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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002
or
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to ______
Commission file number 0-22055
TTR TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3223672
(State or other Jurisdiction of I.R.S. Employer Number
Incorporation or Organization)
575 Lexington Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
212-527-7599
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the 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. Yes [X] No[ ]
The number of shares outstanding of the registrant's Common Stock as of
August 14, 2002, is 17,858,867 shares.
TTR INC. AND ITS SUBSIDIARY
(A Development Stage Company)
Index
PART I - FINANCIAL INFORMATION:
Forward Looking Statements (ii)
Item 1. Financial Statements *
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 1
Consolidated Statements of Operations
For the six and three months ended June 30, 2002 and 2001 2
Consolidated Statements of Comprehensive Loss
For the six and three months ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows
For the six months ended June 30, 2002 and 2001 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
*The Balance Sheet at December 31, 2001 has been taken from the audited
financial statements at that date. All other financial statements are unaudited.
-(i)-
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S JOINT VENTURE WITH
MACROVISION; THE COMPANY'S EXPECTATIONS AS TO SOURCES OF REVENUES; THE COMPANY'S
INTENDED BUSINESS PLANS; EXPECTATIONS AS TO PRODUCT PERFORMANCE; THE COMPANY'S
INTENTIONS TO ACQUIRE OR DEVELOP OTHER TECHNOLOGIES; THE PROSPECTS FOR COMSIGN;
THE COMPANY'S COST RESTRUCTURING PLANS; THE COMPANY'S ANTICIPATED DELISTING FROM
THE NASDAQ NATIONAL MARKET AND PLANS TO EXAMINE LISTING OPTIONS ON THE NASDAQ
SMALLCAP MARKET OR ANOTHER RECOGNIZED MARKET OR EXCHANGE; AND BELIEF AS TO THE
SUFFICIENCY OF ITS CASH RESERVES. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE
COMPETITIVE ENVIRONMENT GENERALLY AND IN THE COMPANY'S SPECIFIC MARKET AREAS;
RAPID TECHNOLOGICAL CHANGES; CHANGES IN TECHNOLOGY; FAILURE OF THE COMPANY'S
TECHNOLOGY TO WORK; LACK OF MARKET ACCEPTANCE FOR SAFEAUDIO; INABILITY OF
MACROVISION TO SUCCESSFULLY MARKET SAFEAUDIO; PERFORMANCE OF COMSIGN; THE
AVAILABILITY OF AND THE TERMS OF FINANCING; THE INABILITY TO SUCCESSFULLY REDUCE
COSTS; THE FAILURE TO REACH A SATISFACTORY ACCOMODATION, ARRANGEMENT OR
SETTLEMENT WITH MACROVISION; INFLATION, CHANGES IN COSTS AND AVAILABILITY OF
GOODS AND SERVICES, ECONOMIC CONDITIONS IN GENERAL AND IN THE COMPANY'S SPECIFIC
MARKET AREAS; DEMOGRAPHIC CHANGES, CHANGES IN FEDERAL, STATE AND /OR LOCAL
GOVERNMENT LAW AND REGULATIONS; CHANGES IN OPERATING STRATEGY OR DEVELOPMENT
PLANS; THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; AND CHANGES IN THE
COMPANY'S ACQUISITIONS AND CAPITAL EXPENDITURE PLANS. ALTHOUGH THE COMPANY
BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS.
MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR
THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY
IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.
