Business context and reporting period
Focus Universal Inc.’s unaudited Form 10-Q covers the three and nine months ended September 30, 2016. The company now focuses on wholesale sales of handheld sensors and filters and development of its Ubiquitor wireless sensor system. Following its December 2015 acquisition of Perfecular, it discontinued its digital marketing business during 2016’s first quarter. The acquisition makes comparisons with 2015, when Perfecular was not consolidated, less meaningful.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $79,670 | $9,630 | $250,659 | $11,638 |
| Gross profit | $66,438 | $7,605 | $219,333 | $5,888 |
| Gross margin | 83.4% | 79.0% | 87.5% | 50.6% |
| Operating expenses | $171,527 | $44,420 | $534,674 | $112,978 |
| Operating loss | $(105,089) | $(36,815) | $(315,341) | $(107,090) |
| Net loss | $(99,956) | $(39,493) | $(309,336) | $(101,241) |
- Management attributed the revenue increase primarily to Perfecular product sales: $79,669 in the quarter and $248,879 year to date. The filing reports no separate guidance or quantified sales outlook.
- Cash and cash equivalents were $423,504 at September 30, 2016, down from $832,013 at December 31, 2015. Working capital was $193,729, compared with $505,781; current assets were $510,549 and current liabilities $316,820.
- For the first nine months, operating cash outflow was $322,311, investing outflow $3,296, and financing outflow $82,902, resulting in a $408,509 decline in cash. The financing outflow included repayment of related-party and shareholder loans; those loans were paid off in February 2016. No such loan balances were reported on the September 30 consolidated balance sheet.
- Total liabilities were $317,639 and stockholders’ equity $221,668. There was no long-term borrowing reported; liabilities primarily comprised accounts payable and accrued liabilities. The filing also reports a $3,155 non-interest-bearing advance to a related party.
Changes, outlook, risks and other notable matters
- Revenue and expenses rose substantially after Perfecular’s acquisition. Year-to-date operating expenses included $90,000 of officer compensation and $136,237 of research and development expenses attributed to Perfecular. The company says it is developing Ubiquitor, completed an initial production run of 1,000 devices, and filed a provisional patent application in January 2016.
- Management cautioned that cash on hand and operating cash may not fund needs over the next 12 months. It plans to rely on cash, operations, borrowings, or debt or equity financing, but says financing may not be available on favorable terms, or at all; inability to fund operations could require it to curtail or cease operations.
- Customer and supplier concentration is significant: one customer represented 100% of accounts receivable and one vendor represented 91% of accounts payable at quarter-end.
- The company disclosed a material weakness in internal control over financial reporting, citing inadequate staffing and technical expertise and reliance on outside consultants for financial-statement adjustments. It also stated disclosure controls were effective, making the distinction between disclosure controls and financial-reporting controls important.
- Lease commitments for 2017 were reported as $79,300 of rent expense, offset by $26,400 of sublease income, or $52,900 net. Management said it knew of no current legal proceedings with a material adverse effect and did not expect contingencies to materially affect results, while noting outcomes cannot be assured.
- The filing contains apparent numerical inconsistencies: MD&A gives third-quarter revenue as $79,669 and gross profit as $66,437, versus the statements’ $79,670 and $66,438; MD&A also cites nine-month net loss of $308,241 in its operating-cash-flow discussion, versus the financial statements’ $309,336. The financial statements report the latter figure.
Important facts for investors to verify
- Whether product sales and cash collections can grow enough to cover operating costs, and what financing is available if they do not.
- The durability of revenue after the acquisition and the extent of dependence on concentrated customers, vendors, and related-party arrangements.
- Ubiquitor’s commercial readiness, market demand, production plans, and patent status.
- Progress in addressing the disclosed material weakness and the identified discrepancies between MD&A and the financial statements.
- The effect of operating losses and cash burn on liquidity, including lease obligations and any future capital needs.