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| TTDS.OB > SEC Filings for TTDS.OB > Form 10-K/A on 29-Sep-2008 | All Recent SEC Filings |
29-Sep-2008
Annual Report
This following information specifies certain forward-looking statements of management of the company. Forward-looking statements are statements that estimate the happening of future events are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology such as, "may," "shall," "could," "expect," "estimate," "anticipate," "predict," "probable," "possible," "should," "continue," or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been complied by our management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and accordingly, no opinion is expressed on the achievability of these forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Overview
We are an emerging, next generation Web-based travel services distribution company. Our core business is the electronic distribution of travel inventory from airlines, car rental companies, hotels, tour and cruise operators, and other travel sellers to travel agencies and their clients on a global basis.
We commenced operations in January 2006 with an initial emphasis on Southeast Asia and intend to expand to other international locations, including South America and Europe. Unlike the travel industry in the United States, which is highly fragmented and decentralized, emerging countries in Asia have only one or two flagship airlines for international routes, the airlines are controlled by the government, the travel agencies are clustered in large associations, and the government has considerable influence over decisions which affect bookings and the issuance of tickets to domestic and foreign travelers.
Critical Accounting Policy and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since these estimates are inherently uncertain, actual results may materially differ.
The following is a discussion of our accounting policies that are both most important to the portrayal of our financial condition and results, and that require management's most difficult, subjective, or complex judgments.
Intangible Assets
The determination of the fair value of certain acquired intangible assets is subjective in nature and often involves the use of significant estimates and assumptions. Further, estimating the useful lives of these assets requires the exercise of judgment due to the rapidly changing technology environment. Historically, we have estimated the fair value of our intangible assets based on the purchase price.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we evaluate our intangible assets and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from our estimated future cash flows. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired and it is written down to the undiscounted cash flow value. We have determined, at the acquisition date, the useful life of our currently held intellectual property was 10 years. We amortize intellectual property using the straight-line method.
As of December 31, 2007 we have no internally developed intangible assets.
Stock Based Compensation
We estimate the fair value of stock option awards to employees using a Black-Scholes pricing model on the grant date in accordance with SFAS No. 123(R) Share Based Payment. The pricing model requires us to make assumptions related to the expected term of the options, which generally differs from the contractual term; expected volatility of our stock price, accounting for known significant events which may have a material impact on the market value of our stock; the risk free interest rate on the grant date for instruments with maturities commensurate with the expected term of the options; and the dividend yield.
Due to the limited history of our company, for all options granted in 2006 we have estimated that the expected term of the employee options to be three years. We currently do not have a trading history that allows us to reasonably estimate the expected volatility of our common stock, therefore the expected volatility of our stock was based on the historical volatility of public companies with similar characteristics. These characteristics include industry, stage of life cycle, size, financial leverage, and other factors. We periodically review and adjust these assumptions in determining the fair value of future option grants.
Results of Operations
We have not generated any revenue since our inception on January 10, 2006. We have made significant progress in the development of our technology and have entered into a series of distribution agreements throughout 2007. Based on these agreements and improvements we have made to our technology our objective is to emerge from the development stage during fiscal year 2008.
During the twelve months ended December 31, 2007 we experienced an increase in our operating expenses of approximately 63% from the year ended December 31, 2006. In general, the increase in operating expenses resulted from our continuing efforts to make our products commercially viable; expansion into markets in Southeast Asia and China; promotion of our Company and business plan; and costs associated with remaining in compliance with SEC and other regulations and filing of registration statements. We are closely monitoring our operating expenses and have reduced our operations to conserve cash until we become operational later in fiscal year 2008.
Increases in payroll and related benefits of approximately $3.3 million from the prior year accounted for most of the increase in operating expenses. The increases resulted from the addition of 30 plus employees throughout 2007 in anticipation of the significant market distribution of our products and related services. Additionally, we incurred non-recurring, non-cash compensation expense of approximately $2.4 million related to the hiring and retention of key employees and officers. Near, and subsequent to, the end of 2007 we terminated several of the employees hired in 2007 in order to manage our expenses. We expect future increases in these expenses commensurate with the execution of our business plan and corresponding growth.