(ii)
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,739,013 $ 4,915,269
Note receivable, net of allowance for note loss -- 130,000
Note receivable, officer 33,333 --
Prepaid expenses and other current assets 112,548 155,156
------------ ------------
Total current assets 2,884,894 5,200,425
Property and equipment - net 220,536 201,453
Investment in ComSign, Ltd. 197,401 1,145,519
Note receivable, officer 66,667 --
Other assets 6,300 3,550
------------ ------------
Total assets $ 3,375,798 $ 6,550,947
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 162,053 $ 151,400
Accrued expenses 347,187 553,408
------------ ------------
Total current liabilities 509,240 704,808
Accrued severance pay 265,198 429,922
------------ ------------
Total liabilities 774,438 1,134,730
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized; none issued and outstanding -- --
Common stock, $.001 par value;
50,000,000 shares authorized; 17,823,396 and 17,593,896
issued and outstanding, respectively 17,823 17,594
Additional paid-in capital 40,528,337 40,526,583
Other accumulated comprehensive income 25,824 36,934
Deficit accumulated during the development stage (37,963,615) (35,125,678)
Less: deferred compensation (7,009) (39,216)
------------ ------------
Total stockholders' equity 2,601,360 5,416,217
------------ ------------
Total liabilities and stockholders' equity $ 3,375,798 $ 6,550,947
============ ============
See Notes to Consolidated Financial Statements.
-1-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From
Inception
Six Months (July 14, Three Months
Ended 1994) to Ended
June 30, June 30, June 30,
2002 2001 2002 2002 2001
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ -- $ -- $ 125,724 $ -- $ --
------------ ------------ ------------ ------------ -----------
Expenses
Research and development (1) 510,150 373,327 5,512,652 249,691 192,276
Sales and marketing (1) 161,319 205,928 4,459,290 69,685 96,226
General and administrative (1) 1,110,488 1,364,434 9,131,308 628,835 690,183
Stock-based compensation 32,207 496,828 11,396,616 810 195,492
Bad debt expense 130,000 -- 130,000 130,000 --
------------ ------------ ------------ ------------ -----------
Total expenses 1,944,164 2,440,517 30,629,866 1,079,021 1,174,177
------------ ------------ ------------ ------------ -----------
Operating loss (1,944,164) (2,440,517) (30,504,142) (1,079,021) (1,174,177)
------------ ------------ ------------ ------------ -----------
Other (income) expense
Legal settlement -- -- 232,500 -- --
Loss on investment -- -- 17,000 -- --
Other income -- -- (75,000) -- --
Net losses of affiliate 176,935 316,189 1,004,182 71,188 180,495
Impairment loss on investment in affiliate 742,000 -- 742,000 742,000 --
Amortization of deferred financing costs -- -- 4,516,775 -- --
Interest income (26,803) (190,976) (889,230) (5,583) (79,628)
Interest expense 1,641 2,252 1,911,246 1,159 1,071
------------ ------------ ------------ ------------ -----------
Total other (income) expenses 893,773 127,465 7,459,473 808,764 101,938
------------ ------------ ------------ ------------ -----------
Net loss $ (2,837,937) $ (2,567,982) $(37,963,615) $ (1,887,785) $(1,276,115)
============ ============ ============ ============ ===========
Per share data:
Basic and diluted $ (0.16) $ (0.15) $ (0.11) $ (0.07)
============ ============ ============ ===========
Weighted average number
of common shares used in
basic and diluted loss per share 17,663,633 17,361,452 17,732,605 17,362,090
============ ============ ============ ===========
(1) Excludes non-cash, stock-based
compensation expense as follows:
Research and development $ -- $ -- $ 456,239 $ -- $ --
Sales and marketing 30,587 16,759 5,336,558 -- 10,196
General and administrative 1,620 480,069 5,603,819 810 185,296
------------ ------------ ------------ ------------ -----------
$ 32,207 $ 496,828 $ 11,396,616 $ 810 $ 195,492
============ ============ ============ ============ ===========
See Notes to Consolidated Financial Statements.
-2-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
From
Inception
Six Months (July 14, Three Months
Ended 1994) to Ended
June 30, June 30, June 30,
2002 2001 2002 2002 2001
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net loss $(2,837,937) $(2,567,982) $(37,963,615) $(1,887,785) $(1,276,115)
Other comprehensive income (loss)
Foreign currency translation adjustments (11,110) (1,623) 25,824 (3,154) (3,527)
----------- ----------- ------------ ----------- -----------
Comprehensive loss $(2,849,047) $(2,569,605) $(37,937,791) $(1,890,939) $(1,279,642)
=========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements.
