face image detection and capture,
named PROFACER IDVR. It does not require special cameras or a specific
environment. Multiple faces in a stream of people may be detected, captured,
recorded and delivered with further analysis, reporting and notification
capabilities. The Face Capture is an application software for video
surveillance, monitoring, law enforcement and other applications.
Individual facial patterns are recorded and stored in a digital photo
database that can be viewed and used for different applications on-site or
remotely. Titanium Technology developed several algorithms, supporting the real
time processing of video data and image localization, determination of position
of head and motion tracing for subsequent recognition.
PROFACER IDVR can be used at airports, banks, casinos, public
buildings, subways, factories, schools or in any other location where it makes
sense to record the faces of visitors, with facilities for integration into
existing DVR systems. The PROFACER IDVR GUI is very simple such that any
operator can use all of its functions with just a minimal amount of training.
The system is highly flexible, allowing images to be digitalized and recorded in
either color or monochrome with a storage capacity typically exceeding 36 months
of facial data recording. The PROFACER IDVR screen simultaneously shows the live
camera shot and the latest sequence of captured images. The PROFACER IDVR
product was installed in the Nanning branch of GuangXi Peoples' Bank of China in
March 2005 and in September 2005, we installed the product in three other
branches of GuangXi People's Bank of China in the cities of BaiSe, DaiXing, and
PinGuo. While this installation began as a pilot project in order to test and
further refine the product, the bank paid for the product and did not simply
allow the product to be installed and tested as an accommodation.
PROFACER IWATCHGUARD. PROFACER IWATCHGUARD adds automatic full time
face recognition, matching and active warning alerts to any new or existing
surveillance system. It allows each camera to serve as a diligent observation
point even when the video is not observed. Face recognition surveillance
incorporates computer intelligence to monitor faces and match those faces
against a "watch list" face database. As a modern new tool to identify potential
threats to public safety, PROFACER IWATCHGUARD can scan facial images of
individuals and match them with a database of images containing known suspects.
In seconds, a scanned face can be searched against thousands, or even millions
of database images to determine if the scanned image matches a previously stored
suspect image.
This product has been applied to protect high security areas such as
casinos, banks, computer centers, research institutes and prisons and jails, for
fully automatic operation 24 hours a day. For example, a casino group in Macau
has started a pilot project using PROFACER IWATCHGUARD to identify unwanted
guests and VIPs. Using a list of unwanted guests stored in the database, casino
staff can focus on trailing specific individuals from thousands of guests
everyday. With the installation of PROFACER IWATCHGUARD, closed circuit
televisions are connected and in real time send the scenes to a detection
manager. Inside the detection engine, a number of clear and distinct faces will
be identified. Each face will attempt to match the existing black-listed faces.
As soon as a face known to the database appears in the scene, the
9
system triggers a configurable alarm. Security guards can locate the unwanted
person easily and take him/her away. As a result, staffs are no longer burdened
by monotonous work, but can be employed more flexibly and effectively while
still increasing security.
PROFACER IMUGSHOT. PROFACER IMUGSHOT is another product derived from
ProFacer surveillance solution. In law enforcement units such as police and
immigration departments, this system can greatly help in reducing fraud and
crime. Through identifying duplicate images in large databases, such as licensed
drivers, missing children and immigration, suspicious targets can be provided as
a list. As a result, the scope in finding the target subjects can be greatly
narrowed which, in turn, provides a cost effective, reliable and time saving
surveillance application.
As existing clients, like the Government Laboratory of HKSAR, have
placed repeat purchase orders, we believe that our customers are satisfied with
this highly accurate, prompt response, and cost effective surveillance system.
It is believed that police forces would be a likely target market for this
advanced application.
PROFACER IDCONTROL. PROFACER IDCONTROL utilizes facial recognition
technology in the airline industry for national security. Every traveler, who is
ready to make boarding registration, can be captured as an image. Our PROFACER
IDCONTROL can start scanning if the given facial image has a high similarity
scale with the suspects contained in a database storing images of terrorists'
faces provided by government agencies. Once a list of suspects is generated,
airline staff can refine the verification process by one-to-one scanning. For
further enhancement, facial images can be saved in the travel document during
the check-in process. When travelers are ready to board the airline, our system
can achieve a high degree of security by further matching live face with the
face ID marked in the travel document. We believe these two levels of security
measures are practical, helpful, safe and convenient in the airport.
PROFACER IDCONTROL can be used for banking application. Face identity
can be embedded in the credit card, every time holders withdraw money from ATM
machines. For greater security, faces can be verified in addition to inputting
passwords, to confirm ownership of credit or debit cards. Using these two levels
of security control, personal property is strongly protected.
CONSULTING
Our consulting team works with the client from the earliest stages of
the project and takes accountability for the success of the project. We provide
services in the areas of security service and system integration/development
projects.
SECURITY SERVICES. As a digital security services provider, we offer
strategic solutions for technology-enabled enterprises. As a security advisor,
we help clients to meet their requirements for continuous IT innovation and
development while controlling the risks inherent in today's complex networked
environments. Our security specialists help customers identify system/network
security weaknesses and provide professional advice on how to best protect vital
information and assets both virtually on the Internet and physically without
compromising productivity or endangering the bottom line. Our services include
security consulting, risk assessment and penetration testing. Security training
is also provided for the staffs to increase the security awareness and
knowledge. Our clients include the Labour Department of Hong Kong SAR, Tokyo
Bank of Mitsubishi, Citic Ka Wah Bank, Hong Kong Productivity Council, Mandatory
Provident Fund Schemes Authority, and Mass Transit Railway Corp (MTRC). In
addition, we agreed to partner with IBM China/Hong Kong Limited to provide
professional services for the Hong Kong government, as part of our role as a
service supplier to IBM China/Hong Kong Limited under a Technical Service
Agreement dated October 5, 2004. That agreement outlines a
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general working relationship, with specific deliverables, services, and pricing
to be outlined from time to time in statement of work documents.
SYSTEM DEVELOPMENT/INTEGRATION. Our solution team utilizes its
technical expertise to implement complex business systems, thereby reducing time
and risk for our customers' mission critical projects. We work with business
systems critical to the running of large commercial and public sector
organizations, as well as large-scale technical systems designed to operate to
the highest levels of reliability in demanding conditions. To keep pace with the
competitive IT world, our staff have been trained in new and advanced
technologies, such as Microsoft .net and J2EE, on system implementation work.
DISTRIBUTION AND MARKETS
We select distributors based on the potential impact of the
distribution relationship. We seek to cooperate with business partners that will
bring synergies, making it quicker to penetrate the target market and
localization. Distributors in the United States include Elite Technology
Solutions and eInfoDev Inc. and Barr Security Inc. Distributors in Asia include
Smart Wireless (Japan), Elixir Group (Macau), Xintec Enterprise Ltd. (China),
Komsa Technology Ltd. (China), ELM Computer Technologies Limited (Hong Kong),
and PCCW Solutions (Hong Kong and People's Republic of China). However, for
major accounts that are readily accessible, we tend to handle such accounts
ourselves since these corporate clients expect expert knowledge and demand
flexibility.
Our distributors purchase products from us at prices specified on our
Distributor Price List in effect from time to time. The distributors sell to
resellers or end-users with a mark-up in price and the profit generated from the
mark-up is the compensation for the distributors. The sales prices to
distributors are approximately 30% to 40% off the recommended retail prices.
Once the products are shipped 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.
Our distributor agreement and reseller agreement dictate the terms and
conditions of the relationship with us, such as pricing, warranties, exclusivity
or non-exclusivity, and term.
We organize exhibitions and seminars periodically to create awareness
of the importance of biometrics applications. We participated in three
exhibitions and one seminar in Japan in 2005 and 2006. The main purpose of these
exhibitions and seminars is to introduce our products to the Japanese market,
especially in the retail sector.
We also prepare marketing materials such as brochures, product white
papers and pricing references for the distributors and provide complete sales
support and technical consulting services to them.
Our markets include the following:
o Hong Kong, including the Hong Kong government and commercial
sectors;
o China, mainly the government;
o Macau, mainly casinos; and
o For Japan, Europe and the US markets, we form a distribution
partnership with the local agents to sell our products.
Clients in Japan came from both retail and commercial sectors.
11
Titanium Technology not only focuses on two core activities,
biometrics-based technology development and professional services, but also
operates a distribution business and distributes a number of commercially
available software, such as software from Microsoft, Novell, Symantec and IBM.
At times, our customers may require software that is not within Titanium's
product range, but is available from these large software manufacturers and
vendors. Most of the software consists of security-related products. We buy
software from these vendors to resell to our customers. In most cases, we
perform a certain amount of customization and system integration services with
respect to the purchased software.
In March 2003, Titanium Technology was selected by the HKSAR government
as a supplier of PC/LAN software in Category C to all departments in HKSAR
government for three years under a bulk tender. The bulk tender is an initiative
from the HKSAR government with the purpose of streamlining and insuring the
process and quality of the procurement of all information technology products by
the government. The government selected companies that it believed to be
qualified for specific categories of products. Category C is software
applications. This means that the government departments have to purchase from
the selected companies and that Titanium Technology is one of the few vendors
from whom the Hong Kong government purchases software. At the time of the award,
there was one other company that received an award in the same category as us.
To strengthen our distributor network, we are authorized resellers for
software marketed by Microsoft, Novell, SiS International Ltd, JOS, and others.
We sell to end users and we can also purchase their products at discounted
prices from the suggested retail prices. In addition, with our expertise in
security technologies, eEye Digital Security has appointed Titanium Technology
to be a regional distributor for eEye products. We estimate that our
distribution business accounted for approximately 9%, 8% and 8% of our business
in fiscal 2006, 2005 and 2004, respectively.
CUSTOMERS
Titanium Technology's major customers include:
o In Hong Kong: the Hong Kong government
o In China: People's Bank of China
o In Macau: Elixir Group, a supplier to an entertainment
corporation - Sociedade de Jogos de Macau
o In Japan: NTT Group
For the year ended December 31, 2006, three customers accounted for
over 58.2% of our revenue: Xintec Enterprise (HK) Ltd. (38.5%), Xintec
Information Technology (HK) Ltd. (14.1%) and ELM Computer Technologies Ltd.
(5.6%). For the year ended December 31, 2005, four customers accounted for over
50% of our revenue. The following four customers were each over 10%: Elixir
Group (Macau) Ltd. (13.2%), MTR Corporation Ltd. (12.0%), GuangXi Hai Tin
Electric Ltd. (11.5%) and Adamson & Gonzalez SL (11.5%). During the fiscal year
ended December 31, 2004, eight customers accounted for approximately 75% of
revenues. Sales to Beacon Base Software Ltd. and Information Security One (Hong
Kong) Ltd. were 20.1% and 12.7% of revenues, respectively
Since a small number of customers account for a substantial portion of
our revenues, the loss of any of our significant customers would cause revenue
to decline and could have a material adverse effect on our business. While the
customers who each accounted for over 10% of our revenue for a particular fiscal
year are not the same as the significant customers for other fiscal years, this
indicates that we need to expand our client base so that we will no longer be
subject to this risk.
12
There is no law in Hong Kong or any provisions in our contracts with
the Hong Kong government that specifies or triggers a termination at the
election of the government.
At December 31, 2006, our backlog of orders believed to be firm was
approximately US$2,000,000 (HK$15,600,000), as compared to approximately
US$1,000,000 (HK$7,800,000) at December 31, 2005. We expect that approximately
US$1,000,000 (HK$7,800,000) will not be filled by the first half of 2007.
INTELLECTUAL PROPERTY
PATENTS. Titanium Technology was issued patent number HK1053239 for
"Apparatus and Method for Recognizing Images" in September 2002. The patent
expires September 10, 2010. Even though we have been issued a patent from Hong
Kong and even if we were to obtain copyright protection on the software, we
would still have to enforce our rights against those who might attempt to
infringe on our intellectual property as patent protection does not necessarily
deter infringement. Such enforcement efforts are likely to be expensive and
time-consuming and we may lack the ability to engage in any significant
enforcement efforts. Instead, we have chosen to use our resources on product
development and the expansion of market share.
TRADEMARK AND TRADE NAME. Titanium Technology has the following
registered trademarks for "ProAccess FaceOK":
o United States - Serial No. 78/414377
o Hong Kong - Trade Mark No. 300053478
o China - Serial No. ZC3732931SL
COMPETITION
The biometrics industry is fragmented and undeveloped, with a plethora
of methods for gathering biometric information, processing the data, and
interconnecting with applications. All the major prevailing biometrics systems
have limitations.
The biometric industry is global in scope, with many competitors and
customers located in US and Europe. While Asia has some companies in the
biometrics arena, many of the biggest projects have been in nations installing
national identification systems. Strategic focus is quite diverse, as well, with
some firms specializing in the proprietary technology associated with capturing
biometric information, others in providing enterprise-level integration
services, and still others in offering managed or hosted services for outsourced
systems. Large players in intermediate or end-use markets for biometrics (e.g.
banking/financial services, security, PCs/peripherals, software/enterprise
systems, and wireless equipment and services) have been active in investing in
or sponsoring biometric technologies.
We intend to compete by utilizing the following strategies:
o put more funding into research and development to strengthen the
quality of our products;
o gain more share in the Asian market before the big competitors
step in;
o seek potential partnerships and strategic alliances; and
o organize more exhibitions of our products.
We believe that we have a major competitor, L-1 Identity Solutions,
Inc., from the United States. L-1 Identity Solutions is the product of a merger
of Identix Incorporated and Viisage Technology, Inc.
13
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 2006, 2005 and 2004, we
spent US$96,154 (HK$750,000), US$24,372 (HK$190,100), and $nil, respectively, on
research and development activities.
We have engaged both Tsinghua University and the Chinese Academy of
Science, Institute of Automation to perform certain research and development
work on our behalf.
Under the terms of the Technology Partnership and Research and
Development Contract entered into in June 2005 with the Institute, we agreed to
provide the capital and operational technicians, while the Institute agreed to
provide the location and technical technicians to perform research for the
application of facial recognition operation technology. Both parties would own
any new facial recognition technology that was developed.
We also entered into a similar contract with Tsing Hua University
(Shenzhen research campus) in November 2005, under which the University
performed research of a multi-media home intelligence system, covering the
receipt of digital TV signals, OSD (Open Software Description) capability, PVR
(Personal Video Recorder) capability, and Blue tooth facial recognition
capability. We agreed to bear all costs of the research, while the University
provided the necessary technical people. The total cost of the research,
approximately US$25,000 (HK$192,000) was paid by December 30, 2005. The
University owns the new intellectual property that was developed, but we have
the right to use the property.
EMPLOYEES
As of February 28, 2007, we employed a total of 42 persons, of which 38
were full-time. None of our employees is covered by a collective bargaining
agreement.
ITEM 1A. RISK FACTORS
WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
YOUR INVESTMENT IN OUR STOCK.
Your evaluation of our business will be difficult because we have a
limited operating history. Titanium Technology has been in business since
February 2001. We face a number of risks encountered by early-stage companies,
including our need to develop infrastructure to support growth and expansion;
our need to obtain long-term sources of financing; our need to establish our
marketing, sales and support organizations, as well as our distribution
channels; our need to manage expanding operations; and our dependence on
technology which could become incompatible or out of date. Our business strategy
may not be successful, and we may not successfully address these risks.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends on our ability to protect our proprietary
technology. In the event that a third party misappropriates or infringes on our
intellectual property, our business would be seriously harmed. Third parties may
independently discover or invent competing technologies or reverse engineer our
technology. We expect that if we should successfully sell licenses to use our
technology, competitors may attempt to duplicate our technology. Even though we
have been issued a patent from Hong Kong and even if we were to obtain copyright
protection on the software, we would still have to enforce our rights against
those who might attempt to infringe on our intellectual property, as patent
protection does not
14
necessarily deter infringement. Such enforcement efforts are likely to be
expensive and time-consuming and we may lack the ability to engage in any
significant enforcement efforts.
THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL COULD IMPAIR OUR ABILITY TO MAINTAIN OUR BUSINESS
OPERATIONS.
