Business context and reporting period
The supplied filing is TouchIT Technologies, Inc.’s Form 10-Q for the quarter ended June 30, 2011—not a BTCS Inc. filing. TouchIT manufactures and sells interactive whiteboards and related technology products through Turkish subsidiaries. The financial statements are combined subsidiary statements; intercompany balances exist and were not consolidated. The filing’s period labels are inconsistent: the headline results are described as quarterly in places, but match the subsidiaries’ six-month results. Figures below are therefore presented as the six months ended June 30, 2011 unless noted.
Financial performance and condition
- Revenue: $914,867, down 58% from $2,171,547 in the comparable 2010 period.
- Profitability: Gross profit was $82,466, a 9.0% gross margin, versus $752,123 and 34.6%. Operating loss was $468,442 versus operating income of $283,112. Net loss was $605,745 versus net income of $271,788.
- Cash flow and cash: Operating cash outflow was $31,721, compared with $552,213 outflow in the comparable period. Cash fell from $50,556 at year-end 2010 to $1,239 at June 30, 2011. Investing outflow was $15,245; financing outflow was $2,351.
- Assets, liquidity and equity: Combined current assets were $1.279 million and current liabilities $1.240 million, implying working capital of about $39,000. Total assets were $1.370 million; reported shareholders’ equity was negative $621,460. Related-party receivables were $655,135 and inventory was $571,586.
- Debt and obligations: The combined subsidiary balance sheet reports no bank borrowings at June 30, but the filing separately describes a $250,000 TCA Global Credit facility advanced in February, at 8% interest and due February 16, 2012. The $750,000 share-purchase advance remains recorded as a long-term obligation.
Material changes and management commentary
- Management attributed the sales decline to slower markets and uncertain customer budgets, while maintaining overhead and increasing marketing activity. Marketing and selling expense was $427,851, or about 46.8% of sales, versus $337,590, or 15.5%, in the comparable period.
- Management had forecast $9 million of 2011 revenue in January, but acknowledged the slow first half and said achieving that target depended on securing substantial tender business. It expected stronger third and fourth quarters, and anticipated revenue growth from recurring business and planned interactive LCD launches; no revised quantified guidance was provided.
- The company reported a $250,000 secured credit facility, guaranteed personally by senior executives and secured by company assets. The lender received 100,000 common shares and 25,000 preferred shares; after an April borrowing-base error and $24,000 overadvance, the company agreed to revised preferred-stock conversion terms and issued 1 million common shares as security, returnable if not needed.
- Sales-channel and product developments included shipments to U.S. government and military customers, work with resellers and prospective OEM partners, and planned 42-, 55- and 65-inch LCD products. Several partner arrangements were still under discussion or anticipated, rather than completed.
Risks, contingencies and unusual items
- Subsidiary financial statements received qualified review conclusions citing substantial doubt about continuing as a going concern. One subsidiary had negative equity of $538,604 and current liabilities exceeding current assets by $615,673; the other had negative equity of $82,856. Continuity depends on future profitability and financial support from shareholders and creditors.
- The filing reports ineffective disclosure controls due to material weaknesses: lack of documented internal-control procedures, inadequate segregation of accounting duties, and insufficient review and supervision. No control changes were reported for the quarter.
- TouchIT Education had a $122,602 advance to a Chinese LCD supplier for goods reportedly due by April 21, 2011; delivery was delayed, a demand letter received no response, and no legal action had begun. It also recorded a full provision against $53,380 of gross receivables.
- An auditor highlighted possible Turkish withholding-tax exposure on $167,978 of consultancy invoices: a 20% withholding could apply under a different interpretation of where services were received. Management did not anticipate a tax risk.
- Foreign-currency translation, inventory and doubtful-receivable provisions, and $26,984 of financial-service expense charged by Trafalgar affected results. The filing reports no material legal proceedings and no subsequent events affecting the financial statements.
- The combined statements are not fully consolidated, and the review reports relate to subsidiary financial statements; they are not an audit opinion on the combined information. The filing also contains apparent inconsistencies in period descriptions and in the reported facility versus balance-sheet debt, which require reconciliation.
Key facts for investors to verify
- Confirm the issuer identity: this is a TouchIT Technologies filing, not BTCS Inc.
- Reconcile the six-month versus quarterly labels and confirm the correct comparative-period figures.
- Reconcile the $250,000 TCA facility, its outstanding balance, cash proceeds, collateral, guarantees and equity-related lender terms with the subsidiary balance sheets and cash flows.
- Assess near-term funding needs, the going-concern qualifications, negative equity, and dependence on related-party and creditor support; clarify the terms and status of the $750,000 share-purchase advance.
- Track collections and recoverability of related-party receivables, the overdue supplier advance, inventory and customer receivables, and resolve the potential withholding-tax exposure.
- Test the assumptions behind the $9 million revenue forecast, expected second-half recovery, new product launches and prospective channel agreements; review remediation of the reported control weaknesses.
As of August 12, 2011, the filing reported 68,449,419 common shares outstanding.