BTCS Inc. (TouchIT Technologies Inc.) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2010, for TouchIT Technologies Inc. (formerly Hotel Management Systems, Inc.). The Company is a manufacturer of touch-based visual communication products for education and corporate markets, with operations based in Istanbul, Turkey. On May 7, 2010, the Company completed a share exchange with TouchIT Tech KS and TouchIT Education, effectively changing its business focus. The financial statements presented are combined for these Turkish subsidiaries.
Key Financial Metrics (Six Months Ended June 30, 2010)
| Metric | Value (USD) |
|---|---|
| Net Sales | $2,171,547 |
| Gross Profit | $752,123 |
| Gross Margin | 34.6% |
| Net Income | $271,788 |
| Cash and Cash Equivalents | $215,613 |
| Total Assets | $1,948,618 |
| Total Liabilities | $1,859,793 |
| Net Cash from Operating Activities | ($552,213) |
| Net Cash from Financing Activities | $744,674 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased by 445% to $2.17 million compared to $488,129 in the same period in 2009. This is attributed to expanded global sales activities, including new markets in the USA, and a larger customer base.
- Profitability Turnaround: The Company moved from a net loss of $179,953 in the prior year period to a net income of $271,788. Gross profit increased by 947% due to stabilized costs and streamlined production.
- Balance Sheet Expansion: Total assets grew by 374% to $1.95 million, driven by increases in trade receivables ($709k vs $88k) and cash. Total liabilities increased by 1,173%, primarily due to a $750,000 "Share Purchase Advance" related to the reverse merger and increased payables to related parties.
- Cash Flow: Operating cash flow was negative ($552k) due to significant increases in receivables and inventory to support sales growth. This was offset by $744k in financing cash flow from the share purchase advance.
Guidance, Outlook, and Risks
- Outlook: Management targets annual revenue of $5 million for 2010. They anticipate Q3 and Q4 to be the strongest quarters. New product launches include a range of Interactive LCDs (42", 55", 65") and "TouchIT Transcribe" annotation software scheduled for September 2010.
- Expansion: The Company leased an additional 1,000m2 of factory space and increased manufacturing and accounting staff to meet demand.
- Internal Controls: Management disclosed that disclosure controls and procedures were not effective as of June 30, 2010. Material weaknesses include a lack of written documentation, insufficient segregation of duties, and lack of review/supervision procedures.
- Risks: Key risks include the need for additional capital to fund growth, intense competition, reliance on key management personnel, and the limited liquidity of the Company's common stock traded on the OTC Bulletin Board.
Investor Verification Checklist
- Related Party Transactions: Verify the nature and terms of the significant increase in "Due to related parties" ($980k) and "Due from related parties" ($602k), which constitute a large portion of the balance sheet.
- Share Purchase Advance: Confirm the status and conversion terms of the $750,000 non-current liability labeled "Share purchase advances" resulting from the May 2010 transaction.
- Receivables Quality: Assess the collectability of trade receivables, which surged to $709k, particularly given the extended payment cycles mentioned for US customers.
- Internal Control Remediation: Review the Company's plan to address the material weaknesses in internal controls identified in Item 4.
- Stock Liquidity: Note that only 12.9 million of the 67.2 million outstanding shares are eligible for resale, creating a limited public float and potential volatility.