-3-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Six Months Inception
Ended (July 14, 1994)
June 30, to June 30,
2002 2001 2002
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,837,937) $(2,567,982) $(37,963,615)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 35,237 45,920 900,545
Bad debt expense 130,000 -- 130,000
Amortization of note discount and finance costs -- -- 4,666,225
Translation adjustment -- -- (1,528)
Beneficial conversion feature of convertible debt -- -- 572,505
Stock, warrants and options issued for services and legal settlement 32,207 496,828 11,569,577
Payment of common stock issued with guaranteed selling price -- -- (155,344)
Net losses of affiliate 176,935 316,189 1,004,182
Impairment loss on investment in affiliate 742,000 -- 742,000
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable 947 (37) 551
Prepaid expenses and other current assets 38,382 (17,171) (111,597)
Other assets (2,750) (3,550) (6,300)
Accounts payable 9,277 120,288 (36,888)
Accrued expenses (199,494) 185,273 1,029,293
Accrued severance pay (133,419) 68,561 144,922
Interest payable -- -- 251,019
----------- ----------- ------------
Net cash used by operating activities (2,008,615) (1,355,681) (17,264,453)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets -- -- 37,572
Purchases of property and equipment (68,701) (60,897) (943,571)
Investment in ComSign, Ltd. -- -- (2,000,000)
Increase in note receivable, officer (100,000) -- (100,000)
Increase in note receivable -- -- (130,000)
Increase in organization costs -- -- (7,680)
----------- ----------- ------------
Net cash used by investing activities (168,701) (60,897) (3,143,679)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,982 8,630 21,177,354
Stock offering costs -- -- (475,664)
Deferred financing costs -- -- (682,312)
Proceeds from short-term borrowings -- -- 1,356,155
Proceeds from long-term debt -- -- 2,751,825
Proceeds from convertible debentures -- -- 2,000,000
Repayment of short-term borrowings -- -- (1,357,082)
Repayments of long-term debt -- -- (1,615,825)
----------- ----------- ------------
Net cash provided by financing activities 1,982 8,630 23,154,451
----------- ----------- ------------
Effect of exchange rate changes on cash (922) (564) (7,306)
----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,176,256) (1,408,512) 2,739,013
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,915,269 8,234,686 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,739,013 $ 6,826,174 $ 2,739,013
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 1,641 $ 2,252 $ 477,669
=========== =========== ============
See Notes to Consolidated Financial Statements.
-4-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of TTR
Technologies, Inc. and its Subsidiary (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10K/A for the year ended December 31, 2001 as filed with
the Securities and Exchange Commission.
Note 2 - Investment in ComSign, Ltd.
The Company has applied the equity method of accounting for this
investment. At the time of the investment the carrying value of the
investment exceeded the Company's share of the underlying net assets of
ComSign. The excess was considered to be goodwill and was being amortized
on a straight-line basis over five years. Since adoption of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", on January 1, 2002, the Company is no longer
amortizing the goodwill.
In July 2000, the Company invested $2 million for a 50% equity interest in
ComSign, Ltd. ("ComSign"), a newly established subsidiary of Comda, Ltd.
("Comda"). ComSign is engaged in the distribution and delivery of digital
authentication certificates of VeriSign, Inc. ("VeriSign"). In June 2000,
ComSign entered into an agreement with VeriSign to act as VeriSign's sole
principal affiliate in Israel and the territories administered by the
Palestinian Authority. The Company disclosed in its quarterly report for
the quarter ended March 31, 2002 that ComSign has been in discussion with
VeriSign to resolve certain issues between them, including the contract
fees payable by ComSign under the terms of the license agreement, and,
that given the decrease in market demand, if the license fees and related
issues are not satisfactorily resolved, then, in the view of management,
ComSign would not be able to continue as a going concern. To date, the
license fees payable by ComSign have not been reduced on terms mutually
agreeable to ComSign and VeriSign nor have the related issues been resoved
to the satisfaction of ComSign. Accordingly, based on information made
available to the Company, management believes that there appears to be a
significant decrease in the fair market value of the Company's investment
in ComSign and that as a consequence thereof, the Company believes the
investment has been impaired. Accordingly, the Company has written-off
during the three months ended June 30, 2002, the amount of $742,000,
representing the remaining goodwill included in the investment.