Our success depends largely upon the efforts, abilities, and
decision-making of our executive officers and directors. Although we believe
that we maintain a core group sufficient for us to effectively conduct our
operations, the loss of any of our key personnel could, to varying degrees, have
an adverse effect on our operations and system development. We do not currently
maintain "key-man" life insurance on any of our executives or directors, but we
intend to have such policies in place in the near future. On the other hand, all
of the key officers have employment contracts in place and significant stock
ownership and we strongly believe that the stability of the core team will be
maintained for a long period of time. Nevertheless, the loss of any one of them
would have a material adverse affect on us and technically, there can be no
assurance that the services of any member of our management will remain
available to us for any period of time.
The knowledge and expertise of our officers and directors are critical
to our operations. There is no guarantee that we will be able to retain our
current officers and directors, or be able to hire suitable replacements in the
event that some or all of our current management leave our company. In the event
that we should lose key members of our staff, or if we are unable to find
suitable replacements, we may not be able to maintain our business and might
have to cease operations, in which case you might lose all of your investment.
WE DERIVE OVER HALF OF OUR REVENUES FROM A FEW CUSTOMERS, THE LOSS OF WHICH
COULD HAVE AN ADVERSE EFFECT ON OUR REVENUES.
For the year ended December 31, 2006, three customers accounted for
over 58.2% of our revenue: Xintec Enterprise (HK) Ltd. (38.5%), Xintec
Information Technology (HK) Ltd. (14.1%) and ELM Computer Technologies Ltd.
(5.6%). For the year ended December 31, 2005, four customers accounted for over
50% of our revenue. The following four customers were each over 10%: Elixir
Group (Macau) Ltd. (13.2%), MTR Corporation Ltd. (12.0%), GuangXi Hai Tin
Electric Ltd. (11.5%) and Adamson & Gonzalez SL (11.5%). Since a small number of
customers account for a substantial portion of our revenues, the loss of any of
our significant customers would cause revenue to decline and could have a
material adverse effect on our business. While the customers who each accounted
for over 10% of our revenue for the 2005 fiscal year are not the same as the
four customers for the 2006 fiscal year, this indicates that we need to expand
our client base so that we will no longer be subject to this risk.
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS IN THE BIOMETRICS
INDUSTRY, WHICH COULD FORCE US TO OFFER LOWER PRICES AND/OR NARROW OUR FOCUS,
RESULTING IN REDUCED REVENUES.
The current global political climate has heightened interest in the use
of security solutions, and we expect competition in this field, which is already
substantial, to intensify. Competitors in biometrics are developing and bringing
to market products that use face recognition as well as eye, fingerprint, and
other forms of biometric verification. Our products also will compete with other
non-biometric technologies, such as certificate authorities and traditional
keys, cards, surveillance systems, and passwords. Widespread adoption of one or
more of these technologies or approaches in the markets we intend to target
could significantly reduce the potential market for our systems and products.
Due to our small size, it can be assumed that most if not all of our competitors
have significantly greater financial, technical, marketing and other competitive
resources. Many of our competitors and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, for
example,
15
to position themselves as being more experienced, having better products, and
being more knowledgeable than us. To compete, we may be forced to offer lower
prices and narrow our marketing focus, resulting in reduced revenues.
SECURITY BREACHES IN SYSTEMS THAT WE SELL OR MAINTAIN COULD RESULT IN THE
DISCLOSURE OF SENSITIVE GOVERNMENT INFORMATION OR PRIVATE PERSONAL INFORMATION
THAT COULD RESULT IN THE LOSS OF CLIENTS AND NEGATIVE PUBLICITY.
Many of the systems we sell manage private personal information and
protect information involved in sensitive government functions. A security
breach in one of these systems could cause serious harm to our business as a
result of negative publicity and could prevent us from having further access to
such systems or other similarly sensitive areas for other governmental clients.
Our systems may also be affected by outages, delays and other difficulties. We
do not have insurance coverage that would cover losses and liabilities that may
result from such events.
THE MARKET FOR OUR SOLUTIONS IS STILL DEVELOPING AND IF THE INDUSTRY ADOPTS
STANDARDS OR A PLATFORM DIFFERENT FROM OUR PLATFORM, THEN OUR COMPETITIVE
POSITION WOULD BE NEGATIVELY AFFECTED.
The market for identity solutions is still emerging. The evolution of
this market is in a constant state of flux that may result in the development of
different technologies and industry standards that are not compatible with our
current products or technologies. In particular, the face recognition market
lacks widely recognized industry standards for commercial use.
A LIMITED NUMBER OF STOCKHOLDERS COLLECTIVELY OWN OVER 75% OF OUR COMMON STOCK
AND MAY ENACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT
OF OTHER STOCKHOLDERS.
As of March 22, 2007, our directors and officers own more than 75% of
our outstanding common stock. Accordingly, these stockholders may, if they act
together, exercise significant influence over all matters requiring stockholder
approval, including the election of a majority of the directors and the
determination of significant corporate actions. This concentration could also
have the effect of delaying or preventing a change in control that could
otherwise be beneficial to our stockholders.
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON SHARES, WHICH LIMITS OUR
SHAREHOLDERS ABILITY TO RESELL THEIR SHARES OR PLEDGE THEM AS COLLATERAL.
While our stock is quoted on the OTC Bulletin Board, the volume of
stock that trades fluctuates widely. We cannot assure you that a market for our
stock will increase. Consequently, investors may not be able to use their shares
for collateral or loans and may not be able to liquidate at a suitable price in
the event of an emergency. In addition, investors may not be able to resell
their shares at or above the price they paid for them or may not be able to sell
their shares at all.
REGULATIONS RELATING TO "PENNY STOCKS" MAY LIMIT THE ABILITY OF OUR SHAREHOLDERS
TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR
SHARES INDEFINITELY.
Our common stock is subject to rules promulgated by the SEC relating to
"penny stocks," which apply to non-NASDAQ companies whose stock trades at less
than US$5.00 per share or whose tangible net worth is less than US$2,000,000
(HK$15,600,000). These rules require brokers who sell "penny stocks" to persons
other than established customers and "accredited investors" to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in the security. These
rules may discourage or restrict the ability of brokers to sell our common stock
and may affect the secondary market for the common stock.
16
AS WE HAVE PLEDGED ALL OF OUR ASSETS TO SECURE AN OVERDRAFT FACILITY AT OUR
BANK, THE FAILURE TO COLLECT OUR ACCOUNTS RECEIVABLE COULD IMPAIR OUR
OPERATIONS.
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 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). At December 31,
2005, the rate charged was 9.5%, with the weighted average rate charged for 2005
being 8.5%. At December 31, 2006, the rate charged was 9.5%, with the weighted
average rate charged for 2006 being 9.65%. 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. If foreclosure were to occur, our
operations would be disrupted.
OUTSTANDING COMMON STOCK PURCHASE WARRANTS MAY NEGATIVELY IMPACT OUR ABILITY TO
OBTAIN FUTURE EQUITY FINANCING ON FAVORABLE TERMS.
As of the date of this report, there are outstanding 3,000,000 common
stock purchase warrants, each of which entitles the holder to purchase one share
of common stock at an exercise price of US$0.50 per share through June 30, 2008.
The warrants are redeemable at US$0.001 per warrant if the common stock is then
listed on a recognized stock exchange or trading at US$1.00 per share for 20
consecutive trading days. These outstanding warrants could have the effect of
keeping our stock from trading at prices substantially higher than US$0.50 per
share. As the market price of the stock exceeds US$0.50 per share, holders of
the warrants would be likely to exercise their warrants, thereby increasing the
number of shares and potentially depressing the market price. This means that we
would be able to obtain financing through the sale of our stock, but only at
prices below US$0.50 per share. The lower the price of the stock, the more
shares we would have to sell to raise a given amount of financing. Accordingly,
as long as the warrants remain unexercised and outstanding, the terms under
which we may be able to obtain additional capital financing may be adversely
affected.
POTENTIAL FUTURE SALES UNDER RULE 144 WOULD INCREASE THE NUMBER OF SHARES IN THE
MARKET AND MAY THEREBY DEPRESS THE MARKET PRICE FOR THE COMMON STOCK.
In general, under Rule 144, a person who has satisfied a one-year
holding period may sell within any three-month period a number of shares which
does not exceed the greater of one percent of the then outstanding shares of
common stock. Rule 144 also permits the sale of shares without any quantity
limitation by a person who is not an affiliate of us and who has beneficially
owned the shares for a minimum period of two years. Therefore, the possible sale
of our shares may, in the future, have a depressive effect on the price of our
common stock in the market, should one develop.
WE ARE A BRITISH VIRGIN ISLANDS COMPANY AND, BECAUSE THE RIGHTS OF SHAREHOLDERS
UNDER BRITISH VIRGIN ISLANDS LAW DIFFER FROM THOSE UNDER U.S. LAW, YOU MAY HAVE
FEWER PROTECTIONS AS A SHAREHOLDER.
Our corporate affairs are governed by our memorandum and articles of
association, the International Business Companies Act of the British Virgin
Islands and the common law of the British Virgin Islands. The rights of
shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibilities of our directors to us under
British Virgin Islands law are to a large extent governed by the common law of
the British Virgin Islands. The common law of the
17
British Virgin Islands is derived in part from comparatively limited judicial
precedent in the British Virgin Islands as well as from English common law,
which has persuasive, but not binding, authority on a court in the British
Virgin Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under British Virgin Islands law are not as
clearly established as they would be under statutes or judicial precedent in
some jurisdictions in the United States. In particular, the British Virgin
Islands has a less developed body of securities laws as compared to the United
States, and some states, such as Delaware, have more fully developed and
judicially interpreted bodies of corporate law.
BRITISH VIRGIN ISLANDS COMPANIES MAY NOT BE ABLE TO INITIATE SHAREHOLDER
DERIVATIVE ACTIONS, THEREBY DEPRIVING SHAREHOLDERS OF THE ABILITY TO PROTECT
THEIR INTERESTS.
British Virgin Islands companies may not have standing to initiate a
shareholder derivative action in a federal court of the United States. The
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those of shareholders of a company organized in the US. Accordingly,
shareholders may have fewer alternatives available to them if they believe that
corporate wrongdoing has occurred.
AS A BRITISH VIRGIN ISLANDS CORPORATION, SHAREHOLDERS MAY HAVE DIFFICULTY IN
ENFORCING JUDGMENTS AGAINST US, THEREBY RENDERING ANY JUDGMENTS USELESS.
The British Virgin Islands courts are also unlikely to recognize or
enforce against us judgments of courts of the United States based on certain
civil liability provisions of U.S. securities laws; and to impose liabilities
against us, in original actions brought in the British Virgin Islands, based on
certain civil liability provisions of U.S. securities laws that are penal in
nature. There is no statutory recognition in the British Virgin Islands of
judgments obtained in the United States, although the courts of the British
Virgin Islands will generally recognize and enforce a non-penal judgment of a
foreign court of competent jurisdiction without retrial on the merits. This
means that even if shareholders were to sue us successfully, they may not be
able to recover anything to make up for losses suffered.
SINCE NONE OF OUR OFFICERS AND DIRECTORS IS A UNITED STATES RESIDENT, IT MAY BE
DIFFICULT TO ENFORCE ANY LIABILITIES AGAINST THEM.
All of our officers and directors reside in Hong Kong. Accordingly, if
events should occur that give rise to any liability on the part of these
persons, shareholders would likely have difficulty in enforcing such
liabilities. If a shareholder desired to sue these persons, the shareholder
would have to serve such persons with legal process. Even if personal service is
accomplished and a judgment is entered against that person, the shareholder
would then have to locate assets of that person, and register the judgment in
the foreign jurisdiction where assets are located.
OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO A LOWER STANDARD OF CARE OWED TO
THE SHAREHOLDERS, WHICH MAY RESULT IN DECREASED CORPORATE PERFORMANCE.
In most jurisdictions in the United States, directors owe a fiduciary
duty to the corporation and its shareholders, including a duty of care, under
which directors must properly apprise themselves of all reasonably available
information, and a duty of loyalty, under which they must protect the interests
of the corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any profit
or advantage. Under British Virgin Islands law, liability of a corporate
director to the corporation is primarily limited to cases of willful malfeasance
in the performance of his duties or to cases where the director has not acted
honestly and in good faith and with a view to the best interests of the company.
18
As a result of this risk and other discussed above, public shareholders
may have more difficulty in protecting their interests in the face of actions
taken by management, members of the board of directors or controlling
shareholders than they would if we were incorporated and operating in the United
States.
CURRENCY CONVERSION CONTROL POLICY IN THE PRC AND EXCHANGE RATE RISK MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The PRC Government has strict restrictions on free conversion of RMB
into foreign currencies and vice versa. On January 1, 1994, the PRC implemented
a unified controlled exchange rate system based on market supply and demand.
Based on such system, the People' Bank of China ("PBOC") quoted a daily exchange
rate of RMB against US dollars based on the market rate for foreign exchange
transaction conducted by the designated banks in the PRC foreign exchange market
during the preceding day. The PBOC also quoted the exchange rates of RMB against
other foreign currencies based on the international market rate.
On July 21, 2005, PBOC announced that the PRC government reformed the
exchange rate regime by moving into a managed floating exchange rate regime
based on market supply and demand with reference to a basket of foreign
currencies. As a result, RMB appreciated against U.S. dollars and Hong Kong
dollars by approximately 2% on July 21, 2005. The value of RMB may continue to
appreciate or depreciate in the future, subject to many factors, including
future changes in the currency value of the basket of currencies with reference
to which the RMB exchange rate is floated, changes in the PRC government's
policy, domestic and international economic and political developments, as well
as market supply and demand. Moreover, foreign exchange transactions under
capital account (including principal payments in respect of foreign
currency-denominated obligations) continue to be subject to foreign exchange
controls and the approval of State Administration of Foreign Exchange of the
PRC.
The existing restrictions on the conversion of RMB into foreign
currencies (and thus restrictions on the subsequent repatriation of those
funds), and any tightening of such restrictions may have an adverse effect on
our ability to obtain sufficient foreign currencies to meet our needs.
Alternatively, in the event that RMB continues to appreciate in the future
currencies (U.S. dollars, Hong Kong dollars or otherwise) and if RMB continues
to appreciate in the future, we may incur exchange losses thereby affecting our
profitability.
INVESTORS IN THE COMPANY COULD BE HARMED IF MANAGEMENT SHOULD ENGAGE IN
COMPETING BUSINESSES.
Our officers and directors are not prohibited from engaging in
competing businesses. We do not have a right of first refusal pertaining to
opportunities that come to their attention and related to the operations of the
company. While we believe that the ownership of stock in the company is
sufficient to motivate management to focus primarily on the business of the
company, we cannot assure you that this will not occur. The BVI corporate
statute applicable to the company requires officers and directors, in performing
their functions, to act honestly and in good faith with a view to the best
interests of the company and exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances, but this
may be difficult to enforce.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
19
ITEM 2. PROPERTIES
Our principal offices are located at 4/F, BOCG Insurance Tower, 134-136
Des Voeux Road, Central, Hong Kong. We have entered into a lease contract with
this new property that runs through June 2008, with an option to renew for an
additional term of two years. The lease requires monthly rent of HK$23,695
(approximately US$3,038) and a monthly management fee and air conditioning
charge of HK$12,863 (approximately US$1,649).
Our research and development center is located at 15/F, Wen Jin Plaza
23, Tian Bei Road 1, Luo Hu Qu, Shenzhen, China, while the sales representative
office in the United States is located at 3723 Haven Avenue, Menlo Park,
California. We have another research and development center at No. 95
ZhongGuanCun East Road, Haidan District, Beijing, China.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on OTCBB and has been quoted on OTCBB under
the symbol "TTNUF" since July 10, 2006. The following table sets forth, for the
periods indicated, the range of quarterly high and low closing price for our
common stock as reported on OTCBB:
2006 HIGH BID LOW BID
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter $0.64 $0.42
Fourth Quarter $0.55 $0.45
As of March 22, 2007, there were 39 holders of record of our common
stock and as of that date, the last reported sales price of our common stock was
$0.43.
