Focus Universal Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The unaudited consolidated statements include Focus Universal and its wholly owned subsidiaries, Perfecular and AVX Design & Integration (AVX). Focus develops universal smart instruments and sells sensors and related products; AVX provides residential and commercial IoT installation services.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $332,170 | $139,102 | $995,245 | $247,434 |
| Gross profit (loss) | $(16,201) | $57,772 | $242,794 | $138,419 |
| Operating expenses | $874,702 | $401,619 | $2,074,072 | $1,338,357 |
| Operating loss | $(890,903) | $(343,847) | $(1,831,278) | $(1,199,938) |
| Net loss | $(882,675) | $(342,530) | $(1,820,002) | $(1,641,641) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.04) | $(0.04) |
- Q3 gross margin was approximately -4.9%, compared with 41.5% in Q3 2018; nine-month gross margin was approximately 24.4%, compared with 55.9% in 2018.
- Nine-month operating cash outflow was $1,077,666, versus $1,139,589 in 2018. Investing cash outflow was $770,793, versus $4,524,944; financing provided $152,617, versus $9,911,592. Cash declined by $1,695,842 to $2,759,909.
- At September 30, cash was $2,759,909, current assets $3,080,972, current liabilities $337,625, and working capital $2,743,347. Total assets were $8,213,735 and stockholders’ equity was $7,769,513.
- Total liabilities were $444,222, including a $50,000 short-term promissory note and $148,798 of operating lease liabilities ($42,201 current). The note bears 6% interest; the filing reports $1,000 accrued interest for the nine-month period.
- Nine-month segment revenue was $446,370 for Focus, including related-party revenue, and $548,875 for AVX. Segment net losses were $1,599,839 and $220,163, respectively.
Material changes versus prior periods
- Revenue increased substantially, mainly because AVX contributed $548,875 after its acquisition in March 2019. Management said the company was phasing out older products while developing new products.
- Q3 revenue rose to $332,170 from $139,102, but cost of revenue exceeded revenue, producing a gross loss. Nine-month revenue rose to $995,245 from $247,434, while gross profit increased to $242,794 from $138,419.
- Operating expenses increased by $473,083 in Q3 and $735,715 for the nine-month period. The filing attributes increases to AVX selling costs and employees, higher professional fees—including acquisition, audit, SEC and potential Nasdaq-listing work—and increased salaries and depreciation.
- AVX acquisition consideration was reported as $890,716: $550,000 cash, 39,286 shares valued at $290,716, and a $50,000 secured promissory note. The purchase-price allocation, including $162,572 goodwill and $145,000 intangible assets, was preliminary.
- Cash fell from $4,455,751 at December 31, 2018 to $2,759,909 at September 30, 2019. Unlike 2018, the 2019 period had no reported equity-sale financing inflow; 2018 financing included substantial stock and subscription proceeds.
Outlook, risks and other notable disclosures
- Going concern: Management reported a $1,820,002 nine-month net loss, $1,077,666 operating cash outflow and $5,823,460 accumulated deficit. It said continued operations depend on shareholder support, debt repayment capacity, obtaining equity financing and achieving profitable operations; it cautioned there is no assurance of adequate financing for Ubiquitor development and commercialization.
- Business outlook: The company intends to develop and commercialize its Ubiquitor universal smart instrumentation platform and explore integration with AVX’s installation business. The filing provides no quantified revenue, earnings or cash-flow guidance.
- Execution and market risks: Ubiquitor was at prototype/early-production stage, with full-scale production and distribution still intended. The company also cited competition and uncertainties in its forward-looking statements.
- Concentrations: One customer represented 25% of accounts receivable at September 30, 2019; one vendor represented 51% of accounts payable. Cash may at times exceed FDIC insurance limits.
- Related party: Revenue from Vitashower Corp., owned by the CEO, was $10,300 for the nine months and $7,300 for Q3 2019. The filing reports no balance due from Vitashower at quarter-end.
- Controls: The filing says disclosure controls were effective, but also says management concluded internal control over financial reporting was ineffective and had a material weakness, principally due to inadequate staffing and technical expertise and reliance on outside consultants.
- The company reported no material legal proceedings, no off-balance-sheet arrangements and no income tax expense for the periods presented.
Important facts for investors to verify
- Whether cash and planned financing are sufficient to fund operations and Ubiquitor commercialization, given the explicit going-concern uncertainty and continuing losses.
- AVX’s post-acquisition contribution, profitability and integration progress, and the final purchase-price allocation, which the filing identifies as preliminary.
- The cause of the Q3 gross loss and whether the transition away from older products is affecting sales, costs or margins.
- The status and remediation plan for the disclosed material weakness in internal control over financial reporting, notwithstanding the separate conclusion that disclosure controls were effective.
- Reconcile the stock-option disclosures: the filing reports 210,000 options granted at $5.70, but parts of the option activity table show a $9.86 weighted-average exercise price and conflicting vesting/exercisability data.
- Clarify acquisition-description differences in the filing, which refers to a stock purchase in one note and an asset purchase in another, and review the related consideration and accounting disclosures.