-5-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed summarized financial data for ComSign, Ltd. as of and for the
three months ended June 30, 2002, are as follows:
Condensed balance sheet data:
Current assets $ 1,035,307
Noncurrent assets $ 1,402,890
Current liabilities $ 1,305,891
Noncurrent liabilities $ 737,500
Condensed statement of operations data:
Revenue $ 144,570
Net loss $ (142,375)
Note 3 - Employment Agreements
On May 2, 2002, the Company entered into a three-year employment
agreement with its new Chief Executive Officer. The agreement provides for
an annual base salary of $240,000 with increases of 10% per annum provided
that the previous year's gross revenues are greater than the base salary.
In accordance with the terms of the employment agreement, the Company
loaned the officer $100,000 for a three-year term with interest at the
rate of 4% per annum. At the end of each calendar year beginning December
31, 2002, the Company has agreed to forgive one-third of the loan as
additional compensation, except under certain conditions where the Chief
Executive Officer resigns or his employment is terminated by the Company
for cause. The Company has granted the officer options to purchase 550,000
shares of the Company's common stock at the market price on the date of
the agreement. One-third of the options vest one year from the date of the
agreement and the remainder vest in eight subsequent equal quarterly
installments. The agreement also contains certain provisions for early
termination, which may result in six months of severance payments based
upon the prior year's base salary and the accelerated vesting of certain
options.
On May 6, 2002, the Company entered into an amended and restated
employment agreement with its President. The Company's President is also
the General Manager of its wholly owned subsidiary. The agreement is for
an initial term of five years and provides for an annual base salary of
$250,000, subject to annual review. The Company will maintain insurance
and a retirement fund in customary form for the benefit of the President
under Israeli law. The President is entitled to participate in all of the
Company's fringe benefit plans and shall continue to be entitled to
participate in the 2000 Equity Incentive Plan. After expiration of the
initial five-year term, the agreement provides for the renewal of the
agreement for additional one-year terms, unless terminated in accordance
with the agreement upon 60 days prior notice. The agreement also contains
certain provisions for early termination, which may result in a severance
payment equal to four years of base salary then in effect. If the
agreement is not renewed upon scheduled expiration, the President is
entitled to two years of base salary then in effect.
In connection with his promotion in April 2002 to Chief Operating
Officer (from Vice President, Corporate Strategy), on May 27, 2002 the
Company entered into an amended and restated employment agreement with
such officer. The amended and restated agreement provides for an annual
base salary of $170,000 with discretionary increases of no more than 10%
per annum subject to yearly reviews for a term of three years. Under the
employment agreement, the vesting schedule of options that were granted in
November 2001 upon the commencement of employment under the Company's 2000
Equity Incentive Plan to purchase 250,000 shares of the Company's common
stock at a purchase price of $1.66 per share has been adjusted such that
90,000 options vest on January 1, 2003 and 40,000 options vest every 7
months thereafter through May 26, 2005.
Note 4 - Settlement Agreement
In May 2002, the Company entered into a settlement agreement with
its former Chief Operating Officer pursuant to which the Company paid such
former officer $198,068 in consideration of the waiver by such former
officer of certain amounts due to him, other alleged claims, and severance
payments. Under the employment agreement entered into by the Company and
such former officer, the Company was obligated to pay the annual salary of
such former officer through September 2003. The Company accrued and
charged at year-end 2001 approximately $437,000, representing the
aggregate salary payments to be made through September 2003 in connection
with the departure of such former officer. During the three months ended
June 30, 2002 the Company removed the remaining balance of approximately
$174,000 from its accrued payroll and severance pay liabilities and
reduced its corresponding salary expense in its statement of operations.
Note 5 - Termination Agreement
In May 2002, the Company entered into a termination agreement with
its Chief Financial Officer. In accordance with the agreement, the Company
paid $95,000 as lump-sum severance to such former officer.