We have never paid cash dividends on our common stock. We currently
intend to retain earnings, if any, for use in our business and do not anticipate
paying any cash dividends in the foreseeable future. Any future declaration and
payment of dividends will be subject to the discretion of our Board of
Directors, will be subject to applicable law and will depend upon our results of
operations, earnings, financial condition, contractual limitations, cash
requirements, future prospects and other factors deemed relevant by our Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA
As stated in United States dollars:
INCOME STATEMENT DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
(US$) (US$) (US$) (US$) (US$)
(RESTATED) (RESTATED)
-----------------------------------------------------------------------------------------
Revenues $ 2,521,279 $ 1,710,528 $ 814,006 $ 558,679 $ 547,095
Net income (loss) $ (426,795) $ 101,924 $ 162,844 $ (101,951) $ 66,801
Net income (loss) per common
share $ (0.009) $ 0.002 $ 0.003 $ (0.002) $ 0.001
BALANCE SHEET DATA:
DECEMBER 31,
-----------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
(US$) (US$) (US$) (US$) (US$)
(RESTATED) (RESTATED)
-----------------------------------------------------------------------------------------
Working capital $ 182,022 $ 777,119 $ 236,560 $ 112,106 $ 104,727
Total assets $ 1,578,544 $ 1,351,479 $ 535,896 $ 394,350 $ 331,051
Long-term debt $ - $ - $ 182,051 $ 120,086 $ -
Stockholders' equity $ 906,929 $ 1,051,859 $ 181,263 $ 18,730 $ 120,809
21
As stated in Hong Kong dollars:
INCOME STATEMENT DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$) (HK$)
(RESTATED) (RESTATED)
-----------------------------------------------------------------------------------------
Revenues $ 19,665,971 $ 13,342,121 $ 6,349,252 $ 4,357,694 $ 4,267,341
Net income (loss) $ (3,328,994) $ 795,004 $ 1,270,181 $ (795,221) $ 521,046
Net income (loss) per common
share $ (0.067) $ 0.016 $ 0.027 $ (0.017) $ 0.01
BALANCE SHEET DATA:
DECEMBER 31,
-----------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
(HK$) (HK$) (HK$) (HK$) (HK$)
(RESTATED) (RESTATED)
-----------------------------------------------------------------------------------------
Working capital $ 1,419,763 $ 6,061,528 $ 1,845,168 $ 874,425 $ 816,872
Total assets $ 12,312,641 $ 10,541,537 $ 4,179,992 $ 3,075,927 $ 2,582,201
Long-term debt $ - $ - $ 1,420,000 $ 936,667 $ -
Stockholders' equity $ 7,074,041 $ 8,204,496 $ 1,413,851 $ 146,097 $ 942,309
HISTORICAL EXCHANGE RATES
Since October 17, 1983, the Hong Kong dollar has been pegged to the
U.S. dollar at HK$7.80 to US$1.00.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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.
22
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 have
been 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.
In September 2006, we signed a letter of intent to acquire Belview
Technologies, Inc., a privately-held Fremont, California-based manufacturer and
distributor of All-In-One Panel PCs, touch screen LCD monitors as well as slim
size PCs. Completion of the acquisition is subject to completion of satisfactory
due diligence and financing. The acquisition, if successful, would give us the
capability for US compliance hardware and kiosk manufacturing. Moreover, we
would also be able to leverage on Belview's existing sales network, which covers
a variety of segments including education, finance and banking, government,
entertainment and gaming, medical, and retail. In addition, Belview would be
able to incorporate our technology in a number of their products giving them the
ability to further improve the quality of their product line.
As of the date of this report, we are still in the process of
conducting our due diligence review and exploring financing alternatives.
Financing for the acquisition will likely come from external funding sources, as
management believes that Titanium's current cash position is not sufficient to
complete the acquisition. Having our stock traded on the OTC Bulletin Board is a
critical piece to obtaining financing on terms that will allow us to implement a
growth strategy.
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.
23
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:
o 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.
o 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.
o 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.
24
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:
o 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.
o 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.
o 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.
o 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.
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. We capitalized US$108,722
(HK$848,034), US$116,735 (HK$910,536) and
25
US$230,740 (HK$1,799,771) for the years ended December 31, 2004, 2005 and 2006,
respectively, for projects ProAccess and ProFacer. 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 in the amounts of US$150,557
(HK$1,174,345), US$97,016 (HK$756,723) and US$26,192 (HK$204,296) for the years
ended December 31, 2004, 2005 and 2006, respectively. This funding income was
offset to software-development costs incurred prior to the beginning of the
capitalization period. According to paragraph 73 of SOP 97-2, if capitalization
of the software-development costs commences pursuant to SFAS No. 86, any income
from the funding party under a funded software-development arrangement should be
credited first to the development costs prior to capitalization. The following
table illustrates the movement of the capitalized software development costs:
AS OF DECEMBER 31,
2006 2006 2005 2005
---- ---- ---- ----
US$ HK$ US$ HK$
Software development costs 256,932 2,004,067 213,751 1,667,259
Grant income (26,192) (204,296) (97,016) (756,723)
--------------- --------------- ---------------- ----------------
Capitalized development costs 239,740 1,799,771 116,735 910,536
=============== =============== ================ ================
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. The royalty fee paid by us for each of the years ended
December 31, 2004, 2005 and 2006 amounted to US$4,427 (HK$34,532), US$6,166
(HK$48,092), and US$7,142 (HK$55,705), respectively. 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.
Under SFAS 123(R), we applied the Black-Scholes valuation model in
determining the fair value of options granted to employees and directors. For
the year ended December 31, 2006, we granted 4,635,000 options to our 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.
26
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. Please see Note 10 of the Notes to Consolidated Financial Statements for
details.
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
FISCAL YEAR ENDED DECEMBER 31, 2006 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2005. Operating revenues consist of project revenues and
maintenance revenues. Operating revenues for the year ended December 31, 2006
were US$2,521,279 (HK$19,665,971), an increase of 47.4% from US$1,710,528
(HK$13,342,121) for the year ended December 31, 2005. Project revenues increased
by US$845,937 (HK$6,598,300) (51.6%) over the same period in 2005, mainly due to
an increased volume of business. The increase in volume can be attributed to
increased orders from existing customers. Maintenance revenues, as a percentage
of all revenues, decreased from 4.2% in 2005 to 1.5% in 2006 due to the
non-renewal of one contract (MTR Corporation), which accounted for US$33,802
(HK$263,662).
The gross margin as a percentage of project revenues showed a decrease
in 2006 to 35.3% from 45.3% in 2005. The decrease in gross profit percentage can
be attributed to the relative increase in cost of goods sold in products. Gross
margin on project revenues in terms of dollars increased to US$877,435
(HK$6,843,997) in 2006 from US$741,358 (HK$5,782,591) in 2005 due to the
increase in sales revenues.
As a percentage of all revenues, maintenance revenue was 1.5% in 2006
and 4.2% in 2005. As part of the product purchase, we provide both product
warranty and post-contract customer support to our customers for a period of
twelve months, free of charge and then at the discretion of the customers, enter
into definite maintenance contracts. Management believes that the decrease in
percentage is due to more customers opting to forego a definite maintenance
contract at the end of the twelve-month period.
Selling, general and administrative expenses increased from US$655,769
(HK$5,115,000) in 2005 to US$1,020,793 (HK$7,962,186) in 2006 due to the
expansion of our operations, which included hiring more personnel. The increase
in salary and welfare accounted for US$126,326 (HK$985,345). Rent expenses
increased by US$37,465 (HK$292,227) due to the relocation of our offices.
Selling and promotional expense also increased by US$100,018 (HK$780,138).
Depreciation and amortization also increased by US$84,891 (HK$662,154) because
of the leasehold improvements made in 2005 to our
27
office facilities and the additions to capitalized software development costs in
2006. As a percentage of revenues, these selling, general and administrative
expenses increased from 38.3% in 2005 to 40.5%.
In 2006, we incurred stock-based compensation expenses of US$280,565
(HK$2,188,409) as a result of stock options granted to officers and employees.
We did not have any stock-based compensation expenses in 2005.
Primarily as a result of the stock-based compensation expenses,
increased selling, general and administrative expenses, and to a lesser extent
to increased research and development expenses, we incurred an operating loss of
US$491,712 (HK$3,835,356) in 2006, as compared to operating income of US$124,944
(HK$974,561) in 2005.
We also incurred other expenses in 2006 of US$6,984 (HK$54,463), which
consisted of interest expense. In comparison, we generated other income in 2005
of US$9,806 (HK$76,491), which consisted primarily of government grant income.
After an income tax credit of US$63,291 (HK$493,666) and minority interest of
US$8,610 (HK$67,159), our net loss for 2006 was US$496,795 (HK$3,328,994), as
compared to net income of US$101,924 (HK$795,004) in 2005.
FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 2004. Project revenues increased by US$897,180 (HK$6,998,002)
(121.1%) comparing the 2005 year to the 2004 year, due to sales of ProAccess
FaceGuard and the commencement of projects such as sales of a facial recognition
system and physical access control system to the Elixir Group of Macau. Sales to
the Elixir Group were US$225,000 (HK$1,755,000). Prices for our products and
services were constant in 2004 and 2005. Accordingly, the increase in sales was
due to increased volume of products and services sold in 2005. For 2005, none of
the project revenues was derived from sales of product to related parties, as
compared to 4.6% of project revenues in 2004 and 21.6% in 2003.
The gross margin as a percentage of project revenues showed a
negligible decrease in 2005 to 45.3% from 46.0% in 2004. Gross margin on project
revenues in terms of dollars increased to US$741,357 (HK$5,782,591) in 2005 from
US$340,741 (HK$2,657,783) in 2004 due to the increase in sales revenues.
As a percentage of all revenues, maintenance revenue was 8.9% in 2004
and 4.2% in 2005. As part of the product purchase, we provide both product
warranty and post-contract customer support to our customers for a period of
twelve months, free of charge and then at the discretion of the customers, enter
into definite maintenance contracts. Management believes that the decrease in
percentage is due to more customers opting to forego a definite maintenance
contract at the end of the twelve-month period.
Selling, general and administrative expenses increased from US$233,180
(HK$1,818,804) in 2004 to US$655,769 (HK$5,115,000) in 2005 due to the expansion
of our operations, which included hiring more personnel. The increase in
personnel and increase in outside professional fees each accounted for
approximately 25% (US$105,600; HK$823,700) of the increase in selling, general
and administrative expenses. Outside professional fees included patent
application preparation and filing, product design, and testing expense. The
remaining 50% of the increase can be attributed to setup expenditures for our
new research and development center facility in Beijing (20%; US$84,500;
HK$659,100), an increase in marketing and promotional expenses (20%; US$84,500;
HK$659,100) and an increase of overall general expenditures because of our
larger scale of operations (10%; US$42,300; HK$330,000). As a percentage of
revenues, these selling, general and administrative expenses increased from
28.6% in 2004 to 38.3% in 2005.
28
Primarily as a result of the increased selling, general and
administrative expenses, and to a lesser extent to research and development
expenses of US$24,372 (HK$190,100) in 2005, operating income decreased 27.3% in
2005 to US$124,944 (HK$974,561) from US$171,946 (HK$1,341,182) in 2004.
Other income in 2005 of US$9,806 (HK$76,491), which consisted primarily
of government grant income, increased from US$8,092 (HK$63,117) in 2004. Income
taxes for 2005 were 59.8% higher than in 2004. As a result, while we generated
110% more revenues in 2005, our increased operating costs and provision for
income taxes resulted in net income 37.4% lower than that of 2004.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had working capital of US$182,022
(HK$1,419,763), as compared to US$777,119 (HK$6,061,528) at December 31, 2005.
The decrease was due primarily to the decrease in cash and cash equivalent of
US$167,712 (HK$1,308,149) and increase in accounts payable of US$370,447
(HK$2,889,487).
During the year ended December 31, 2006, our operating activities
provided cash of US$405,088 (HK$3,159,689). We used US$600,401 (HK$4,683,130)
for investing activities, which were primarily for additions to plant and
equipment and capitalized software development costs. In comparison, during the
year ended December 31, 2005, we used US$230,959 (HK$1,801,477) for operating
activities and US$219,422 (HK$1,711,493) for investing activities. Our financing
activities provided cash of US$700,418 (HK$5,463,260), which were primarily from
an increase in bank overdraft of US$185,130 (HK$1,444,012) and net proceeds from
a private placement of our stock and warrants of US$517,425 (HK$4,035,915).
At December 31, 2006, our bank overdraft was US$219,490 (HK$1,712,024).
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$182,022 (HK$1,419,763) at
December 31, 2006, we do not believe that we have current and available capital
resources sufficient to fund planned operations for the remainder of the current
fiscal year. We are pursuing debt and/or equity financing to cover our cash
needs. 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 December 31, 2006, our backlog of orders believed to be firm
was approximately US$2,000,000 (HK$15,600,000), as compared to approximately
US$1,000,000 (HK$7,800,000) at December 31, 2005. We expect that approximately
US$1,000,000 (HK$7,800,000) will not be filled by the first half of 2007.
29
As of December 31, 2006, we had the following significant contractual
obligations and commercial commitments:
- ---------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
(HK$) (HK$) (HK$) (HK$) (HK$)
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations Nil Nil Nil Nil Nil
- ---------------------------------------------------------------------------------------------------------------------
Capital (Finance) Lease Obligations Nil Nil Nil Nil Nil
- ---------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations $597,917 $455,747 $142,170 Nil Nil
- ---------------------------------------------------------------------------------------------------------------------
Purchase Obligations Nil Nil Nil Nil Nil
- ---------------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities Reflected on the Nil Nil Nil Nil Nil
Company's Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------
Total $597,917 $455,747 $142,170 Nil Nil
- ---------------------------------------------------------------------------------------------------------------------
See Note 16 to our Consolidated Financial Statements for additional
information on our commitments and contingencies.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND
ERROR CORRECTIONS" ("SFAS 154"), which replaces Accounting Principles Board
Opinions No. 20, "ACCOUNTING CHANGES" and SFAS No. 3, "REPORTING ACCOUNTING
CHANGES IN INTERIM FINANCIAL STATEMENTS--AN AMENDMENT OF APB OPINION NO. 28".
SFAS 154 provides guidance on the accounting for and reporting of accounting
changes. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of this statement did not have a material effect on our
financial position or results of operations.
In September 2005, the FASB's Emerging Issues Task Force ("EITF")
reached a final consensus on Issue 04-13, "ACCOUNTING FOR PURCHASES AND SALES OF
INVENTORY WITH THE SAME COUNTERPARTY" ("EITF 04-13"). EITF 04-13 requires that
two or more legally separate exchange transactions with the same counterparty be
combined and considered a single arrangement for purposes of applying APB
Opinion No. 29, "Accounting for Nonmonetary Transactions", when the transactions
are entered into in contemplation of one another. EITF 04-13 is effective for
new arrangements entered into, or modifications or renewals of existing
arrangements, in interim or annual periods beginning after March 15, 2006. We do
not anticipate that the adoption of this statement will have a material effect
on our financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, "ACCOUNTING FOR CERTAIN
HYBRID INSTRUMENTS-AN AMENDMENT OF FASB STATEMENTS 133 AND 140", which is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006. The
statement improves financial reporting by eliminating the exemption from
applying SFAS No. 133 to interests in securitized financial assets so that
similar instruments are accounted for similarly regardless of the form of the
instruments. The Statement also improves financial reporting by allowing a
preparer to elect fair value measurement at acquisition, at issuance, or when a
previously recognized have to bifurcated, if the holder elects to account for
the whole instrument-by-instrument basis, in cases in which a derivative would
otherwise have to bifurcated, if the holder elects to account for the whole
instrument
30
on a fair value basis. We do not anticipate that the adoption of this statement
will have a material effect on our financial position or results of operations.
In July 2006, the FASB issued FIN 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109, which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our consolidated financial statements the impact of a tax
position if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are
effective for us on January 1, 2007, with the cumulative effect of the change in
accounting principle, if any, recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact of adopting FIN 48 on our
consolidated financial statements.
