FOCUS UNIVERSAL INC. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 15, 2019. Financial statements are unaudited and consolidated. The company develops and sells sensor products and is developing its Ubiquitor universal wireless sensor platform. Its operations expanded during the quarter with the March 15 acquisition of AVX Design & Integration, an IoT installation and management business.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $242,738 | $68,552; up $174,186 (about 254%) |
| Gross profit | $120,610 | $50,628 |
| Gross margin | 49.7% | 73.9% |
| Operating expenses | $568,618 | $200,342 |
| Operating loss | $(448,008) | $(149,714) |
| Net loss | $(447,283), or $(0.01) per share | $(203,833), or $(0.01) per share |
| Cash from operations | $(369,117) | $(141,872) |
| Cash and cash equivalents | $3,554,975 at March 31 | $4,455,751 at December 31, 2018 |
| Working capital | $3,855,642 | $4,479,928 at December 31, 2018 |
Revenue includes $128,545 from AVX after acquisition; the acquired business generated $93,596 gross profit and $69,747 operating income for that period. Focus’s segment reported an operating loss of $517,755. Professional fees rose by $305,113 to $355,274, mainly for acquisition-related legal, accounting and consulting work, the annual audit, SEC filings and preparation for a potential Nasdaq listing. The company also attributed higher general and administrative costs to salaries and depreciation.
Investing cash outflow was $529,638, including $550,000 paid for AVX, partly offset by $201,482 of cash acquired and $181,120 of property and equipment purchases. Financing cash outflow was $2,021. Cash declined by $900,776 during the quarter. The filing reports current assets of $4.22 million and current liabilities of $367,209.
Total liabilities were $520,022 at March 31, including a $50,000 AVX acquisition promissory note (split between $41,500 current and $8,500 long-term) and $195,642 of operating lease liabilities. The note bears 6% interest and is payable in 12 monthly installments beginning June 1, 2019. Total assets were $9.47 million; stockholders’ equity was $8.95 million.
Material developments, outlook and risks
- AVX acquisition: The stated purchase consideration was $890,716: $550,000 cash, $290,716 in company shares and a $50,000 secured promissory note. The preliminary allocation included $307,572 goodwill, which management said was not impaired at quarter-end. Pro forma results, assuming AVX had been acquired January 1, were revenue of $838,293 and net loss of $165,738 for Q1 2019, compared with revenue of $402,570 and net loss of $134,910 in Q1 2018.
- Liquidity and going concern: Despite cash and positive working capital, the filing says the net loss, operating cash burn and accumulated deficit of $4,450,741 raise doubt about the company’s ability to continue as a going concern. Continuation depends on shareholder support, debt repayment capacity, obtaining necessary equity financing and achieving profitable operations; the filing gives no assurance financing will be available.
- Business plans: Management describes continued development and commercialization of Ubiquitor and its mobile application, including an initial production run of 1,000 devices, and plans to pursue distribution and broader marketing. The filing provides no quantified revenue or earnings guidance.
- Controls: Management concluded disclosure controls were effective, but separately identified a material weakness in internal control over financial reporting, citing inadequate staffing and technical expertise and reliance on outside consultants for financial-statement adjustments.
- Other disclosures: The company adopted lease accounting in Q1 2019 and recognized $184,416 in right-of-use assets. It reported no material legal proceedings and no off-balance-sheet arrangements. One customer represented 28% of accounts receivable at quarter-end.
Important facts for investors to verify
- Reconcile the acquisition description and accounting: the filing refers to a stock purchase agreement in one section and an asset purchase agreement in another; confirm the transaction structure and final purchase-price allocation.
- Confirm acquisition share counts and consideration. The acquisition note lists 29,286 shares, while the equity statement lists 39,286 shares issued for acquisition.
- Check the cost-of-revenue discrepancy: the financial statements report $122,128, while MD&A states $122,610. The financial statements and segment table report $122,128.
- Assess cash runway, financing needs and progress toward profitability in light of the going-concern disclosure and ongoing operating cash burn.
- Monitor AVX’s contribution and integration, Ubiquitor commercialization, and remediation of the disclosed material weakness in financial reporting controls.