-6-
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
TTR Technologies, Inc. (hereinafter, the "Company" or "TTR") designs and
develops digital security technologies that provide copy protection for
electronic content distributed on optical media and over the Internet. Optical
media store data that may be retrieved by utilizing a laser and include compact
discs, which are commonly referred to as CDs, and digital versatile discs which
are commonly referred to as DVDs. DVDs that store software, including games and
reference material, are referred to as DVD-ROMs. Copy-protected CDs are designed
to be compatible with and to play on currently existing compact disc players and
other play-back devices.
In November 1999, the Company entered into an agreement with Macrovision
Corporation to jointly design and develop a copy protection product designed to
thwart the illegal copying of audio content on CDs. The new product is currently
marketed under the brand name "SAFEAUDIO" and is based primarily upon the
Company's proprietary MusicGuard technology, a unique media-based technology
designed to prevent the unauthorized copying of audio content distributed on
CDs, as well as related Macrovision technology. SAFEAUDIO(TM) is owned jointly
by TTR and Macrovision. Macrovision has an exclusive world-wide royalty bearing
license to market SAFEAUDIO and all other related technologies and products
jointly developed that are designed to prevent the illicit duplication of audio
programs (including the audio portion of music videos, movies and other video or
audio content) distributed on optical media (not limited to CDs and DVDs) and
technologies for Internet digital rights management for audio applications. The
Company is entitled to royalties of thirty percent (30%) of the net revenues
collected by Macrovision or its affiliates from any products or components
incorporating SAFEAUDIO.
The Company is continually working to expand its technologies in the areas
of copy protection and Internet security. Presently, the Company is engaged in
the design, development and testing of technologies relating to DVD-ROMs. In
addition, Company is engaged in the design, development and testing of copy
protection solutions designed to allow consumers relative freedom and ease in
utilizing copy protected discs and music files downloaded from the Internet.
These proposed solutions are currently in various stages of design, testing and
evaluation and include:
(i) PALLADIUMCD Key, a solution designed to facilitate off-line
authentication and playing of a copy-protected CD on a personal computer using
the consumer's existing Windows Media Player and to securely transfer the
content of the copy protected CD to the consumer's hard drive and to securely
record (burn) CD-R copies of the CD (a CD-R is a commercially available blank
CD);
(ii) PALLADIUMCD Online, which enables end-users to securely burn music
files downloaded from the Internet through subscription services (and other
services offering digital music) to blank CD-Rs. Once so burned, the content on
the CD-R is copy-protected. PALLADIUMCD Online is a software based solution that
utilizes the consumer's personal computer and a burner and can be used with
music distribution services such as pressplay and MusicNet; and
(iii) PALLADIUMCD Pre-Release allows labels and replicators to burn
copy-protected CD-Rs for the pre-release album market by integrating the
PalladiumCD core technology into autoloaders, CD-R duplication devices and
individual PCs. These components allow mass production of copy-protected
pre-release CD-R's (using the labels' and replicators' existing infrastructure),
which are typically distributed to radio stations and music critics before an
album's general public release.
-7-
The Company has not yet begun to commercialize these solutions and there can be
no assurance that the Company will be able to successfully commercialize these
solutions.
Under the agreement between the Company and Macrovision, the Company
granted to Macrovision an exclusive right of first refusal with respect to the
acquisition of all rights in or worldwide exclusive marketing and distribution
rights to any music protection technology that the Company develops, and any
Internet digital rights management technologies developed by the Company that
are applicable to music, music video, video, software or data publishing
products or markets. The DVD and Internet technologies and solutions noted
above, or certain components thereof, may be subject to such right of first
refusal. Macrovision has reiterated its allegation, initially reported in the
Company's quarterly report on Form 10-Q for the three months ended March 31,
2002, that the Company breached the agreement between them. The Company and
Macrovision are currently holding discussions to address these and related
matters.