In September 2006, the SEC released SAB No. 108, "CONSIDERING THE
EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT
YEAR FINANCIAL STATEMENTS" ("SAB 108"). SAB 108 provides interpretive guidance
on the SEC's views on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provision of SAB 108 is effective for us in the current fiscal year ended
December 31, 2006. We are currently evaluating the impact of SAB 108 but do not
believe that the application of SAB 108 will have a material effect on our
financial position, cash flows nor results of operations.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No.157, "FAIR VALUE MEASUREMENTS" ("SFAS 157"), which defines fair
value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 will be effective for us starting
January 1, 2008. Earlier adoption is permitted, provided we have not yet issued
financial statements, including for interim periods, for that fiscal year. We
are currently evaluating the impact of SFAS 157 on our consolidated financial
position, cash flows and results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2006, we did not have any off-balance sheet
arrangements.
ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the pages beginning with page F-1.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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.
ITEM 9B. OTHER INFORMATION
None.
32
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Our executive
officers, directors, and key employees are:
NAME AGE POSITION
Dr. Kit Chong "Johnny" Ng 32 Chairman of the Board of Directors
Jason Ma 34 Chief Executive Officer
Prof. Stan Li 48 Chief Scientific Advisor
Kin Kwong "Humphrey" Cheung 34 Chief Technology Officer and Director
Wai Hung "Billy" Tang 34 Chief Operation Officer and Director
Patrick Lo 35 Director of Business Development of
Titanium Technology
Eric Wong 52 Consultant
Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.
DR. KIT CHONG "JOHNNY" NG, CHAIRMAN. Dr. Ng is the Chairman of the
Board of Directors of the Company. Currently, Dr. Ng's duties include his
functioning as our principal financial and accounting officer. He received his
post-doctor in computer sciences and technologies in 2006 from Tsinghua
University in Beijing, China. Dr. Ng received his bachelor's degree in
manufacturing engineering in 1996 and doctorate degree in industrial and systems
engineering in 2002 from The Hong Kong Polytechnic University, and has been an
Adjunct Associate Professor there, specializing in biometrics technology. Dr. Ng
first organized his own technology start-up, 303 Company Limited, in 1998. This
company, which was sold to a listed company in 2001, was a solution provider of
fingerprint authentication technology. He served as the Chief Executive Officer
of that company from August 1999 to August 2001. Shortly after this transaction,
he started Titanium Technology in September 2001 with research and development
as its primary activity, and gradually expanded his business venture beyond Hong
Kong.
Dr. Ng has received a great deal of recognition for his achievements,
which include the following:
o one of the "Ten Outstanding Young Digi Persons 2000" by the
Hong Kong Productivity Council and Hong Kong Junior Chamber
(Dr. Ng is the youngest recipient in this event.);
o "Innovative Entrepreneur of the Year" for 2003 by the Hong Kong
Junior Chamber; and
o one of the "Top 100 Cosmopolitan Chinese Confucian Businessman
in 2004" by the Chinese Confucian Foundation and China Economic
Daily.
The "Innovative Entrepreneur of the Year" award recognizes successful
and creative entrepreneurs in greater China. According to the selection
criteria, this award recognized Titanium as one of the best companies in terms
of products and services, originality of ideas, uniqueness in the market,
management and marketing strategies, revenues of the company, the future
prospect and potential of the
33
company. He is a highly sought after speaker at high level industry conferences
and a frequent commentator in the media. He was one of the speakers,
representing Hong Kong, at one of the Asia-Pacific Economic Cooperation ("APEC")
business conferences held in Korea in 2005.
MR. JASON MA, CHIEF EXECUTIVE OFFICER. Mr. Ma became the Chief
Executive Officer of Titanium Technology in May 2005 and is responsible for
formulating business strategies, overseeing the entire business operation, and
establishing and executing global alliances and mergers and acquisitions for the
company. Mr. Ma was born and raised in Hong Kong and went to the United States
for his university education, where he received a bachelor's degree in
engineering and computer science from the University of California at Berkeley
in 1995, and an MBA degree from the University of Southern California's Marshall
School of Business in 1998. During his stays in the United States he had worked
for different companies in the fields of computer science and marketing. Mr. Ma
returned to Hong Kong in 1998 and has since been involved in various IT related
endeavors. Before joining Titanium Technology in April 2004, he was the general
manager for Laurentia Technologies Ltd., a consumer electronics company
(February 2003 to March 2004), and he was the director of project management for
Ebiz Incubation Co., Ltd. from February 2000 to February 2003. Ebiz Incubation
was a Hong Kong private equity fund for incubation and investment in
technology-related ventures. From November 1998 to January 2000, he was the
assistant marketing manager for Ball Asia Pacific Ltd., a joint venture of Ball
Corporation, a publicly-held company based in Broomfield, Colorado. Ball Asia
Pacific Ltd. supplies metal beverage containers in the PRC and Hong Kong.
PROF. STAN LI, CHIEF SCIENTIFIC ADVISOR. Prof. Li has been a Researcher
at National Lab of Pattern Recognition (NLPR), Institute of Automation, Chinese
Academy of Sciences (CASIA), and the Director of the Center for Biometrics
Research and Testing (CBRT) since August 2004. He worked at Microsoft Research
Asia (MSRA) as a Researcher from May 2000 to Aug 2004. His role was to lead the
MSRA group to develop facial recognition technologies. Prior to that, he was an
Associate Professor of Nanyang Technological University, Singapore. His current
research interest is in face recognition technologies, biometrics, intelligent
surveillance, pattern recognition, and machine learning. Prof. Li has been the
Chief Scientific Advisor to Titanium Technology since June 2005. He has
published several books, including "Handbook of Face Recognition"
(Springer-Verlag, 2004) and "Markov Random Field Modeling in Image Analysis"
(Springer-Verlag, 2nd edition in 2001), and over 180 reference papers and book
chapters in these areas. He obtained a B.Eng from Hunan University, an M.Eng
from National University of Defense Technology, and a PhD. from Surrey
University where he also worked as a research fellow. All the degrees are in
Electrical and Electronic Engineering. He is a senior member of IEEE and
currently serves as editorial board of Pattern Recognition, and program
committees of various international conferences.
MR. KIN KWONG "HUMPHREY" CHEUNG, CHIEF TECHNOLOGY OFFICER AND DIRECTOR.
Mr. Cheung has been the Chief Technology Officer of Titanium Technology since
July 2001. He received a bachelor's degree in Electronic Engineering from The
Chinese University of Hong Kong in 1994 and a master's degree in Manufacturing
Engineering from The Hong Kong Polytechnic University in 1998. Mr. Cheung is
responsible for overseeing the technical development of all product lines as
well as the integration of the technologies into product, systems and platforms
into deliverables that will best serve market demands. Prior to founding
Titanium Technology, Mr. Cheung worked at the Computer Graphics Laboratory for
the Hong Kong Polytechnic University as a research assistant. He was also a
co-founder of 303 Company Limited with Dr. Johnny Ng and Mr. Billy Tang, serving
as the Chief Technical Officer from April 1999 to March 2001. He has published
several papers in the fields of computer graphics, solid modeling, biometrics,
and pattern recognition.
MR. WAI HUNG "BILLY" TANG, CHIEF OPERATION OFFICER AND DIRECTOR. Mr.
Tang has been the Chief Operation Officer of Titanium Technology since July 2001
and is responsible for its management
34
and overall operation. He holds Bachelor's degree in Mathematics from the Hong
Kong University of Science and Technology. Under his leadership, Titanium
Technology has experienced tremendous growth and has increased its employee base
to over 30 employees worldwide in just over a year. Prior to co-founding
Titanium Technology, he was also a co-founder of 303 Company Limited with Dr.
Johnny Ng and Mr. Humphrey Cheung. He served as Chairman of that company from
April 1998 to January 2001. Mr. Tang previously was an instrumental member of
the research team in the department of Industrial and Systems Engineering of the
Hong Kong Polytechnic University from November 1996 to March 1997, where he
focused on the research of virtual reality technology. He was a system engineer
for Internet Access Hong Kong Limited, one of the largest Internet Service
Providers in Hong Kong, from June 1997 to April 1998.
PATRICK LO, DIRECTOR OF BUSINESS DEVELOPMENT OF TITANIUM TECHNOLOGY.
Mr. Lo joined Titanium Technology in May 2003. From January 2001 to March 2003,
he worked for Information Security One, a Hong Kong company that distributes
security products in China, such as intrusion detection systems, firewalls, and
log analysis tools. As the director for enterprise security services, he was
responsible for sales operations in Hong Kong and China.
ERIC WONG, CONSULTANT. Mr. Wong has over 25 years of experience in the
areas of production development, sales and marketing in Southeast Asia and
Europe. Accordingly, we use Mr. Wong as a consultant. For the past five years,
he has been involved primarily as the chairman of BTC Consultant Co., Ltd., a
company incorporated in Hong Kong that provides professional consultancy and
business services with regard to foreign investment in China. It focuses on
assisting multinational companies in obtaining commercial opportunities offered
by China's consumer market.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
While the officers and directors are engaged in other business activities, we
anticipate that such activities will not interfere in any significant fashion
with the affairs of our business. Due to the ownership of stock in our company
by management, we believe that they are sufficiently motivated to focus
primarily on the business of the company. Additionally the employment agreements
with members of management state that any and all industrial property rights,
including patents, to which they are or may be entitled or which are created as
a result of their services under their employment agreements belong to and are
the exclusive property of Titanium Technology. The employment agreements also
contain a non-compete provision that prohibits them from engaging or being
interested in any capacity in any business whose activities are substantially
similar to or compete with any of the business activities of Titanium Technology
or any of its subsidiaries, being involved in any projects or products handled
or produced by Titanium Technology or its subsidiaries, or dealing with any
existing customers of Titanium Technology or its subsidiaries.
Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies, which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention,
35
either in the performance of their duties or in any other manner, will be
considered opportunities of, and be made available to us and the companies that
they are affiliated with on an equal basis. A breach of this requirement will be
a breach of the fiduciary duties of the officer or director. If we or the
companies with which the officers and directors are affiliated both desire to
take advantage of an opportunity, then said officers and directors would abstain
from negotiating and voting upon the opportunity. However, all directors may
still individually take advantage of opportunities if we should decline to do
so. Except as set forth above, we have not adopted any other conflict of
interest policy with respect to such transactions.
COMMITTEES OF THE BOARD OF DIRECTORS
We have not yet established any committees of our board of directors.
DIRECTOR NOMINATION PROCESS
Neither our Memorandum of Association nor Articles of Association set
forth a director nomination process.
CODE OF ETHICS
We have not yet adopted a Code of Business Conduct and Ethics that
applies to our principal executive officer, principal financial officer,
principal accounting officer, and persons performing similar functions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
We did not become subject to Section 16(a) of the Securities Exchange
Act of 1934 until January 2007. That section requires our officers, directors,
and persons who beneficially own more than 10% of our common stock to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
10% beneficial owners are also required by rules promulgated by the SEC to
furnish us with copies of all Section 16(a) forms they file.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Our Board of Directors is responsible for developing the executive
compensation principles, policies and programs for our executive officers and is
also responsible for determining the compensation to be paid to our executive
officers. Dr. Ng and Messrs. Tang and Cheung participated in deliberations
concerning executive officer compensation as members of the Board of Directors.
The objectives of our compensation programs are to provide fair market
value cash compensation and an incentive scheme related to the growth of the
company to our key employees, including, but not limited to, our executive
officers. Our compensation program has three components: salary, performance
bonuses, and stock options.
We design our salary component to pay our key employees a base salary
as close to the market rate as possible so that we can be competitive in the
labor market. With some company functions, we provide a performance bonus, such
as sales commissions, as added motivation for our key people. We determine both
salaries and performance bonuses based on market value.
36
We have granted stock options to align the interests of our key
employees to the growth of our company. Stock option grants are determined on an
individual basis with our directors making the decision in each case, based on
what they believe the particular employee will bring to the company.
The following table sets forth information about the remuneration of
our principal executive officer and principal financial officer for services
rendered during the years ended December 31, 2006, 2005 and 2004. None of our
other executive officers had total compensation of $100,000 or more. Certain
columns as required by the regulations of the Securities and Exchange Commission
have been omitted as no information was required to be disclosed under those
columns.
SUMMARY COMPENSATION TABLE
(IN UNITED STATES DOLLARS)
- -------------------------------------------------------------------------------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTION AWARDS ($) COMPENSATION ($) TOTAL ($)
- -------------------------------------------------------------------------------------------------------------------
Jason Ma (Chief Executive 2006 30,769 88,000 -0- 118,769
Officer) (1)<F1> 2005 30,769 -0- -0- 30,769
- -------------------------------------------------------------------------------------------------------------------
Johnny Ng (Chairman of the 2006 46,154 16,500 -0- 62,654
Board of Directors) (2)<F2> 2005 -0- -0- -0- -0-
2004 30,512 -0- -0- 30,512
- -------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
(IN HONG KONG DOLLARS)
- -------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTION AWARDS ($) ALL OTHER TOTAL ($)
COMPENSATION ($)
- -------------------------------------------------------------------------------------------------------------------
Jason Ma (Chief Executive 2006 240,000 686,400 -0- 926,400
Officer) (1)<F1> 2005 240,000 -0- -0- 240,000
- -------------------------------------------------------------------------------------------------------------------
Johnny Ng (Chairman of the 2006 360,000 128,700 -0- 488,700
Board of Directors) (2)<F2> 2005 -0- -0- -0- -0-
2004 237,994 -0- -0- 237,994
- -------------------------------------------------------------------------------------------------------------------
- -------------------
<FN>
(1)<F1> Mr. Ma became our chief executive officer in May 2005
(2)<F2> Dr. Ng has been functioning as our chief financial officer for the last
three fiscal years. He also functioned as our chief executive officer
from September 2001 to April 2005. Dr. Ng waived his salary for 2005.
</FN>
The following table sets forth information with respect to options that
we granted to the executive officers named in the above table during the year
ended December 31, 2006.
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES EXERCISE PRICE OF GRANT DATE FAIR VALUE
EXECUTIVE OFFICER GRANT DATE UNDERLYING OPTIONS (#) OPTION AWARDS ($/SH) OF OPTION AWARD (1)<F1>
- -------------------------------------------------------------------------------------------------------------------
Jason Ma July 1, 2006 800,000 0.20 $88,000
- -------------------------------------------------------------------------------------------------------------------
Johnny Ng July 1, 2006 150,000 0.20 $16,500
- -------------------------------------------------------------------------------------------------------------------
- ------------------
<FN>
(1)<F1> The fair value of stock options at the date of grant was determined
under the Black-Scholes option pricing model, less the amount that the
officer is required to pay upon exercise of the options. The
assumptions utilized to calculate fair value for the stock options
granted in 2006 are as follows: volatility - 72.4%; estimated option
exercise period - 2.13 years; risk free interest rate - 5.04%; and
expected total forfeitures of 0%.
</FN>
The following table sets forth information with respect to options that
remained unexercised at December 31, 2006 for the executive officers named
above. No options were exercised during the year ended December 31, 2006.
37
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES NUMBER OF SECURITIES
UNDERLYING UNDERLYING
UNEXERCISED OPTIONS UNEXERCISED OPTIONS OPTION EXERCISE OPTION EXPIRATION
NAME (#) EXERCISABLE (#) UNEXERCISABLE PRICE ($) DATE
- --------------------------------------------------------------------------------------------------------------------
Jason Ma -0- 800,000 (1)<F1> 0.20 July 1, 2011
- --------------------------------------------------------------------------------------------------------------------
Johnny Ng -0- 150,000 (1)<F1> 0.20 July 1, 2011
- --------------------------------------------------------------------------------------------------------------------
- ------------------
<FN>
(1)<F1> All of these options were granted as of July 1, 2006 and vest as
follows: 50% vest six months from date of grant and the remaining 50%
vest one year from date of grant.
</FN>
We do not have any pension plan or any plan that provides for the
deferral of compensation on a basis that is not tax-qualified. Our subsidiary,
Titanium Technology, participates in a defined contribution pension scheme under
the Mandatory Provident Fund Schemes Ordinance ("MPF Scheme") for all of its
eligible employees in Hong Kong. The MPF Scheme is available to all employees
aged 18 to 64 with at least 60 days of service in the employment in Hong Kong.