Our increased public relations efforts, along with legal and accounting fees, made up an additional 27% of the overall increase in operating expenses for the year ended December 31, 2007. For the year ended December 31, 2007 we paid three investor relations firms approximately $2.3 million primarily through the issuance of stock in the Company. Additionally, the costs associated with filing a registration statement, quarterly financial statements, and subsequent amendments to each contributed to our increased professional fees. At December 31, 2007 we had prepaid consulting fees of approximately $1.5 million. We expect the continuing amortization of these prepaids to materially contribute to professional fees recognized in 2008 partially offset by our expected reduction in legal and accounting fees.
Decrease in other general and administrative expenses, mainly reduction in marketing and advertising, accounted for the remaining increase in total operating expenses. The increase was primarily made up of higher rent expense due to the incorporation of our Chinese subsidiary; insurance increases; and improvements in our data communications capabilities. These expenses are expected to fluctuate with overall activity level of the Company and its foreign based subsidiaries.
On June 28, 2007 we converted our Line of Credit into a $3,000,000 Convertible Senior Note Agreement (Loan) between the Company, JMW, San Gabriel Fund LLC, Underwood Family Partners LTD., and Battersea Capital Inc (Lenders). The Loan began accruing interest at 1% per month on July 1, 2007 and matures on July 1, 2008, it may be prepaid without penalty. The Lenders, at their sole discretion, may convert the outstanding principal balance into shares of common stock at an exercise price of $3.00 per share including a cashless exercise option. The accrued interest, at the time of conversion, may be paid in either cash or shares of common stock at the Company's discretion.
Pursuant to the terms of the Convertible Note, we agreed to a commitment fee via the issuance of warrants exercisable for an aggregate of 2,000,000 shares of our common stock at an exercise price of $3.00 per share for five years, including a cashless exercise option. We agreed to register the shares underlying the warrants no later than December 31, 2007. Additionally, we agreed to "piggyback" register the shares underlying the warrants in any future registration prior to the expiration date, if any. Finally, the warrants contain certain adjustment provisions related to issuing equity instruments at prices lower than the current exercise price. We did not file a registration for the warrants by December 31, 2007, we have been in discussions with the investors and have informed them that we plan to delay the registration of the warrants until we have finalized terms of a future financing event. To ddate they have been cooperating with us regarding the default conditions of their notes.
At December 31, 2007 the entire $3,000,000 of the Loan was outstanding. We recorded $2,884,381 as discount on loan to account for value of the warrants. We have reviewed the provisions of EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" and has determined that the warrants do not qualify for derivative accounting and accounted for the warrants under APB No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The discount is being amortized over the life of the loan to interest expense. For the year ended December 31, 2007 we amortized $1,411,348 of the discount to loan interest expense.
We recognized an immaterial loss on foreign currency adjustments in 2007 related to our Chinese subsidiary. As our activity increases in China to the extent that we do not receive income in the form of Chinese RMB these losses could become material in the future.
Liquidity and Capital Resources
We have not generated any revenue from our operations since our inception on January 10, 2006. As a result, our primary source of liquidity is through debt and equity financing arrangements with independent third party investors, as well as related parties. Further, we have been successful at entering into agreements with several of our service providers to accept shares of our common stock in consideration for services received.
Debt issuances throughout the year ended December 31, 2007, all of which are short-term, has resulted in a working capital deficit of approximately $1.4 million at December 31, 2007. As of December 31, 2007 we had approximately $4.2 million in loans that mature on or prior to July 1, 2008. Of this amount, $3 million, plus accrued interest, may be converted to shares of Company common stock any time prior to its maturity on July 1, 2008 at the sole discretion of the loan holder. The remaining balances of our notes as of December 31, 2007 do not contain any conversion options. See Note 5 of our consolidated financial statements for a complete description of the terms of our loans payable at December 31, 2007.
For the year ended December 31, 2007 we received $162,026 from issuances of our common stock. Throughout the year we issued an aggregate 2,986,353 shares of our common stock for compensation to both employees and non-employees. We recognized approximately $1.8 million in stock based compensation for the shares issued to our employees. The value of the amount issued to third party service providers was approximately $2.9 million of which $1.5 million will be recognized over the remaining lives of the corresponding service contracts. See Note 6 of our consolidated financial statements for a complete description of our stock issuances during the year ended December 31, 2007.