The Company has not had any significant revenues to date. As of June 30,
2002, the Company had an accumulated deficit of approximately $37,963,615. The
Company's expenses related primarily to costs and expenditures on research and
development, marketing, recruiting and retention of personnel, costs of raising
capital and operating expenses
Revenue Sources
The Company expects, for the near-term, that its primary source of
revenue, if any, will be royalties under the license agreement with Macrovision
and, upon completion and commercialization of the newly developed technologies,
license fees therefrom. However, no assurance can be provided that the SAFEAUDIO
technology or any of the other technologies and solutions developed by the
Company will be commercially successful or whether any royalties or other
proceeds from the sale thereof will be generated. The Company is currently
seeking to develop or acquire other technologies that may provide other sources
of revenue. However, there can be no assurance that the Company will develop or
acquire other technologies or if it does, that such technologies will generate
any revenue or profits.
Results of Operations
Six months ended June 30, 2002 ("2002 Period") compared to six months ended June
30, 2001 ("2001 Period") and the three months ended June 30 2002 compared to the
three months ended June 30, 2001.
There were no revenues for the 2002 Period or the 2001 Period.
Research and development costs for the 2002 Period were $510,150 compared
to $373,327 for the 2001 Period and $249,691 for the three months ended June 30,
2002 as compared to $192,276 for the comparable period in 2001. The increase
reflects the compensation of newly hired additional research and development
personnel. Current research and development is primarily focused on expanding
the capabilities of the existing version of SAFEAUDIO and extending copy
protection technology to CD-Rs and digital rights management.
Sales and marketing expenses for the 2002 Period were $161,319 compared to
$205,928 for the 2001 Period and $69,685 for the three months ended June 30,
2002 compared to $96,226 for the comparable period in 2001. This decrease is
primarily attributable to the Company's declining contribution to the sales and
marketing responsibilities associated with SAFEAUDIO that, pursuant to the
Company's Agreement with Macrovision, are assumed by Macrovision.
General and administrative expenses for the 2002 Period were $1,110,488 as
compared to $1,364,434 for the 2001 Period and $628,835 for the three months
ended June 30, 2002 as compared to $690,183 for the comparable period in 2001.
The decrease during the 2002 Period as compared to the 2001 Period is partially
attributable to the departure of the
-8-
Company's former Chief Operating Officer in October 2001, the non-recurring fees
relating to the Company's listing on the Nasdaq National Market System that were
incurred in the 2001 Period, government mandated increases in the reserves for
holiday and severance pay by the Company's Israeli subsidiary incurred in the
2001 Period as well as a decrease in the overall travel related expenses during
the 2002 Period resulting from cost control measures implemented by the Company.
Stock-based compensation for the 2002 Period was $32,207 as compared to
$496,828 for the 2001 Period and $810 for the three months ended June 30, 2002
as compared to 195,492 for the comparable period in 2001. The decrease in
stock-based compensation expense is attributable to a reduction in remaining
deferred compensation incurred in previous years. In addition, during the 2002
Period, the Company did not issue any stock options that would have required the
Company to recognize additional deferred compensation.
The Company recorded a bad debt expense of $130,000 in the 2002 Period in
connection with the non-payment of a note receivable upon its maturity in July
2002. Management believes collection of the full amount due under the promissory
note is doubtful.
The Company's affiliate, ComSign Ltd., commenced operations in July 2000.
ComSign serves as VeriSign Inc.'s sole principal affiliate in Israel and the
Palestinian Authority and exclusive marketer of VeriSign's digital
authentication certificates and related services. ComSign had been in discussion
with VeriSign to resolve certain issues between them, including the contract
fees payable by ComSign under the terms of the license agreement. As fully
described in Note 2 to the consolidated financial statements, to date such
payments have not been so reduced nor have any of the related issues been
resolved to ComSign's satisfaction. Based on information available to
management, the Company deems the investment to be impaired and, accordingly,
has recorded an impairment loss of $742,000 in its statement of operations for
the six and three months ended June 30, 2002. No such loss was recorded during
the comparable periods in 2001.
Interest income for the 2002 Period was $26,803 as compared to $190,976
for the 2001 Period and $5,583 for the three months ended June 30, 2002 as
compared to $79,628 for the comparable period in 2001. The decrease is
attributable to the lower cash and cash equivalent balances, primarily resulting
from the expenditure of cash to finance the Company's operations and decreased
interest rates.