Contributions are made by Titanium Technology at 5% of the participants'
relevant income with a ceiling of US$2,564 (HK$20,000). The participants are
entitled to 100% of Titanium Technology's contributions together with accrued
returns irrespective of their length of service with us, but the benefits are
required by law to be preserved until the retirement age of 65. The total
contributions made for MPF Scheme were US$10,897 (HK$84,997), US$13,586
(HK$105,972) and US$13,183 (HK$102,827) for the years ended December 31, 2004,
2005 and 2006 respectively.
EMPLOYMENT CONTRACTS
We entered into agreements with our executive officers, Jason Ma,
Humphrey Cheung, and Billy Tang as of January 1, 2005. While each of the
agreements provides for permanent employment, each agreement may be terminated
by either party at any time without cause upon two weeks' notice or on payment
of two weeks' salary. In the event of termination, the employee is subject to a
12-month non-competition provision during which he cannot engage in any business
that competes with us or deal with any of our existing customers. The agreements
provide for monthly salaries of US $2,564 (HK$20,000) for Mr. Ma, US$3,846
(HK$30,000) for Mr. Cheung, and US$3,846 (HK$30,000) for Mr. Tang, with annual
salary reviews on January 1 of each year.
COMPENSATION OF DIRECTORS
Each of our directors is an officer and employee of our company. We do
not compensate them separately for service as a director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
our common stock, as of March 21, 2007:
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS (2)<F2>
- ---------------------------------------- ---------------------- --------------------
Johnny Ng 37,910,000 (3)<F3> 75.7%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
38
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> NUMBER OF SHARES OWNED PERCENT OF CLASS (2)<F2>
- ---------------------------------------- ---------------------- --------------------
Golden Mass Technologies Ltd. 37,835,000 (3)<F3> 75.7%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Jason Ma 400,000 (4)<F4> 0.8%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Humphrey Cheung 75,000 (3)<F3> 0.1%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
Billy Tang 75,000 (3)<F3> 0.1%
4/F BOCG Insurance Tower
134-136 Des Voeux Road Central
Hong Kong
All Directors and Executive Officers As a 38,460,000 (5)<F5> 76.0%
Group (4 persons)
- -------------------
<FN>
(1)<F1> To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2)<F2> This table is based on 50,000,000 shares of common stock outstanding as
of March 21, 2007. If a person listed on this table has the right to
obtain additional shares of common stock within 60 days from March 21,
2007, the additional shares are deemed to be outstanding for the
purpose of computing the percentage of class owned by such person, but
are not deemed to be outstanding for the purpose of computing the
percentage of any other person.
(3)<F3> Includes 37,835,000 shares owned by Golden Mass Technologies Ltd., a
British Virgin Islands company, as to which Johnny Ng has sole voting
and dispositive power through an indirect 51% ownership in Golden Mass.
Humphrey Chung and Billy Tang each own 19% of Golden Mass but do not
have voting or dispositive power over these shares. Also includes
75,000 shares issuable upon exercise of vested stock options.
(4)<F4> Includes 400,000 shares issuable upon exercise of vested stock options.
(5)<F5> Includes 625,000 shares issuable upon exercise of vested stock options.
</FN>
CHANGES IN CONTROL
There are no agreements known to management that may result in a change
of control of our company.
EQUITY COMPENSATION PLANS
At December 31, 2006, our equity compensation plans were as follows:
39
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES WEIGHTED AVERAGE
TO BE ISSUED UPON EXERCISE EXERCISE PRICE OF NUMBER OF SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE FOR
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FUTURE ISSUANCE
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation 4,625,000 $0.20 375,000
plans approved by
securitey holders
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation -0- -- -0-
plans not approved by
security holders
- ---------------------------------------------------------------------------------------------------------------------
Total 4,625,000 $0.20 375,000
- ---------------------------------------------------------------------------------------------------------------------
STOCK OPTION PLAN
On November 22, 2005, our board of directors approved a stock option
plan under which options to purchase up to 5,000,000 shares of common stock may
be granted. The plan provides for the granting of incentive stock options to our
employees and non-statutory options to our employees, advisors and consultants.
The board of directors or the compensation committee of the board
determines the exercise price for each option at the time the option is granted.
The exercise price for shares under an incentive stock option will not be less
than 100% of the fair market value of the common stock on the date such option
is granted. The fair market value price is the closing price per share on the
date the option is granted. The committee or board also determines when options
become exercisable. The term of an option will be no more than ten (10) years
from the date of grant. No option can be exercised after the expiration of its
term.
Unless otherwise expressly provided in any option agreement, the
unexercised portion of any option granted to an optionee automatically
terminates one year after the date on which the optionee's employment or service
is terminated for any reason, other than by reason of cause, voluntary
termination of employment or service by the optionee, or the optionee's death.
Options terminate immediately upon the termination of an optionee's employment
for cause or 30 days after the voluntary termination of employment or service by
the optionee. If an optionee's employment or consulting relationship terminates
as a result of his or her death, then all options he or she could have exercised
at the date of death, or would have been able to exercise within the following
year if the employment or consulting relationship had continued, will be
exercisable within the one year period following the optionee's death by his or
her estate or by the person who acquired the exercise right by bequest or
inheritance.
Options granted under the plan are not transferable other than by will
or the laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee, except that a non-statutory stock
option is transferable to a family member or trust for the benefit of a family
member if the committee's prior written consent is obtained.
We have the right to redeem any shares issued to any optionee upon
exercise of the option granted under the plan immediately upon the termination
of optionee's employment or service arising from disability, the death of the
optionee, the voluntary termination of employment or services of the
40
optionee, or the termination of employment or services of the optionee for
cause. The redemption price is the fair market value of the shares on the date
of the event of redemption.
In the event that our stock changes by reason of any stock split,
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate adjustments
shall be made in the number and class of shares of stock subject to the plan,
the number and class of shares of stock subject to any option outstanding under
the plan, and the exercise price for shares subject to any such outstanding
option.
In the event of a merger in which our shareholders immediately before
the merger own 50% or more of the issued and outstanding shares of stock of the
resulting entity after the merger, then existing options shall automatically
convert into options to receive stock of the resulting entity. Unless otherwise
expressly provided in any option, the committee in its sole discretion may
cancel, effective upon the date of the consummation of any change of control,
any option that remains unexercised on such date.
The plan authorizes the board to amend, alter, suspend, or terminate
the plan, or any part thereof, at any time and for any reason. However, the plan
requires shareholder approval for any amendment to the plan to the extent
necessary and desirable to comply with applicable laws. No such action by the
board or shareholders can alter or impair any option previously granted under
the plan without the written consent of the optionee. The plan remains in effect
until terminated by action of the board or operation of law.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor any of
our former directors, senior officers or principal shareholders, nor any family
member of such former directors, officers or principal shareholders, has or had
any material interest, direct or indirect, in any transaction, or in any
proposed transaction which has materially affected or will materially affect us.
ERICORPS CREATION (HK) LIMITED
Ericorps Creation (HK) Limited is owned by Eric Wong and his wife, who
own indirectly 10.0% of our outstanding shares through their ownership of Golden
Mass Technologies Ltd. Ericorps is also one of our distributors of ProAccess
FaceOK. We sell our products to distributors at prices based on the quantities
purchased. The price decreases as the quantity increases. The terms that we have
with Ericorps are the same as those with other third party distributors.
Therefore, we believe that the terms of the transactions with Ericorps have been
no less favorable than the terms of similar transactions with non-affiliates.
During the years ended December 31, 2005, 2004 and 2003, we sold products to
Ericorps Creation (HK) Limited in the amounts of $nil, US$34,204 (HK$266,791)
and US$105,874 (HK$825,820), respectively.
AMOUNTS DUE FROM RELATED PARTIES
We have paid for the expenses related to the annual company secretary
fee, similar to a corporate annual report fee, of Golden Mass Technologies
Limited ("Golden Mass"), a shareholder that is controlled by, among others,
Johnny Ng, Humphrey Cheung, and Billy Tang, who are our officers and directors,
since 2002. Johnny Ng, Humphrey Cheung, and Billy Tang own indirectly 51%, 19%
and 19%, respectively, of Golden Mass. We paid for these expenses as an
accommodation, since Golden Mass does not maintain a bank account in Hong Kong.
The amounts paid were US$769 (HK$6,000), US$705 (HK$5,500) and US$705
41
(HK$5,500) for the years ended December 31, 2005, 2004 and 2003, respectively.
This practice has ceased effective January 1, 2006.
In 2003, when we decided to establish an office in PRC, we established
an annual budget for the subsidiary and we remitted cash in those budgeted
amounts to Humphrey Cheung. Due to the fact that non-cash payment methods are
not widely accepted in the PRC, we have advanced cash to Humphrey Cheung, who
then pays expenditures for our PRC subsidiary, such as salaries, fees, and rent,
in cash. This practice continued in 2003, 2004 and 2005. The amounts paid to
Humphrey Cheung for this purpose were US$165,879 (HK$1,293,860), US$86,439
(HK$674,225) and US$59,710 (HK$465,737) during the years ended December 31,
2005, 2004 and 2003, respectively. In 2005, after review of its cash levels and
its related party transactions, management concluded that it would discontinue
this practice and would also prohibit the practice of advancing funds to related
parties.
The following table sets forth the advances and repayments, as stated
in Hong Kong dollars (HK$):
Humphrey Golden Mass Total
Cheung
Cash Non-cash HKD HKD HKD
- ------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 - - -
Personal expenses paid on behalf X 19,434 6,100 25,534
Unpaid share capital X - 360,000 360,000
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 19,434 366,100 385,534
Loan to director for PRC subsidiary expenses X 465,737 - 465,737
Repayment X (48,441) - (48,441)
Personal expenses paid on behalf X - 5,500 5,500
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 436,730 371,600 808,330
Loan to director for PRC subsidiary expenses X 674,225 - 674,225
Repayment X (79,370) - (79,370)
Share capital paid up by set-off with - (360,000) (360,000)
shareholder's loan X
Personal expenses paid on behalf X - 5,500 5,500
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 1,031,585 17,100 1,048,685
Loan to director for PRC subsidiary expenses X 1,293,860 - 1,293,860
Personal expenses paid on behalf X - 6,000 6,000
Repayment X (681,684) (681,684)
Amount setting off against "Amount due to
related parties" X (1,643,761) (23,100) (1,666,861)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 - - -
========================================================================================================================
AMOUNTS DUE TO RELATED PARTIES
In 2002 and 2003, Johnny Ng, Billy Tang, and Goldford Consultancy
Limited ("Goldford"), a company owned by Johnny Ng, advanced US$37,190
(HK$290,085), to us, net of repayments. In 2004, we repaid the advances from
Goldford in full. Johnny Ng and Billy Tang also advanced funds to us and at
December 31, 2004, the aggregate amounts of these advances were US$27,025
(HK$210,797). During the year ended December 31, 2005, Johnny Ng and Billy Tang
loaned us US$457,629 (HK$3,569,508) and we repaid them US$201,611
(HK$1,572,562), leaving a balance of US$283,044 (HK$2,207,743). Both Johnny Ng
and Billy Tang agreed to offset US$213,700 (HK$1,666,861) of this amount against
42
amounts due from related parties. Johnny Ng and Billy Tang then forgave the
balance of US$69,344 (HK$540,882) and this amount was contributed to the capital
of the company. We believe that the terms of these transactions were no less
favorable than what could have been obtained from non-affiliates.
The following table sets forth the movement of the amounts due to
related parties in Hong Kong dollars (HK$). Amounts for Goldford are included in
Johnny Ng's column as he owns that company.
Billy Tang Johnny Ng Total
HKD HKD HKD
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 - 4,716 4,716
Advances to us during the year 77,649 330,755 408,404
Repayment by us during the year (36,925) (181,930) (218,855)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 40,724 153,541 194,265
Advances to us during the year 54,146 578,811 632,957
Repayment by us during the year - (537,137) (537,137)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 94,870 195,215 290,085
Advances to us during the year 133,300 308,212 441,512
Repayment by us during the year (50,000) (470,800) (520,800)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 178,170 32,627 210,797
Advances to us during the year 3,564,508 5,000 3,569,508
Repayment by us during the year (1,534,935) (37,627) (1,572,562)
Amount offset against amounts due from related parties (1,666,861) - (1,666,861)
Amount forgiven and contributed to additional paid-in capital (540,882) - (540,882)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 - - -
=======================================================================================================================
SHAREHOLDERS LOANS
In 2003 and 2004, Johnny Ng, Billy Tang, and Humphrey Cheung, through
Golden Mass, loaned us US$117,949 (HK$920,000) and US$64,102 (HK$500,000),
respectively, leaving a balance of US$182,051 (HK$1,420,000) owed to them at
December 31, 2004. During the year ended December 31, 2005, no additional money
was loaned. These loans were unsecured, interest-free, and not repayable within
the next twelve months. The whole amount of US$182,051 (HK$1,420,000) was
forgiven by the shareholders and contributed to the company as additional
paid-in capital in 2005. We believe that the terms of these transactions were no
less favorable than what could have been obtained from non-affiliates.
PERSONAL GUARANTEES
Billy Tang, Johnny Ng, and Humphrey Cheung personally guaranteed our
installment loan from a financial institution in the amount of US$38,462
(HK$300,000). None of these individuals received any remuneration for the
guarantee. This loan was repaid in 18 monthly installments of US$2,313
(HK$18,042) in 2005.
On February 6, 2006, Billy Tang, Johnny Ng, and Humphrey Cheung
personally guaranteed our banking facilities arrangement with the bank where we
maintain our checking account. The arrangement allows us to overdraft our
account up to US$256,410 (HK$2,000,000) and Messrs. Tang, Ng and Cheung have
provided their personal guarantees up to that amount. We believe that the terms
of these transactions were no less favorable than what could have been obtained
from non-affiliates.
43
DIRECTOR INDEPENDENCE
Our common stock trades in the OTC Bulletin Board. As such, we are not
currently subject to corporate governance standards of listed companies, which
require, among other things, that the majority of the board of directors be
independent.
Since we are not currently subject to corporate governance standards
relating to the independence of our directors, we choose to define an
"independent" director in accordance with the NASDAQ Global Market's
requirements for independent directors (NASDAQ Marketplace Rule 4200). The
NASDAQ independence definition includes a series of objective tests, such as
that the director is not an employee of the company and has not engaged in
various types of business dealings with the company.
We do not have any independent directors under the above definition. We
do not list that definition on our Internet website.
We presently do not have an audit committee, compensation committee,
nominating committee, executive committee of our Board of Directors, stock plan
committee or any other committees.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
For the fiscal year ended December 31, 2006, Zhong Yi (Hong Kong)
C.P.A. ("Zhong Yi") is expected to bill approximately US$60,000 (HK$468,000) for
the audit of our annual financial statements, the review of our Form 10-Q
filings and for the review of our registration statements.
For the fiscal year ended December 31, 2005, Zhong Yi billed US$50,000
(HK$390,000) for the audit of our annual financial statements and its review of
our registration statements.
AUDIT-RELATED FEES
There were no fees billed for services reasonably related to the
performance of the audit or review of our financial statements outside of those
fees disclosed above under "Audit Fees" for fiscal years 2006 and 2005.
TAX FEES
For the fiscal years ended December 31, 2006 and 2005, Zhong Yi billed
$nil and $nil, respectively, for tax compliance, tax advice, and tax planning
services.
ALL OTHER FEES
There were no fees billed by Zhong Yi, other than for the services
described above, for fiscal years 2006 and 2005.
PRE-APPROVAL POLICIES AND PROCEDURES
Prior to engaging our accountants to perform a particular service, our
audit committee obtains an estimate for the service to be performed. The audit
committee in accordance with procedures for the company approved all of the
services described above.
44
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the preceding paragraph.
45
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are either filed herewith or incorporated
herein by reference:
FINANCIAL STATEMENTS
The audited consolidated financial statements of Titanium Group Limited
and subsidiaries as of December 31, 2006 and 2005 and for each of the three
years in the period ended December 31, 2006, and the Report of Independent
Registered Public Accounting Firm thereon, are included herein as shown in the
"Index to the Consolidated Financial Statements".
FINANCIAL STATEMENT SCHEDULES
No Financial Statement Schedules are included herein because either the
amounts are not sufficient to require submission of the schedules or because the
information is included in the Financial Statements or notes thereto.
