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| TTNUF.OB > SEC Filings for TTNUF.OB > Form 10-Q on 20-Aug-2009 | All Recent SEC Filings |
20-Aug-2009
Quarterly Report
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the risk of discovering that their products do not meet the needs of the potential customers or are technologically outdated after a marketing campaign is launched.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.
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.
We obtained financing resulting in net proceeds of US$1,225,000 (HK$9,555,000) in April 2007. These proceeds have been used for working capital and for the further development of our proprietary technology.
In September 2007, we set up a Hong Kong joint venture, Titanium RFID Limited, in which we hold a 51% interest. This joint venture will engage in the development and marketing of radio frequency identification (RFID) solutions to complement our core biometric technology. In December 2008, we set up a Hong Kong joint venture, Titanium Biometrics Limited, in which we hold a 51% interest. This joint venture will engage in the promotion and marketing of biometrics face recognition access control and time attendance systems in Mainland China.
Effective June 10, 2009, control of Golden Mass Technologies Ltd., the Company's largest shareholder, changed from Dr. Kit Chong "Johnny" Ng to Crown Prince International Limited, a British Virgin Islands corporation owned by Lai Huamin. Golden Mass Technologies Ltd. owns 25,835,221 shares, which represents approximately 50% of the registrant's issued and outstanding shares. Dr. Kit Chong "Johnny" Ng resigned as the Chairman of the Board of Directors and principal financial officer and continues to serve as the Honorary Chairman. Mr. Lai was appointed to serve as a director and the Chairman of the Board. We believe this change of control will be beneficial to the long term growth of the company. The new major shareholder and the new members of the management team are experienced veterans in the industry and are capable to bring in additional capital to strengthen the operation and the research and development of the Group. They are also well connected in the region and will be a tremendous aid in the Company's sales and marketing efforts in the PRC.
Critical Accounting Policies
Intangible assets. Intangible assets include (1) patent and license right registration fees and (2) product development costs.
PATENT AND LICENSE RIGHT REGISTRATION FEES. Patent and license right registration fees represents the software licenses and patent costs paid to third parties and is amortized using the straight-line method over their estimated useful lives of 10 years.
PRODUCT DEVELOPMENT COSTS. We account for developments costs related to software products to be sold, leased or otherwise marketed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of computer Software to be Sold, Leased, or Otherwise Marketed" ("SFAS No. 86"), Software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Costs that are capitalized include direct labor and related overhead. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and software technologies. For the period ended June 30, 2009, we did not incur any capitalized product development costs.
Amortization of capitalized software development costs begins when the product is available for general release to customers. Amortization is computed by the straight-line method over the estimated economic life of the products, ranging from 4 to 5 years.
In prior years, we developed our products, namely ProAccess and ProFacer, under the subsidy assistance program from the Government of the Hong Kong Special Administrative Region ("HKSAR") in developing the innovative products. Pursuant to such program, HKSAR was required to provide funding to us for our product development, which was available up to the aggregate amount of US$256,410 (HK$2,000,000) in accordance with the milestones of the product development plan. We received such grant of an aggregate of US$244,864 (HK$1,909,938) and were not subject to any repayment. However, we were required to contribute approximately 50% of the overall project cost in accordance with the grant agreement. When the project was completed, we tendered to the Government its pro rata share of the residual funds remaining in the project account. In addition we were 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.
Upon the completion, the ownership of the intellectual property resulting from the project was vested in us. The royalty fee paid by us for the periods ended June 30, 2009 and 2008 amounted to US$3 (HK$20) and US$3,105 (HK$24,220), respectively. As of June 30, 2009, we have an unpaid royalty fee against the subsidy grant totaling US$215,444 (HK$1,680,459).
Impairment of long-lived assets. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," all long-lived assets such as plant and equipment and intangible assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment in the carrying value of an asset group is recognized whenever anticipated future undiscounted cash flows from an asset group are estimated to be less than its carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. We reviewed our impairment test on certain intangible assets such as patents and trademarks and concluded that the decline in expected future benefits from certain software products such as ProFacer items was sufficient to result in an impairment loss of US$35,619 (HK$277,832).
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.
In accordance with the SEC's Staff Accounting Bulletin No. 104, "Revenue Recognition," we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
We also apply the provisions of Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." For arrangements that require significant production, modification, or customization of software, we apply the provisions of Accounting Research Bulletin ("ARB") No. 45, "Long-Term Construction-Type Contracts," and SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." We also consider the guidance of the Emerging Issues Task Force ("EITF") Topic 00-21, "Revenue Arrangements with Multiple Deliverables" with respect to the recognition of revenue from the sale of hardware components (separate accounting units) of a multiple deliverable arrangement. While these statements govern the basis for revenue recognition, significant judgment and the use of estimates are required in connection with the determination of the amount of product, maintenance and service revenue as well as the amount of deferred revenue to be recognized in each accounting period. Material differences may result in the amount and timing of our revenue for any period if actual results differ from management's judgment or estimates.