The Company reported a net loss for the 2002 Period of $2,837,937 or $(.16)
per share on a basic and diluted basis, as compared to a net loss of $2,567,982
or $(.15) per share for the 2001 Period and $1,887,785 or $(.11) per share for
the three months ended June 30, 2002 as compared to $1,276,115 or $(.07) per
share for the comparable period in 2001.
Liquidity and Capital Resources
At June 30, 2002, the Company had cash of approximately $2.7 million,
representing a decrease of approximately $2.2 million from December 31, 2001.
Cash used by operating activities during the six months ended June 30, 2002 was
$2,008,615 compared to $1,355,681 for the same period in 2001.
The Company plans to restructure its cost base and reduce outlays by
approximately 25% over the course of the next 12 months. If the Company is
successfull in reducing its expenses, the Company believes that cash on-hand
will be sufficient to meet the Company's requirements to maintain its business
as presently conducted for the next twelve months. No assurance however, can be
provided that the Company will be able to implement its cost reduction plan. If
it becomes necessary for the Company to raise additional capital, there can be
no assurance that additional capital will be available to the Company on terms
acceptable to it, if at all. Furthermore, it is anticipated that any such
financing, if obtained, will have a dilutive effect on existing stockholders.
The Company currently has no commitments for any such financing. The inability
to obtain such financing, if necessary, will have a material adverse effect on
the Company, its operations and future business prospects.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K/A for the year ended December 31, 2001. There has been no material change
in these market risks since the end of the fiscal year 2001.
PART II
Item 1. Legal Proceedings
Not Applicable
Item 2. Change in Securities & Use of Proceeds
Sale of Unregistered Securities
There were no issuances for sale of any unregistered securities by the
Company during the six months ended June 30, 2002.
Item 3. Default Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
With the filing of this quarterly report on Form 10-Q for the three months
ended June 30, 2002, the Company anticipates that it will be notified by NASDAQ
that its common stock will be delisted from the NASDAQ National Market because
the Company will no longer be in compliance with the minimum net tangible asset
requirement of $4.0 million. As previously reported, the Company also received
notice from NASDAQ of the potential delisting of its common stock because its
shares have closed at a per share price of less than $1 since May 23, 2002. The
Company intends to examine the possibility of applying to have its shares listed
on the NASDAQ SmallCap market or another recognized exchange or market. No
assurance can be provided that the Company will in fact apply to have its shares
listed on any such exchange or market, or that if such application is filed it
will be approved or that at the time of application the Company will even be
eligible for listing on such exchange or market. The failure to maintain listing
on an exchange or market may have an adverse effect on the price of the common
stock.
Item 6. Exhibits and Reports on 8-K
(a) Reports on Form 8-K
(i) Report on Form 8-K dated April 24, 2002
(ii) Report on Form 8-K dated June 13, 2002
(iii) Report on Form 8-K dated June 27, 2002
(b) Exhibits
4.1 Promissory Note made as of May 2, 2002 by Daniel C. Stein in
favor of TTR.
10.1 Employment Agreement between TTR and Daniel C. Stein dated as of May 2,
2002.
10.2 Amended and Restated Employment Agreeemnt between TTR and Marc D. Tokayer
dated as of May 6, 2002.
10.3 Amended and Restated Employment Agreement between TTR and Samuel Brill
dated as of May 27, 2002.
10.4 Settlement Agreement between TTR and Emanuel Kronitz dated as of May 9,
2002.
10.5 Termination Agreement between TTR and Matthew L. Cohen dated as of
April 17, 2002.
10.6 Amendment dated as of June 10, 2002 to Termination Agreement between TTR
and Matthew L. Cohen dated as of April 17, 2002.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002.
99.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TTR TECHNOLOGIES, INC.
Registrant
Date: August 14, 2002 By /s/ Sam Brill
Sam Brill,
Chief Operating Officer (Principal
Financial Officer)
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