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)
- --------------------------------------------------------------------------------
21 Subsidiaries of the registrant (1)
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
46
- --------------------------------------------------------------------------------
REGULATION
S-K NUMBER EXHIBIT
- --------------------------------------------------------------------------------
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) Filed as an exhibit to the initial filing of the registration statement
on Form S-1 (File No. 333-128302) on September 14, 2005.
(2) Filed as an exhibit to Amendment No.1 to the registration statement on
Form S-1 (File No. 333-128302) on December 9,2005.
(3) Filed as an exhibit to Amendment No. 2 to the registration statement on
Form S-1 (File No. 333-128302) on January 26, 2006.
(4) Filed as an exhibit to Amendment No. 3 to the registration statement on
Form S-1 (File No. 333-128302) on March 8, 2006.
(5) Filed as an exhibit to Amendment No. 6 to the registration statement on
Form S-1 (File No. 333-128302) on May 24, 2006.
47
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TITANIUM GROUP LIMITED
Date: March 30, 2007 By: /s/ JASON MA
-------------------------------------
Jason Ma
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive Officer (Principal Executive
/s/ JASON MA Officer) March 30, 2007
- ------------------------------------
Jason Ma
Chairman of the Board of Directors (Principal
Financial Officer and Principal Accounting
/s/ DR. KIT CHONG "JOHNNY" NG Officer) March 30, 2007
- ------------------------------------
Dr. Kit Chong "Johnny" Ng
/s/ KIN KWONG "HUMPHREY" CHEUNG Director March 30, 2007
- ------------------------------------
Kin Kwong "Humphrey" Cheung
/s/ WAI HUNG "BILLY" TANG Director March 30, 2007
- ------------------------------------
Wai Hung "Billy" Tang
48
------------------------------------------------------------
TITANIUM GROUP LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THEREON)
------------------------------------------------------------
ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED
CERTIFIED PUBLIC ACCOUNTANTS
TITANIUM GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations And Comprehensive Income F-3 - F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS
TITANIUM GROUP LIMITED
We have audited the accompanying consolidated balance sheets of Titanium Group
Limited and subsidiaries ("the Company") as of December 31, 2006 and 2005, and
the related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Titanium Group
Limited and subsidiaries at December 31, 2006 and 2005, and the consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ ZHONG YI (HONG KONG) C.P.A. COMPANY LIMITED
Zhong Yi (Hong Kong) C.P.A. Company Limited
Certified Public Accountants
Hong Kong, China
March 28, 2007
F-1
TITANIUM GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2005
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"),
EXCEPT PER SHARE DATA)
AS OF DECEMBER 31,
-------------------------------------------------------
2006 2006 2005
US$ HK$ HK$
ASSETS
Current assets:
Cash and cash equivalents 149,298 1,164,528 2,472,677
Accounts receivable, net 606,237 4,728,648 4,712,014
Inventories 9,123 71,156 69,737
Deposits and other receivables 43,891 342,347 1,144,141
Deferred tax assets 38,513 300,401 -
Income taxes recoverable 15,185 118,442 -
----------------- ----------------- -----------------
Total current assets 862,247 6,725,522 8,398,569
----------------- ----------------- -----------------
Plant and equipment, net 377,572 2,945,064 735,639
Intangible assets, net 338,725 2,642,055 1,407,329
----------------- ----------------- -----------------
TOTAL ASSETS 1,578,544 12,312,641 10,541,537
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft 219,490 1,712,024 1,506,862
Accounts payable 423,417 3,302,651 413,164
Deferred revenue 37,318 291,084 -
Income taxes payable - - 417,015
----------------- ----------------- -----------------
TOTAL LIABILITIES 680,225 5,305,759 2,337,041
----------------- ----------------- -----------------
MINORITY INTEREST (8,610) (67,159) -
----------------- ----------------- -----------------
Stockholders' equity:
Common stock, US$0.01 (HK$0.078) par value,
100,000,000 shares authorized; 50,000,000 shares
issued and outstanding 500,000 3,900,000 3,900,000
Additional paid-in capital 599,385 4,675,206 2,486,797
(Accumulated deficits)/retained earnings (193,180) (1,506,811) 1,822,183
Accumulated other comprehensive income/(loss) 724 5,646 (4,484)
----------------- ----------------- -----------------
Total stockholders' equity 906,929 7,074,041 8,204,496
----------------- ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,578,544 12,312,641 10,541,537
================= ================= =================
See accompanying notes to consolidated financial statements.
F-2
TITANIUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006,
2005 AND 2004 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"),
EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2006 2006 2005 2004
US$ HK$ HK$ HK$
OPERATING REVENUES:
Products $ 1,932,569 $ 15,074,036 $ 7,877,028 $ 4,099,371
Products sold to related parties - - - 266,791
Services 551,707 4,303,315 4,902,023 1,414,887
Maintenance services 37,003 288,620 563,070 568,203
---------------- ---------------- --------------- ----------------
Total operating revenues 2,521,279 19,665,971 13,342,121 6,349,252
---------------- ---------------- --------------- ----------------
COST OF REVENUES:
Cost of products 1,300,713 10,145,559 3,368,963 1,975,940
Cost of products sold to related parties - - - 128,607
Cost of services 306,128 2,387,795 3,627,497 1,018,719
Maintenance services 8,638 67,378 66,000 66,000
---------------- ---------------- --------------- ----------------
Total cost of revenues 1,615,479 12,600,732 7,062,460 3,189,266
---------------- ---------------- --------------- ----------------
GROSS PROFIT 905,800 7,065,239 6,279,661 3,159,986
---------------- ---------------- --------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative expenses 1,020,793 7,962,186 5,115,000 1,818,804
Research and development costs 96,154 750,000 190,100 -
Stock-based compensation 280,565 2,188,409 - -
---------------- ---------------- --------------- ----------------
TOTAL OPERATING EXPENSES 1,397,512 10,900,595 5,305,100 1,818,804
---------------- ---------------- --------------- ----------------
(LOSS)/INCOME FROM OPERATIONS (491,712) (3,835,356) 974,561 1,341,182
---------------- ---------------- --------------- ----------------
OTHER INCOME/(EXPENSE):
Interest income 2,888 22,537 - -
Interest expense (9,872) (77,000) (23,563) (16,532)
Government grant income - - 69,067 55,200
Other income - - 30,987 24,449
---------------- ---------------- --------------- ----------------
Total other (expense)/income (6,984) (54,463) 76,491 63,117
---------------- ---------------- --------------- ----------------
(LOSS)/INCOME BEFORE INCOME TAXES (498,696) (3,889,819) 1,051,052 1,404,299
Income taxes credit/(expense) 63,291 493,666 (263,238) (164,688)
---------------- ---------------- --------------- ----------------
(LOSS)/INCOME BEFORE MINORITY INTEREST (435,405) (3,396,153) 787,814 1,239,611
Minority interest 8,610 67,159 7,190 30,570
---------------- ---------------- --------------- ----------------
NET (LOSS)/INCOME $ (426,795) $ (3,328,994) $ 795,004 $ 1,270,181
================ ================ =============== ================
Other comprehensive income/(loss):
- Foreign currency translation adjustment 1,298 10,130 (1,156) (2,427)
---------------- ---------------- --------------- ----------------
COMPREHENSIVE (LOSS)/INCOME $ (425,497) $ (3,318,864) $ 793,848 $ 1,267,754
================ ================ =============== ================
See accompanying notes to consolidated financial statements.
F-3
TITANIUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2006,
2005 AND 2004 (ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"),
EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2006 2006 2005 2004
US$ HK$ HK$ HK$
Net (loss)/ income per share
Basic $ (0.009) $ (0.067) $ 0.016 $ 0.027
================ ================ =============== ================
Diluted $ (0.009) $ (0.067) $ 0.016 $ 0.027
================ ================ =============== ================
Weighted average number of shares outstanding
Basic 50,000,000 50,000,000 48,250,000 47,000,000
================ ================ =============== ================
Diluted 50,000,000 50,000,000 48,250,000 47,000,000
================ ================ =============== ================
See accompanying notes to consolidated financial statements.
F-4
TITANIUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Common stock Retained
Additional Accumulated earnings/
paid-in comprehensive (accumulated Total
No. of shares Amount capital income/(loss) deficits) equity
------------- ------ ------- ------------- --------- ------
At January 1, 2004 47,000,000 $ 390,000 $ - $ (901) $ (243,002) $ 146,097
Foreign currency
translation adjustment - - - (2,427) - (2,427)
Net income for the year - - - - 1,270,181 1,270,181
-------------- -------------- -------------- ----------------- -------------- --------------
At December 31, 2004 47,000,000 390,000 - (3,328) 1,027,179 1,413,851
Private placement of
common stock, net 3,000,000 234,000 3,801,915 - - 4,035,915
Forgiveness of
shareholders' loan - - 1,960,882 - - 1,960,882
Par value
reclassification - 3,276,000 (3,276,000) - - -
Foreign currency
translation adjustment - - - (1,156) - (1,156)
Net income for the year - - - - 795,004 795,004
-------------- -------------- -------------- ----------------- -------------- --------------
At December 31, 2005 50,000,000 3,900,000 2,486,797 (4,484) 1,822,183 8,204,496
Fair value of employee
stock options - - 2,188,409 - - 2,188,409
Foreign currency
translation adjustment - - - 10,130 - 10,130
Net loss for the year - - - - (3,328,994) (3,328,994)
-------------- -------------- -------------- ----------------- -------------- --------------
At December 31, 2006 50,000,000 $ 3,900,000 $ 4,675,206 $ 5,646 $ (1,506,811) $ 7,074,041
============== ============== ============== ================= ============== ==============
See accompanying notes to consolidated financial statements.
F-5
TITANIUM GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31,
2006 2006 2005 2004
US$ HK$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss)/income $ (426,795) $ (3,328,994) $ 795,004 $ 1,270,181
Adjustments to reconcile net (loss)/income to net
cash provided by/(used for) operating activities:
Depreciation and amortization 158,843 1,238,979 576,825 269,316
Allowances for doubtful accounts 57,300 446,942 - -
Minority interest in earnings of subsidiaries (8,610) (67,159) (7,190) (30,570)
Stock-based compensation 280,565 2,188,409 - -
Loss on disposals of long term assets - - 29,144 -
(Increase)/decrease in operating assets:
Accounts receivable from a related party - - 1,048 (780)
Accounts receivable, net (59,432) (463,576) (3,275,164) (233,957)
Amount due from related parties - - - (600,355)
Inventories (181) (1,419) (48,784) (20,953)
Deposits and other receivables 102,794 801,794 (1,032,672) (63,609)
Deferred tax assets (38,513) (300,401) - -
Increase/(decrease) in operating liabilities:
Amount due to related parties - - 1,378,770 280,712
Accounts payable 370,447 2,889,487 (193,880) (80,708)
Deferred revenue 37,318 291,084 (263,662) (263,662)
Income taxes payable (68,648) (535,457) 280,655 121,654
Deferred tax liabilities - - (41,571) 17,299
-------------- -------------- -------------- --------------
Net cash provided by/(used for) operating activities 405,088 3,159,689 (1,801,477) 664,568
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (368,650) (2,875,473) (783,741) (121,865)
Capitalization of software development costs (231,751) (1,807,657) (927,752) (914,524)
-------------- -------------- -------------- --------------
Net cash used for investing activities (600,401) (4,683,130) (1,711,493) (1,036,389)
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term bank loan - - (16,667) (200,000)
Proceeds from shareholders' loan - - - 500,000
Net increase/(decrease) in bank overdraft 26,303 205,162 1,444,012 (148,414)
Net proceeds from private placement - - 4,035,915 -
-------------- -------------- -------------- --------------
Net cash provided by financing activities 26,303 205,162 5,463,260 151,586
-------------- -------------- -------------- --------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 1,298 10,130 (1,156) (2,427)
-------------- -------------- -------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (167,712) (1,308,149) 1,949,134 (222,662)
See accompanying notes to consolidated financial statements.
F-6
TITANIUM GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2006
(ORIGINAL CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
YEAR ENDED DECEMBER 31,
2006 2006 2005 2004
US$ HK$ HK$ HK$
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 317,010 2,472,677 523,543 746,205
-------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 149,298 $ 1,164,528 $ 2,472,677 $ 523,543
============== ============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expenses $ 9,872 $ 77,000 $ 23,563 $ 16,532
============== ============== ============== ==============
Cash paid for income taxes $ 43,871 $ 342,192 $ 23,971 $ 25,735
============== ============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Comprehensive income/(loss) $ 1,298 $ 10,130 $ (1,156) $ (2,427)
============== ============== ============== ==============
Forgiveness of amount due to related parties and
shareholders' loan $ - $ - $ 1,960,882 $ -
============== ============== ============== ==============
Netting off between the amount due from related
parties with the amount due to related parties $ - $ - $ 1,048,685 $ 360,000
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
F-7
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
1. ORGANIZATION AND BUSINESS BACKGROUND
Titanium Group Limited (the "Company") was incorporated as an
International Business Company with limited liability in the British
Virgin Islands ("BVI") under the International Business Companies Act, Cap
291 of the British Virgin Islands on May 17, 2004. The Company, through
its subsidiary companies, Titanium Technology Limited and Titanium
Technology (Shenzhen) Co., Limited, 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.
Facial based biometric identification and security projects are made up of
two elements, the biometric products and professional services. The
biometric products consist of 3 major proprietary software products 1)
Ti-Face, the face recognition engine, 2) ProAccess, a facial based
biometric authentication system and 3) ProFacer, a facial based biometric
integrated surveillance system. These software products are always bundled
with other outside purchased identification and security hardware
products, including workstations and live-scan devices, to sell to
customers. The professional services include the design, development and
integration services of biometric identification and security solutions to
customers using the products.
Titanium Technology Limited also provides other professional services and
technical support services to its customers, including information
security consulting, remote monitoring system consulting and security
audit consulting services.
The Company and subsidiaries are hereinafter collectively referred to as
the "Group".
Details of the Company's subsidiaries as at December 31, 2006 are
described below:
Place of Particulars of
incorporation Principal activities issued/ Effective
and kind of legal and place of registered share interest
Name entity operation capital Held
---- ------ --------- ------- ----
Titanium Technology Hong Kong, company Sales and marketing 30,000 ordinary 100%
Limited with limited of biometric shares of HK$1 each
("TTLHK") liability identification and
security products and HK$30,000 (US$3,846)
services
Titanium Technology The People's Republic Development of Registered capital 92%
(Shenzhen) Co., Limited of China (the "PRC"), biometric technology
("TTLSZ") company with limited and new products HK$1,000,000
liability development
F-8
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
o Basis of presentation
These accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America.
o Basis of consolidation
The interest of the Company in the operating subsidiaries was acquired by
means of exchange for shares in the Company pursuant to a share exchange
agreement on June 20, 2005. The transaction is considered to be transfer
between entities under common control, within the meaning of US GAAP.
Accordingly, the assets and liabilities transferred have been accounted
for at historical cost or at their "fair value" at the date of their
original acquisition and have been included in the foregoing financial
statements as of the beginning of the periods presented.
The consolidated financial statements include the financial statements of
the Company and its subsidiaries, TTLHK and TTLSZ.
All significant inter-company balances and transactions within the Group
have been eliminated on consolidation.
o Use of estimates
In preparing these consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheets and revenues and expenses during the
years reported. Actual results may differ from these estimates.
o Cash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand,
demand deposits placed with banks or other financial institutions and all
highly liquid investments with an original maturity of three months or
less as of the purchase date of such investments.
F-9
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Accounts receivable
Accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Group's best estimate
of the amount of probable credit losses in the Group's existing accounts
receivable. The Group determines the allowance based on historical
write-off experience of the Group. The Group reviews its allowance for
doubtful accounts on a regular basis. Past due balances over 90 days and
over a specified amount are reviewed individually for collectibility. All
other balances are reviewed on a pooled basis by industry. Account
balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. The Group does not have any off-balance-sheet credit
exposure related to its customers. As of December 31, 2005 and 2006, the
Group recorded the allowances for doubtful accounts in the amount of
HK$Nil and HK$446,942, respectively.
o Inventories
Inventories are stated at lower of cost or market value. Cost is
determined using the first-in-first-out method for all inventories.