Our current and historic liquidity concerns have resulted in our focus being near term based. Our efforts are concentrated on developing revenue generating activities in geographical areas that appear most likely for success. Initially, these areas appear to be Southeast Asia, China, and Europe.
Our current forecasts are that our 2008 operations will be insufficient to meet our current debt obligations, or our other working capital needs. As a result, in early 2008, we entered into additional short term loan arrangements to meet our on-going working capital needs. We are actively pursuing longer term debt financing arrangements on terms that are more favorable to the Company. In addition to seeking the above debt financing, we are contemplating raising additional capital through equity issuances in 2008. Any additional equity issuances will be dependent upon market conditions, achievement of certain milestones in our technology development, and identification of specific needs.
In the event we are unsuccessful in our capital raising efforts or generating revenue from our operations we will not continue as a going concern.
Related Parties
During the fiscal years ending December 31, 2006 and December 2007, we borrowed money from shareholders and officers to meet operating cash flow, wee Note 9 of the financial statements.
At December 31, 2007 our cash resources were insufficient to fund the Company's current and expected operations. Throughout the fourth quarter of 2007 and the first quarter of 2008 our concentration was centered on obtaining the necessary funding to meet our current obligations and expected additional 2008 needs. In early 2008 we obtained additional short-term debt financing of approximately $1.1 million to meet our obligations and working capital needs through the first half of 2008. Additionally, we have focused on reducing and reallocating our expenses to activities that are essential to distributing our products and services to our target markets. To that end, we have reduced our workforce from 45 to 37; limited travel and related expenses; and entered into equity payment arrangements with several of our service providers.
As noted in our Part I, Item 1 - Description of Business, our initial emphasis was on Southeast Asia and China. Our current plans consist of continued focus in China and Europe. The lack of decentralization of the travel industry in these geographic areas remains attractive for the implementation and use of our electronic distribution system of travel inventory from airlines, travel agencies, cruise operators, and other travel related service providers. Additionally, we are concentrating our efforts on the business to business (B2B) market which appears to be relatively "un-tapped" by our significant competitors. Current estimates indicate 80% of global airline tickets and 70% of all travel is booked by service providers in our target markets. Travel and Tourism Forecast World, as of May 2006, estimated the global travel distribution market at over $10 billion.
We believe our internet-based distribution platform and low-fee structure provides us certain advantages in penetrating our target markets since our main competitors' distribution systems generally operate on high-cost, legacy mainframe technology platforms. This appears to be particularly true in less technologically advanced countries such as China.
We are building on our already strong Chinese infrastructure. Our Red Dragon Express ™ is the only comprehensive travel solution where any agent can create a local Chinese itinerary, including international and domestic segments; construct passenger records; and clear payments, all on a seamless and low cost basis. We also enjoy an association with the China International Travel Service (CITS), an important Chinese government supported entity and China's largest and most influential tourist enterprise group. CITS has a network of more than 1,400 agents and tour companies nationwide and has hosted more than 10 million international visitors to China.
In early 2008, our management team identified significant needs to accelerate our market penetration in China, and improve our overall market capitalization. Congruent with these needs, we are discussing with a Chinese company to acquire a Chinese online travel distributor (Target) for approximately $10 million. Due diligence related to this acquisition is expected to be completed in July 2008 and we intend to close the transaction shortly thereafter. The Target currently has 180,000 registered users, a 100-seat call center, and 22 agent partners. The acquisition will include both business to consumer and business to business platforms which currently generate revenue.
We have entered into a non-binding letter of intent to acquire a 51% ownership stake in a European Company that serves as the general sales agent for the German Railway System and has a network of over 25,000 travel agents in Germany, Switzerland, Austria, Russia, and Poland. The approximate cost of this acquisition would be $5.0 million.
We expect to continue to devote funding and personnel to research and product development as well as to the enhancement of existing product lines and the fulfillment of foreign joint ventures. We plan to develop new "add-ons" and extension modules in response to client needs and requests. Included in the our development pipeline are booking systems for private corporate executive jets and regional air flights, air cargo carriers, railroad travel, ferries, private clubs and bed and breakfast establishments.
Our plans, including the above potential acquisitions, are dependent upon our ability to obtain financing on terms that are not further detrimental to the Company. If we are unable to obtain financing in early 2008 we will likely become insolvent by the end of 2008.
Off-Balance Sheet Arrangements
There are no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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