PRODUCTS REVENUE. The timing of product revenue recognition is dependent on the nature of the product sold. Product arrangements comprising multiple deliverables including software, hardware, professional services, and maintenance are generally categorized into one of the following:
· Facial-based biometric identification and security projects that do not require significant modification or customization of our software: Revenue associated with these arrangements, exclusive of amounts allocated to maintenance, for which we have vendor-specific objective evidence of fair value ("VSOE"), is recognized upon installation and receipt of written acceptance of the project by the customer when required by the provisions of the contract, provided that all other criteria for revenue recognition have been met. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the maintenance period. To date, we have not made an allocation of contract revenue to separate accounting units since all of the products have been delivered simultaneously and no deferral of revenue would result.
· Facial-based biometric identification and security projects that require significant modification or customization of our software: Revenue associated with these arrangements is recognized using the percentage of completion method as described by SOP 81-1. The percentage of completion method reflects the portion of the anticipated contract revenue, excluding maintenance that has VSOE, which has been earned, equal to the ratio of labor effort expended to date to the anticipated final labor effort, based on current estimates of total labor effort necessary to complete the project. Revenue resulting from arrangements for which VSOE of the maintenance element does not exist is recognized ratably over the contractual maintenance period.
· Self-developed software products sales and re-sale of purchased third parties products: Revenue associated with the sale of these products, excluding maintenance when applicable, is recognized upon shipment to the customer. The amount of these revenues has historically not been significant.
· 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.
SERVICES REVENUE. Services revenue is primarily derived from computer engineering services, system design, consulting and integration and maintenance services that are not an element of an arrangement for the sale of products. These services are generally billed on a time and materials basis. The majority of our professional services are performed under time-and-materials arrangements. Revenue from such services is recognized as the services are provided.
MAINTENANCE SERVICES REVENUE. Maintenance revenue consists of fees for providing technical support and software updates, primarily to customers purchasing the primary products. We recognize all maintenance revenue ratably over the applicable maintenance period. We determine the amount of maintenance revenue to be deferred through reference to substantive maintenance renewal provisions contained in the arrangement.
INTEREST INCOME. Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
Foreign currency translation. The consolidated financial statements are expressed in Hong Kong dollars ("HK$"). The translations of HK$ amounts into the United States dollar ("US") are for the convenience of readers in the United States of America only and have been made at the rate of HK$7.8 to US$1, the approximate free rate of exchange at December 31, 2008 and 2007. Such translations should not be construed as representations that the HK$ amounts could be converted into US$ at that rate or any other rate.
Results of Operations
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008. For the three months ended June 30, 2009, projects revenues decreased by US$253,135 (HK$1,974,450) (73%) over the same period in 2008. The decrease of projects revenues was attributed primarily to the company's strategy to focus its sales effort of its new product - eGuard, which had been launched earlier in the year but has experienced production delay due to manufacturing issues. The issues are expected to be resolved in the third quarter of 2009.
Our cost of projects as a percentage of projects revenues was 68% for 2009 as compared to 143% for 2008. Our cost of projects revenue in 2008 exceeded revenues due to materials we purchased for a Housing Authority project of approximately US$256,400 (HK$2,000,000) that could not be billed to the client.
Selling, general, and administrative expenses increased by US$72,099 (HK$562,374) (52%) in 2009 as compared to 2008 due mainly to an increase in provision for doubtful debt of US$38,893 (HK$303,368) and increase in professional fee of US$11,548 (HK$90,076).
Despite the decreased revenues and increased operating expenses, our loss from operations decreased from US$281,473 (HK$2,195,487) in 2008 to US$258,053 (HK$2,012,817) in 2009. In 2008, we had incurred a gross loss on projects.
We had other expense in 2009 of US$29,188 (HK$227,670), due to interest expense of US$28,029 (HK$218,624). In contrast, we had other income of US$104,678 (HK$816,490) in 2008, due to sundry income of US$138,181 (HK$1,077,813), which mainly consists of the receipt of a refund for promotion expenses of US$104,103 (HK$812,000), which was paid in 2007, and a gain of US$34,079 (HK$265,813) due to disposal of fixed asset, which more than offset interest expense of US$31,148 (HK$242,956).
In summary, due to decreased revenues in the quarter ended June 30, 2009 and increased operating and other expenses, we generated a net loss of US$287,241 (HK$2,240,487), as compared to a net loss of US$174,416 (HK$1,360,447) in 2008.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008. For the six months ended June 30, 2009, projects revenues decreased by US$555,890 (HK$4,335,942) (67%) over the same period in 2008. The decrease of projects revenues was attributed primarily to the company's strategy to focus its sales effort of its new product - eGuard, as described above.