Inventories consist of computer accessories purchased from various
suppliers.
o Plant and equipment, net
Plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on a
straight-line basis over the following expected useful lives from the date
on which they become fully operational and after taking into account their
estimated residual values:
DEPRECIABLE LIFE RESIDUAL VALUE
Computer hardware and software 5 years Nil
Furniture, fixtures and office equipment 5 years 5%
Moulds 5 years Nil
Leasehold improvements The shorter of their useful Nil
lives or over the lease terms
Expenditure for maintenance and repairs is expensed as incurred.
F-10
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Intangible assets / Software development costs
Intangible assets consist of 1) the software licenses costs and patent
costs paid to third parties and 2) the capitalized software development
costs. The Group reviews 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 Group
capitalized HK$848,034, HK$910,536 and HK$1,799,771 for the years ended
December 31, 2004, 2005 and 2006, respectively, for projects ProAccess and
ProFacer. For a detailed breakdown of the intangible assets please refer
to Note 6.
The Group received government funding in the amounts of HK$1,174,345,
HK$756,723 and HK$204,296 for the years ended December 31, 2004, 2005 and
2006 respectively. This funding income was offset to software-development
costs incurred prior to the beginning of the capitalization period.
According to paragraph 73 of SOP 97-2, if capitalization of the
software-development costs commences pursuant to SFAS No. 86, any income
from the funding party under a funded software-development arrangement
should be credited first to the development costs prior to capitalization.
The following table illustrates the movement of the capitalized software
development costs:
As of December 31,
2006 2005
HK$ HK$
Software development costs 2,004,067 1,667,259
Grant income (204,296) (756,723)
------------- --------------
Capitalized development costs 1,799,771 910,536
============= ==============
ESTIMATED USEFUL LIFE
Product development costs 5 years
Patent and license right registration fee 20 years
F-11
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Grant income represents subsidy from the Government of the Hong Kong
Special Administrative Region ("HKSAR") for assisting the Group in
development of products of innovative nature. The products developed under
this subsidy plan include ProAccess and ProFacer. Pursuant to the
agreements made between the Group and HKSAR, HKSAR is required to provide
funding to the Group for product development. The funding is made
available to the Group in accordance with the milestones as established by
the Group and is subject to a ceiling of HK$2,000,000. The Group is not
required to repay the Government grant. However, the Group is required to
contribute approximately 50% of the overall project cost in accordance
with the grant agreement. Upon completion of the project, the Group
tenders to the Government its pro rata share of the residual funds
remaining in the project account. In addition the Group is 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 the Group. The royalty fee paid by the
Group for the years ended December 31, 2004, 2005 and 2006 amounted to
HK$34,532, HK$48,092 and HK$55,705 respectively.
The Group is entitled to retain ownership of the intellectual property
resulting from the project.
o Impairment of long-lived assets
In accordance with SFAS Statement No. 144, "ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS", long-lived assets, such as plant, and
equipment and intangible assets subject to depreciation or amortization
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposal group classified as held for sale
would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Intangible assets are tested annually for impairment and are tested for
impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset's fair value. This
determination is made at the reporting unit.
o Deferred revenue
Deferred revenue consists primarily of payments received in advance of
revenue recognition from maintenance. Revenues from maintenance fees are
recognized ratably over the term of the maintenance period.
F-12
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Revenue recognition
The Group generates revenues principally from contracts for facial based
biometric identification and security projects, which typically include
outside purchased workstations and live-scans devices, bundled with the
Group's 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 the Group's facial based biometric identification and
security projects generally includes twelve months free post-contract
customer support (details see Note 18). The Group also generates revenues
from services performed under fixed-price and time-and-material
agreements. To a lesser extent, the Group also generates revenues from
sales of its proprietary biometrics products and re-sales of products
sourced from outside third parties. The Group classifies 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 months period.
The Group applies 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, the Group applies 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." The Group also
considers 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 the Group's
revenue for any period if actual results differ from management's
judgments or estimates.
(1) 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 THE
GROUP'S SOFTWARE
Revenue associated with these arrangements, exclusive of amounts
allocated to maintenance, for which the Group 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.
F-13
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
To date the Group has not made an allocation of contract revenue to
separate accounting units since all of the products are delivered
simultaneously and no deferral of revenue would result.
FACIAL BASED BIOMETRIC IDENTIFICATION AND SECURITY PROJECTS THAT
REQUIRE SIGNIFICANT MODIFICATION OR CUSTOMIZATION OF THE GROUP'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.
(2) 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 the Group's professional services are performed under
time-and-materials arrangements. Revenue from such services is recognized
as the services are provided.
(3) Maintenance services revenue
Maintenance services revenue consists of fees for providing technical
support and software updates, primarily to customers purchasing the
primary products. The Group recognizes all maintenance revenue ratably
over the applicable maintenance period. The Group determines the amount of
maintenance revenue to be deferred through reference to substantive
maintenance renewal provisions contained in the arrangement.
(4) Interest income
Interest income is recognized on a time apportionment basis, taking into
account the principal amounts outstanding and the interest rates
applicable.
(5) Revenue recognition criteria
The Group recognizes 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 the Group's transactions
as follows:
F-14
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
PERSUASIVE EVIDENCE OF AN ARRANGEMENT: The Group uses either contracts
signed by both the customer and the Group or written purchase orders
issued by the customer that legally bind the Group and the customer as
evidence of an arrangement.
PRODUCT DELIVERY: The Group deems 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: The Group considers the fee to be fixed or
determinable if the fee is not subject to refund or adjustment and the
payment terms are within its normal established practices. If the fee is
not fixed or determinable, the Group recognizes the revenue as amounts
become due and payable.
COLLECTION IS DEEMED PROBABLE: The Group conducts 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 the
Group expects that the customer will pay amounts under the arrangement as
payments become due.
(6) Sales to authorized distributors
The Group also uses authorized distributors to sell certain of its
products and only the authorized distributors are allowed to resell those
products. The Group requires the authorized distributors to purchase the
products and then sell through the authorized distributors' own
distribution channel to the end customers. From the Group's 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,
the Group bills 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. The Group is not
required to provide training to authorized distributors.
o Research and development costs
Research and development costs are expensed when incurred in the
development of new products or processes including significant
improvements and refinements of existing products. Such costs mainly
relate to labor and material cost. The Group incurred HK$Nil, HK$190,100
and HK$750,000 of such costs for the years ended December 31, 2004, 2005
and 2006 respectively.
o Advertising costs
The Group expenses advertising costs are accounted for in accordance with
SOP 93-7, "REPORTING FOR ADVERTISING COSTS". Advertising expenses of
HK$63,143, HK$103,749 and HK$26,988 were incurred for the years ended
December 31, 2004, 2005 and 2006 respectively.
F-15
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Income taxes
The Group accounts for income tax using SFAS No. 109 "ACCOUNTING FOR
INCOME TAXES", which requires the asset and liability approach for
financial accounting and reporting for income taxes. Under this approach,
deferred income taxes are provided for the estimated future tax effects
attributable to temporary differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases, and for
the expected future tax benefits from loss carry-forwards and provisions,
if any. Deferred tax assets and liabilities are measured using the enacted
tax rates expected in the years of recovery or reversal and the effect
from a change in tax rates is recognized in the statement of operations in
the period of enactment. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not
that some portion of, or all of the deferred tax assets will not be
realized. For details please refer to Note 11.
o Segment reporting
SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION" establishes standards for reporting information about
operating segments on a basis consistent with the Group's internal
organization structure as well as information about geographical areas,
business segments and major customers in these financial statements. The
Group operates in one principal business segment.
o Comprehensive income
Comprehensive income as defined includes all changes in equity during a
period from non-owner sources. Accumulated comprehensive income, as
presented in the accompanying consolidated statements of stockholders'
equity consists of changes in unrealized gains and losses on foreign
currency translation. This comprehensive income is not included in the
computation of income tax expense or benefit.
o Foreign currency translation
The Group's functional currency is the Hong Kong dollar because the
majority of the Group's 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 (primarily transactions
involving the United States dollar and the Renminbi Yuan ("RMB")) have
been re-measured into Hong Kong dollars in accordance with the relevant
provisions of SFAS No. 52, "FOREIGN CURRENCY TRANSLATION". The objective
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 US dollars are presented was US$1 / HK$7.8.
F-16
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
Cash, receivables, payables, 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 stockholders' equity, are stated at their actual
dollar cost or are restated from their historic cost, by applying the
historical exchange rate as monthly average exchange rates to underlying
transactions.
o Net (loss)/income per share
The Group calculates net (loss)/income per share in accordance with SFAS
No. 128, "EARNINGS PER SHARE". Basic net (loss)/income per share is
computed by dividing net (loss)/income by the weighted average number of
shares of common stock outstanding for the period. Diluted net
(loss)/income 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 Group. For the year ended December
31, 2005, warrants to purchase 3,000,000 shares of common stock of the
Group which were issued in connection with the sale of common stock (see
Note 8) 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. For the year ended December 31, 2006, share options
granted to employees and non-employees (see Note 10) are excluded from the
computation of diluted net loss per share as the stock options were
anti-dilutive.
o Equity-based compensation
The Company adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" beginning at its inception. Effective from January 1, 2006,
the Company 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.
Under SFAS 123(R), the Company applied the Black-Scholes valuation model
in determining the fair value of options granted to employees and
directors. For the year ended December 31, 2006, the Company granted
4,635,000 options to its employees and directors. Options are measured
based on the fair market value of the underlying awards at the date of
grant. The Company recognizes 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. Please see Note 10 for details.
F-17
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
o Retirement plan costs
Contributions to retirement schemes (which are defined contribution plans)
are charged to general and administrative expenses in the consolidated
statements of income and comprehensive income as and when the related
employee service is provided.
o Fair value of financial instruments
The carrying value of the Group's financial instruments, which include
cash and cash equivalents, accounts receivables, deposits and other
receivables, bank overdraft, deferred revenue, other payables and accrued
liabilities, approximate their fair values due to the short-term maturity
of these instruments.
o Related parties
For the purposes of these financial statements, parties are considered to
be related if one party has the ability, directly or indirectly, to
control the party or exercise significant influence over the party in
making financial and operating decisions, or vice versa, or where the
Group and the party are subject to common control or common significant
influence. Related parties may be individuals or other entities.
All material related party transactions have been disclosed in Note 12 to
these financial statements.
o Recently issued accounting standards
In May 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND ERROR
CORRECTIONS" ("SFAS 154"), which replaces Accounting Principles Board
Opinions No. 20, "ACCOUNTING CHANGES" and SFAS No. 3, "REPORTING
ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS--AN AMENDMENT OF APB
OPINION NO. 28". SFAS 154 provides guidance on the accounting for and
reporting of accounting changes. It establishes retrospective application,
or the latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction of an
error. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The
adoption of this statement did not have a material effect on the Group's
financial position or results of operations.
In September 2005, the FASB's Emerging Issues Task Force ("EITF") reached
a final consensus on Issue 04-13, "ACCOUNTING FOR PURCHASES AND SALES OF
INVENTORY WITH THE SAME COUNTERPARTY" ("EITF 04-13"). EITF 04-13 requires
that two or more legally separate exchange transactions with the same
counterparty be combined and considered a single arrangement for purposes
of applying APB Opinion No. 29, "Accounting for Nonmonetary Transactions",
when the transactions are entered into in contemplation of one another.
EITF 04-13 is effective for new arrangements entered into, or
modifications or renewals of existing arrangements, in interim or annual
periods beginning after March 15, 2006. The Group does not anticipate that
the adoption of this statement will have a material effect on the Group's
financial position or results of operations.
F-18
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
In February 2006, the FASB issued SFAS No. 155, "ACCOUNTING FOR CERTAIN
HYBRID INSTRUMENTS-AN AMENDMENT OF FASB STATEMENTS 133 AND 140", which is
effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006. The statement improves financial reporting by eliminating the
exemption from applying SFAS No. 133 to interests in securitized financial
assets so that similar instruments are accounted for similarly regardless
of the form of the instruments. The Statement also improves financial
reporting by allowing a preparer to elect fair value measurement at
acquisition, at issuance, or when a previously recognized have to
bifurcated, if the holder elects to account for the whole
instrument-by-instrument basis, in cases in which a derivative would
otherwise have to bifurcated, if the holder elects to account for the
whole instrument on a fair value basis. The Group does not anticipate that
the adoption of this statement will have a material effect on the Group's
financial position or results of operations.
In July 2006, the FASB issued FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109, which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires
that the Group recognizes in its consolidated financial statements the
impact of a tax position if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for the Group on January 1, 2007, with
the cumulative effect of the change in accounting principle, if any,
recorded as an adjustment to opening retained earnings. The Group is
currently evaluating the impact of adopting FIN 48 on its consolidated
financial statements.
In September 2006, the SEC released SAB No. 108, "CONSIDERING THE EFFECTS
OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR
FINANCIAL STATEMENTS" ("SAB 108"). SAB 108 provides interpretive guidance
on the SEC's views on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a current
year misstatement. The provision of SAB 108 is effective for the Group in
the current fiscal year ended December 31, 2006. The Group is currently
evaluating the impact of SAB 108 but does not believe that the application
of SAB 108 will have a material effect on its financial position, cash
flows nor results of operations.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No.157, "FAIR VALUE MEASUREMENTS" ("SFAS 157"), which defines
fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157 does not require
any new fair value measurements but rather eliminates inconsistencies in
guidance found in various prior accounting pronouncements. SFAS 157 will
be effective for the Group starting January 1, 2008. Earlier adoption is
permitted, provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. The Group is
currently evaluating the impact of SFAS 157 on its consolidated financial
position, cash flows and results of operations.
F-19
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
3. ACCOUNTS RECEIVABLE, NET
As of December 31,
2006 2005
HK$ HK$
Accounts receivable, trade 5,175,590 4,712,014
Less: allowances for doubtful accounts (446,942) -
------------- ---------------
Accounts receivable, net 4,728,648 4,712,014
============= ===============
For the years ended December 31, 2004, 2005 and 2006, the Group provided
the allowances for doubtful accounts of HK$Nil, HK$Nil and HK$446,942,
respectively.
4. DEPOSITS AND OTHER RECEIVABLES
As of December 31,
2006 2005
HK$ HK$
Deposits paid - 967,118
Sundry debtors 104,755 1,932
Prepayments 92,744 30,243
Rental and utility deposits 144,848 144,848
------------- ---------------
Deposits and other receivables 342,347 1,144,141
============= ===============
The deposits paid represented the trade deposits paid to certain vendors
in the PRC for the manufacture of hardware products.
F-20
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
5. PLANT AND EQUIPMENT, NET
Plant and equipment consist of the following:
As of December 31,
2006 2005
HK$ HK$
Computer hardware and software 1,357,818 234,026
Furniture, fixtures and office equipment 865,317 78,426
Moulds 935,000 -
Leasehold improvements 781,900 752,110
-------------- -------------
3,940,035 1,064,562
Less: accumulated depreciation (994,971) (328,923)
-------------- -------------
Plant and equipment, net 2,945,064 735,639
============== =============
Depreciation expenses for the years ended December 31, 2004, 2005 and 2006
were HK$69,417, HK$193,957 and HK$666,048, respectively.
6. INTANGIBLE ASSETS, NET
As of December 31,
2006 2005
HK$ HK$
Product development costs 3,679,199 1,879,428
Patent and license right registration fee 147,522 139,636
-------------- -------------
3,826,721 2,019,064
Less accumulated amortization (1,184,666) (611,735)
-------------- -------------
Intangible assets, net 2,642,055 1,407,329
============== =============
The amortization of the intangible assets is calculated on a straight-line
basis over their expected useful lives and charged to the consolidated
statements of operations. Amortization expenses for the years ended
December 31, 2004, 2005 and 2006 were HK$199,899, HK$382,868 and
HK$572,931, respectively.
