Business Context and Reporting Period
Company: TouchIT Technologies Inc. (formerly Hotel Management Systems, Inc.)
Filing Type: Form 10-Q
Period Ended: March 31, 2010
Business Overview: The Company manufactures touch-based visual communication products (interactive whiteboards, touch screens) for education and corporate markets. Operations are conducted through Turkish subsidiaries TouchIT Tech KS and TouchIT Ed.
Recent Developments: On May 7, 2010, the Company completed a share exchange to acquire the Turkish subsidiaries and changed its name to TouchIT Technologies, Inc. Concurrently, it entered a subscription agreement for up to $1.5 million in convertible promissory notes.
Key Financial Metrics (Q1 2010)
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $1,046,011 | $359,468 |
| Gross Profit | $327,862 | $154,497 |
| Gross Margin | 31.4% | 43.0% |
| Operating Income | $69,943 | $10,725 |
| Net Income | $70,017 | $17,025 |
| Cash and Equivalents (End of Period) | $52,383 | $17,941 |
| Net Cash from Operating Activities | ($773) | ($55,098) |
| Total Assets | $1,145,907 | $726,386 |
| Total Liabilities | $1,258,727 | $648,506 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 191% ($686,543) compared to Q1 2009, driven by an established product line and expanded global customer base.
- Profitability: Net income surged 311% to $70,017. Operating income increased 552% due to completed factory setup and reduced product development costs.
- Balance Sheet: Total assets grew 58% to $1.15 million. Current liabilities increased 94% to $1.26 million, primarily due to a 152% increase in amounts due to related parties (raw material purchases) and a 330% increase in other current liabilities (convertible notes).
- Cash Flow: Net cash used in operating activities improved significantly, decreasing by 98% to a negligible outflow of $773, compared to a $55,098 outflow in the prior year.
Guidance, Outlook, and Risks
Outlook: Management targets annual revenue of $5 million for 2010. Q1 is historically a weak quarter; stronger performance is expected in Q3 and Q4. The Company expects to achieve positive cash flow for the full calendar year 2010.
Material Weaknesses in Internal Controls: Management concluded disclosure controls were not effective due to: (1) lack of written documentation of internal controls; (2) insufficient segregation of duties; and (3) lack of review and supervision procedures for financial reporting.
Risks:
- Liquidity: Success is contingent on raising additional capital; failure to secure financing could limit operations.
- Market: Intense competition and limited operating history.
- Stock Liquidity: Shares trade on the OTC Bulletin Board with a limited public float, leading to potential price volatility and difficulty in liquidating investments.
- Related Parties: Significant reliance on related parties for raw materials and financing.
Investor Verification Checklist
- Capital Needs: Verify the status of the $1.5 million convertible note financing and whether additional capital is required to meet the $5M revenue target.
- Related Party Transactions: Review the nature and terms of the $792,864 owed to related parties and the $357,013 due from related parties to assess dependency and potential conflicts.
- Internal Controls: Assess the remediation plan for the three identified material weaknesses in financial reporting controls.
- Share Structure: Confirm the impact of the recent share exchange (48.3M shares issued) and the potential dilution from the convertible notes and warrants.
- Revenue Quality: Validate the sustainability of the 191% revenue growth and the concentration of customers in the education sector.