Our cost of projects as a percentage of projects revenues was 72% for 2009 as compared to 100% for 2008. Our cost of projects revenue in 2008 exceeded revenues due to materials we purchased for a Housing Authority project of approximately US$256,400 (HK$2,000,000) that could not be billed to the client.
Selling, general, and administrative expenses decreased by US$96,195 (HK$750,318) (19%) in 2009 as compared to 2008 due mainly to a reduction of professional fees of US$33,364 (HK$260,236).
We recognized an impairment loss on intangible assets of US$35,619 (HK$277,832) during the 2009 period as a result of the phasing out of our old product "ProFacer". There was no impairment loss in 2008.
During the six months ended June 30, 2009, we incurred US$168,172 (HK$1,311,741) of research and development expenses, compared to none in the same period of 2008.
Due to the decreased revenues and increased operating expenses, our loss from operations increased from US$497,337 (HK$3,879,229) in 2008 to US$513,583 (HK$4,005,945) in 2009.
We had other expense in 2009 of US$95,610 (HK745,759), consisting of interest expense of US$56,057 (HK$437,248), amortization cost on discount of convertible debentures of US$30,648 (HK$239,056), and loss from change in fair value of warrant liability of US$17,879 (HK$139,456). In contrast, we had other income in 2008 of US$121,367 (HK$946,662), due to sundry income of US$138,181 (HK$1,077,813), which mainly consists of the receipt of a refund for promotion expenses of US$104,103 (HK$812,000), which was paid in 2007, and a gain of US$34,079 (HK$265,813) due to disposal of asset. We also had a gain from change in warrant liability of US$35,404 (HK$276,151) which more than offset interest expense of US$57,722 (HK$450,231).
In summary, due to decreased revenues in 2009 and increased operating and other expenses, we generated a net loss of US$608,515 (HK$4,746,415), as compared to a net loss of US$371,481 (HK$2,897,553) in 2008.
Going Concern
As a result of the losses incurred during the last two fiscal years and the accumulated deficit of US$1,375,117 (HK$10,725,914) at December 31, 2008, the report of our independent registered public accounting firm on the financial statements for the year ended December 31, 2008 included an explanatory paragraph indicating substantial doubt as to our ability to continue as a going concern. We incurred a net loss of US$608,515 (HK$4,746,415) for the six months ended June 30, 2009 and had an accumulated deficit of US$1,983,632 (HK$15,472,329) at June 30, 2009. Management has taken certain actions and continues to implement changes designed to improve the Company's financial results and operating cash flows. The actions involve certain cost-saving initiatives, continuous development of new products and growing strategies, including rapid promotion and marketing the new products in the People's Republic of China. Management believes that these actions will enable the Company to move towards profitability and improve cash flow in its continuing operations through June 30, 2010.
Liquidity and Capital Resources
As of June 30, 2009 , we had working deficit of US$42,428 (HK$330,934), as compared to working capital of US$349,711 (HK$2,727,739) at December 31, 2008, due primarily to the loss for the six-month period. The decrease was reflected in reductions in cash of US$123,149 (HK$960,560) and accounts receivable, net of US$148,826 (HK$1,160,842), and an increase in accounts payable and accrued liabilities of US$142,108 (HK$1,108,440), offset by small increases in inventories of US$6,483 (HK$50,571) and deposits and other receivables of US$14,229 (HK$110,990).
During the six months ended June 30, 2009, our operating activities used cash of US$119,760 (HK$934,133), as compared to providing cash of US$329,612 (HK$2,570,973) in 2008. The most significant adjustments to reconcile net loss to net cash were for depreciation and amortization (US$139,361 and HK$1,087,018), the impairment loss on intangible assets (US$35,619 and HK$277,832), an allowance for doubtful accounts (US$62,019 and HK$483,748) and the loss from change in fair value of warrant liability (US$17,879 and HK$139,456).
We did not have any cash flows from investing or financing activities in 2009. In comparison, we used US$301,789 (HK$2,353,934) in 2008 for software development costs and also used US$3,378 (HK$26,347) for repayment of a short-term bank loan.
Our working capital had a deficit of US$42,428 (HK$330,934) as at June 30, 2009. As such, our growth plan may require additional funding from outside sources. We intend to pursue discussion with existing shareholders, third party financing sources and potential lenders to ensure access to funds as required. Our future liquidity will also depend on our revenue growth and ability to control our operating expense. Our current fixed overhead is approximately US$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. 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 June 30, 2009, several backlog orders of approximately US$800,000 (HK$6,240,000) will be confirmed, as compared to approximately US$1,800,000 (HK$14,040,000) at June 30, 2008. We expect that approximately US$400,000 (HK$3,120,000) will be carried forward to the next fiscal year.
Forward-Looking Statements
This report includes "forward-looking statements." All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "expect," "intend," "project," "estimate," "anticipate," "believe," or "continue" or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove to have been correct.
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