F-21
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
7. BANK OVERDRAFT
The amount of the overdraft as of December 31, 2005 and 2006 was
HK$1,506,862 and HK$1,712,024 respectively. The average month end amount
of the overdraft for the year ended December 31, 2005 and 2006 was
HK$841,596 and HK$1,243,865 respectively. The bank overdraft is subject to
an interest rate of 1.5% per annum over the Hong Kong Prime Rate (8% and
8% at December 31, 2005 and 2006 respectively) or 2% per annum over the
overnight HIBOR (6.32% and 4.0625% at December 31, 2005 and 2006
respectively), whichever is higher. The interest rate being charged on the
bank overdraft as of December 31, 2005 and 2006 was 9.5% and 9.5% per
annum respectively. The weighted average interest rate for the year ended
December 31, 2005 and 2006 was 8.5% and 9.65% respectively. The Group's
subsidiary, TTLHK incurred interest expense on this overdraft facility of
HK$22,188 and HK$77,000 for the years ended December 31, 2005 and 2006.
The overdraft facility is reviewed by the bank on a monthly basis and is
subject to cancellation at the discretion of the bank. TTLHK is required
to deposit payments of accounts receivable in the account to which the
overdraft applies. The overdraft facility is secured by all of the assets
of TTLHK and is personally guaranteed by the directors of TTLHK. There is
an annual facility fee of HK$7,500.
8. COMMON STOCK
At the time of incorporation, the Company's authorized capital was
1,000,000 shares of common stock, par value US$0.05 (HK$0.390). On June
20, 2005, the authorized capital was changed to 100,000,000 shares of
common stock, par value US$0.01 (HK$0.078).
Pursuant to a share exchange agreement dated June 22, 2005, the Company
issued 47,000,000 shares in exchange for the then outstanding shares of
TTLHK and TTSL. They then became wholly owned subsidiaries of the Company.
On September 30, 2005, certain shareholders agreed to forgive loans made
to the Group through that date. The amount of the forgiveness (net of
loans made to the shareholders) was contributed to the capital of the
Group and aggregated HK$1,106,393.
During the year ended December 31, 2005, the Company sold 3,000,000 shares
of common stock at US$0.20 (HK$1.560) per share through a private
placement and received aggregate gross proceeds of HK$4,680,000. Expenses
of the offering were approximately HK$644,085, leaving a net proceeds of
HK$4,035,915. In addition, the Company issued 3,000,000 common stock
purchase warrants to the investors. Each common stock purchase warrant
entitles the investor to purchase one share of common stock at an exercise
price of US$0.50 (HK$3.900) per share through June 30, 2008. The Group has
determined that the fair value of the warrants at their issue date is not
a material amount.
A reclassification of HK$3,276,000 was made to common stock and additional
paid in capital to agree the cumulative amounts paid to the common stock's
par value.
F-22
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
9. NET (LOSS)/INCOME PER SHARE
Basic net (loss)/income per share is computed using the weighted average
number of the ordinary shares outstanding during the year. Diluted net
(loss)/income per share is computed using the weighted average number of
ordinary shares and ordinary share equivalents outstanding during the
year.
The following table sets forth the computation of basic and diluted net
(loss)/income per share for the year indicated:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Basic and diluted net (loss) /income per share calculation
Numerator:
Net (loss)/income in computing basic net
(loss)/income per share (3,328,994) 795,004 1,270,181
Denominator:
Weighted average ordinary shares outstanding 50,000,000 48,250,000 47,000,000
Basic and diluted net (loss)/income per share $ (0.067) $ 0.016 $ 0.027
============== ============== ==============
For the year ended December 31, 2006 in which the Group had a net loss,
stock options granted to employees and non-employees would have been
anti-dilutive and excluded from the computation of diluted losses per
share.
10. 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
Group 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 is 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 is granted. The board will also
determine when options become exercisable.
F-23
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
On July 1, 2006, the Company authorized to grant 1,435,000 options to the
employees and 3,200,000 options to directors, officers and consultants of
the Group, respectively with an exercise price of US$0.20 (HK$1.56) per
share, being the fair market value at the time of the grant. These options
will become vested in different periods from 6 months to 12 months from
the grant date depending upon the optionee and all of these options have a
life of five (5) years from the grant date.
A summary of option plan activity for the year ended December 31, 2006 is
presented below:
Number of Weighted average
options exercise price
----------------- ------------------
Options outstanding as of January 1, 2006 - US$ -
Granted in July 2006 4,635,000 0.20
Forfeited (10,000) 0.20
----------------- ------------------
Options outstanding as of December 31, 2006 4,625,000 US$ 0.20
================= ==================
Options exercisable as of December 31, 2006 - -
================= ==================
The Company charged HK$2,188,407 (US$280,565) of stock-based compensation
to operations for the year ended December 31, 2006 by applying the fair
value method in accordance with SFAS No. 123.
The Company adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" using the Black-Scholes Option Pricing Model to estimate the
fair value of options. The weighted average fair value of options granted
during 2006 was US$0.09 (HK$0.702) per share. Weighted average assumptions
used in the valuation for the year ended December 31, 2006 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 (%) 72.4
As of December 31, 2006, there was US$118,939 (HK$927,724) of total
unrecognized compensation cost related to non-vested stock options. These
costs are expected to be recognized over the remaining vesting period of
0.47 years.
F-24
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
11. INCOME TAXES
The Company is registered in the BVI and has operations in 2 tax
jurisdictions in Hong Kong and the PRC.
The Company generated substantially all of its net income from its Hong
Kong operation for the years ended December 31, 2006, 2005 and 2004, and
the Company has recorded income tax provisions for these years.
Income taxes consist of the following:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Current tax (credit)/expense (193,265) 304,809 147,389
Deferred tax (300,401) (41,571) 17,299
---------------- --------------- ---------------
Income taxes (credit)/expense (493,666) 263,238 164,688
================ =============== ===============
The components of (loss)/income before income taxes are as follows:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Loss subject to BVI (2,348,706) (987,760) -
(Loss)/income subject to Hong Kong (551,660) 2,326,412 1,786,427
Loss subject to the PRC (989,453) (287,600) (382,128)
--------------- --------------- ----------------
(Loss)/income before income taxes (3,889,819) 1,051,052 1,404,299
=============== =============== ================
Income tax (credit)/expenses applicable to Hong
Kong operation (493,666) 263,238 164,688
=============== =============== ================
BRITISH VIRGIN ISLAND
Under the current BVI law, the Company is not subject to tax on income.
F-25
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
HONG KONG
As of December 31, 2006, the Group's Hong Kong subsidiary, TTLHK generated
approximately HK$457,857 of net operating income. The provision for income
taxes of TLLHK has been calculated by applying the current rate of
taxation of 17.5% for 2004 to 2006 to the estimated taxable income earned
in or derived from Hong Kong during the period, if applicable. Deferred
tax, where applicable, is provided under the liability method at the rate
of 17.5% for 2004 to 2006, being the effective Hong Kong statutory income
tax rate applicable to the ensuing financial year, on the difference
between the financial statement and income tax bases of measuring assets
and liabilities.
The following table sets forth reconciliation between statutory income tax
and the effective tax rate for Hong Kong operation for the periods
presented:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Income before income taxes (551,660) 2,326,412 1,786,427
Statutory income tax rate 17.5% 17.5% 17.5%
-------------- -------------- --------------
Income tax at Hong Kong tax rate on income before
income taxes (96,541) 407,122 312,625
Income not taxable for tax purposes:
- Interest income (3,900) (5,423) (18)
Expenses not deductible for tax purposes
- Non-deductible donations - 3,381 1,768
- Loss on disposal of plant and equipment - 5,100 -
- Difference between book and tax depreciation 16,012 97 (5,652)
- Capitalization of product development costs (215,972) (93,564) (114,495)
- Over provision in prior year (193,265) - -
- Others - (53,475) (29,540)
-------------- -------------- --------------
Actual income tax (credit) expenses (493,666) 263,238 164,688
============== ============== ==============
F-26
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
The following table sets forth the significant components of the net
deferred tax assets for Hong Kong operation as of December 31, 2006, 2005
and 2004:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Deferred tax assets:
Plant and equipment (325,748) 16,012 21,208
Allowances for doubtful accounts 51,970 - -
Tax losses 574,179 - -
Less: valuation allowance - (16,012) (21,208)
-------------- -------------- --------------
Net deferred tax assets 300,401 - -
============== ============== ==============
THE PRC
The Group's subsidiary, TTLSZ is registered and operates in Shenzhen, the
PRC and is recognized as "Manufacturing Enterprise Located in Special
Economic Zone". As a result, TTLSZ is entitled to Enterprise Income Taxes
("EIT") at a preferential tax rate of 15%. TTLSZ is currently exempted
from any EIT due to cumulative tax losses.
As of December 31, 2006, TTLSZ generated approximately HK$2,187,193 of
cumulative tax losses which can be carried forward indefinitely to offset
future taxable income. The deferred tax assets for the PRC subsidiary at
December 31, 2006 consists mainly of tax losses and for which a full
valuation allowance has been provided, as the management believes it is
more likely than not that these assets will not be realized in the future.
The following table sets forth the significant components of the net
deferred tax assets for the PRC operation as of December 31, 2006, 2005
and 2004:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Tax losses 328,079 179,661 136,521
Less: valuation allowance (328,079) (179,661) (136,521)
-------------- -------------- --------------
Net deferred tax assets - - -
============== ============== ==============
F-27
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
12. RELATED PARTY TRANSACTIONS
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Sales of products to a related company controlled
by a shareholder of the Group - - 266,791
============== ============== ==============
The products were sold at the fair market value to a related company
during 2004.
13. SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
The Group 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 are:
- Hong Kong, including the government and commercial sectors;
- The PRC, mainly the government sector;
- International, mainly casino, retail and commercial sectors.
An analysis of the Group's revenues and net assets by region are as
follows:
As of December 31,
2006 2005
HK$ HK$
Net assets
- Hong Kong 9,145,507 9,326,720
- The PRC (2,071,466) (1,122,224)
-------------- --------------
7,074,041 8,204,496
============== ==============
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Revenue
- Hong Kong 17,692,455 7,081,868 5,123,767
- The PRC 1,973,516 2,344,574 810,065
- International - 3,915,679 415,420
-------------- -------------- --------------
19,665,971 13,342,121 6,349,252
============== ============== ==============
F-28
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
14. PENSION PLANS
The Group's subsidiary, TTLHK participates in a defined contribution
pension scheme under the Mandatory Provident Fund Schemes Ordinance ("MPF
Scheme") for all of its eligible employees in Hong Kong.
The MPF Scheme is available to all employees aged 18 to 64 with at least
60 days of service in the employment in Hong Kong. Contributions are made
by the Group's subsidiary, TTLHK operating in Hong Kong at 5% of the
participants' relevant income with a ceiling of HK$20,000. The
participants are entitled to 100% of TTLHK's contributions together with
accrued returns irrespective of their length of service with TTLHK, but
the benefits are required by law to be preserved until the retirement age
of 65. The total contributions made for MPF Scheme were HK$84,997,
HK$105,972 and HK$102,827 for the years ended December 31, 2004, 2005 and
2006 respectively.
Under the PRC Law, full-time employees of the Group's subsidiary, TTLSZ
are entitled to staff welfare benefits including medical care, welfare
subsidies, unemployment insurance and pension benefits through a China
government-mandated multi-employer defined contribution plan. TTLSZ is
required to accrue for these benefits based on certain percentages of the
employees' salaries. The total contributions made for such employee
benefits were HK$19,274, HK$27,922 and HK$64,294 for the years ended
December 31, 2004, 2005 and 2006 respectively.
15. STATUTORY RESERVES
Under the PRC Company Law, the Group's subsidiary, TTLSZ is required to
make appropriations to three reserves funds, the statutory surplus
reserve, statutory public welfare fund and discretionary surplus reserve,
based on after-tax net earnings and determined in accordance with
generally accepted accounting principles of the People's Republic of China
(the "PRC GAAP"). Appropriation to the statutory surplus reserve should be
at least 10% of the after-tax net earnings until the reserve is equal to
50% of TTLSZ's registered capital. Appropriation to the statutory public
welfare fund is 10% of the after-tax net earnings determined in accordance
with PRC GAAP. The statutory public welfare fund is established for the
purpose of providing employee facilities and other collective benefits to
the fund is established for the purpose of providing employee facilities
and other collective benefits to the employees and is non-distributable
other than in liquidation. No appropriations to the discretionary surplus
reserve are made at the discretion of the Board of Directors.
As TTLSZ has recorded an operating loss under the PRC GAAP for the year
ended December 31, 2006, no appropriation to statutory reserves was made.
F-29
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
16. COMMITMENTS AND CONTINGENCIES
The Group rented offices under non-cancelable operating lease agreements.
Based on the current rental lease agreements, the future minimum rental
payments required for the coming years are as follows:
2006
Year HK$
2007 455,747
2008 142,170
--------------
597,917
==============
For the years ended December 31, 2004, 2005 and 2006, rental expenses were
HK$207,088, HK$262,518 and HK$567,388, respectively.
17. CONCENTRATIONS AND RISKS
(a) MAJOR CUSTOMERS
The following is a table summarizing the revenues from customers that
individually represent greater than 10% of the total revenues for the year
ended December 31, 2006 and their outstanding balances as at year-end
date:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Customer A (i) 7,581,000 - -
Customer B (ii) 2,769,000 - -
Customer C - 1,755,000 -
Customer D - 1,538,642 -
Customer E - 1,532,700 -
Customer F - 1,606,855 351,662
Customer G - - 1,277,656
Customer H - 62,400 809,200
Customer I - - 266,791
Customer J - 42,878 96,888
Customer K - 364,770 585,158
---------------- ----------------- -----------------
10,350,000 6,903,245 3,387,355
================ ================= =================
F-30
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
(i) As of December 31, 2005 and 2006, the balances due to the Group
amounted to HK$Nil and HK$Nil.
(ii) As of December 31, 2005 and 2006, the balances due to the Group
amounted to HK$Nil and HK$188,505.
(b) MAJOR VENDORS
The following is a table summarizing the cost of revenue from vendors that
individually represent greater than 10% of the total cost of revenue for
the year ended December 31, 2006 and their outstanding balances as at
year-end date:
Year ended December 31,
2006 2005 2004
HK$ HK$ HK$
Vendor A (i) 4,353,758 - -
Vendor B (ii) 4,007,000 - -
Vendor C (iii) 1,120,670 168,977 1,648,369
Vendor D - 1,538,642 -
---------------- ----------------- -----------------
9,481,428 1,707,619 1,648,369
================ ================= =================
(i) As of December 31, 2005 and 2006, the balances due from the Group
amounted to HK$Nil and HK$Nil.
(ii) As of December 31, 2005 and 2006, the balances due from the Group
amounted to HK$Nil and HK$Nil.
(iii) As of December 31, 2005 and 2006, the balances due from the Group
amounted to HK$17,444 and HK$64,280.
(c) CREDIT RISK
Financial instruments that are potentially subject to credit risk consist
principally of trade receivables. The Group believes the concentration of
credit risk in its trade receivables is substantially mitigated by its
ongoing credit evaluation process and relatively short collection terms.
The Group does not generally require collateral from customers. The Group
evaluates the need for an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical
trends and other information.
(d) EXCHANGE RISK
The Group cannot guarantee that the current exchange rate will remain
steady; therefore there is a possibility that the Group could post the
same amount of profit for two comparable periods and because of the
fluctuating exchange rate actually post higher or lower profit depending
on exchange rate of HK$ converted to US$ on that date. The exchange rate
could fluctuate depending on changes in political and economic
environments without notice.
F-31
TITANIUM GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(CURRENCY EXPRESSED IN HONG KONG DOLLARS ("HK$"))
18. PRODUCT WARRANTIES AND POST-CONTRACT CUSTOMER SUPPORT
Under the terms of the contracts, the Group will provide both product
warranty and post-contract customer support ("PCS") to its customers for a
period of twelve months, free of charge and then at the discretion of the
customers, enter into definite maintenance contracts.
The Group's standard warranty for its software products generally covers a
twelve-month period. The Group has not experienced any material returns
where it was under obligation to honor this standard warranty provision.
Warranty claims on hardware deficiencies are covered by the particular
hardware suppliers. As such, no reserve for product warranty has been
provided in the accompanying consolidated balance sheets or reflected in
the result of operations for the years ended December 31, 2004, 2005 and
2006.
The nature of the PCS consists of the provision of a technical support
telephone hotline to the customers. As the usage of this hotline is very
seldom, the Group did not maintain any specific personnel to operate this
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.
F-32