Business Context and Reporting Period
Company: TouchIT Technologies, Inc. (formerly Hotel Management Systems, Inc.)
Reporting Period: Quarter ended March 31, 2011
Operations: The Company manufactures and sells touch-based visual communication products (interactive whiteboards, LCDs) for education and corporate markets. Operations are conducted primarily through two wholly-owned Turkish subsidiaries: TouchIT Technologies KS and TouchIT Education KS. The financial statements presented are combined but not fully consolidated, meaning inter-company transactions are not eliminated.
Recent Developments: In February 2011, the Company secured a $250,000 revolving credit facility from TCA Global Credit Master Fund, LP, secured by all company assets and personal guarantees from the CEO and CFO.
Key Financial Metrics (Q1 2011)
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $773,658 | $1,046,011 |
| Gross Profit | $216,892 | $326,976 |
| Gross Margin | 28.0% | 31.3% |
| Operating Loss | $(163,359) | $72,268 |
| Net Loss | $(220,684) | $70,017 |
| Cash and Equivalents | $27,954 | $52,383 |
| Total Current Assets | $1,545,026 | $1,105,514 |
| Total Current Liabilities | $1,127,659 | $1,257,763 |
| Working Capital | $417,367 | $(152,249) |
| Shareholders' Equity | $(236,399) | $225,184 |
Note: The Company reported a negative shareholders' equity position of $(236,399) as of March 31, 2011, driven by the current period net loss and accumulated deficits.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by 26% ($272,353) compared to Q1 2010. Management attributes this to a market slowdown, uncertain customer budgets, and a strategic shift away from non-recurring tender business toward recurring revenue streams. Q1 2010 was noted as abnormally high.
- Operating Loss: The Company swung from an operating profit of $72,268 in Q1 2010 to an operating loss of $(163,359) in Q1 2011. This was caused by fixed overhead costs remaining stable despite the revenue drop.
- Expense Increases: Marketing and selling expenses rose to $293,399 (38% of revenue) from $179,608 (17% of revenue) due to increased investment in sales consultants and investor relations. General and administrative expenses also increased slightly.
- Asset Growth: Total assets increased by 43% to $1.64 million, primarily due to a significant buildup in inventory ($612,991 vs. $243,783) and increased receivables from related parties.
- Equity Erosion: Shareholders' equity turned negative, dropping from a positive $225,184 in Q1 2010 to $(236,399) in Q1 2011.
Guidance, Outlook, and Risks
Outlook: Management had previously forecasted 2011 revenue of $9 million but acknowledged a slow first quarter. Future performance depends on securing large tender opportunities and the success of new product launches (42", 55", and 65" Interactive LCDs) planned for Q3 2011. The Company is expanding into South Africa and the Middle East (specifically Saudi Arabia) and has initiated OEM discussions with Hitachi Solutions Europe Ltd.
Risks and Contingencies:
- Going Concern: The independent auditors' report highlights that current liabilities exceed current assets by $341,535 and total equity is negative. The continuity of operations is dependent on future profitability and financial support from shareholders/creditors.
- Internal Controls: Management identified three material weaknesses in disclosure controls: lack of written documentation, insufficient segregation of duties, and lack of review/supervision procedures for financial reporting.
- Tax Risk: Auditors noted a potential tax risk regarding $101,791 in consultancy fees invoiced abroad, which may be subject to 20% withholding tax under Turkish law if interpreted differently by tax authorities.
- Liquidity: The Company relies on a revolving credit facility and shareholder support to maintain liquidity. Cash flow from operations was negative at $(5,593) for the quarter.
Investor Verification Checklist
- Consolidation Status: Verify the extent of inter-company transactions between TouchIT Tech KS and TouchIT Ed, as they are combined but not consolidated, potentially inflating asset and liability figures.
- Related Party Balances: Scrutinize the significant "Due from related parties" ($484,459) and "Due to related parties" ($807,120) balances to assess the true liquidity and solvency of the entity.
- Inventory Valuation: Confirm the realizability of the increased inventory balance ($612,991), which represents a significant portion of current assets.
- Debt Covenants: Review the terms of the $250,000 credit facility with TCA Global Credit Master Fund, specifically the security interests and personal guarantees provided by executives.
- Going Concern Viability: Assess the Company's ability to generate positive cash flow from operations to cover fixed costs and service debt without further equity injections.