Focus Universal Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. The company develops universal smart sensor instruments and also wholesales sensors, meters, and filtration products.
Financial performance
| Metric | Three months 2018 | Three months 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $139,102 | $265,718 | $247,434 | $847,866 |
| Gross profit | $57,772 | $74,103 | $138,419 | $219,691 |
| Gross margin | 41.5% | 27.9% | 55.9% | 25.9% |
| Operating expenses | $401,619 | $175,615 | $1,338,342 | $538,404 |
| Net loss | $(342,530) | $(140,617) | $(1,641,641) | $(354,301) |
| Net loss per share, basic and diluted | $(0.01) | Less than $0.01 as presented | $(0.04) | $(0.01) |
- Revenue declined 47.7% for the quarter and 70.8% for the nine-month period. Nine-month 2017 comparative revenue was restated.
- Operating expenses rose substantially, mainly from professional fees and general and administrative costs. Nine-month professional fees were $720,910, versus $102,162; general and administrative costs were $360,713, versus $168,451.
- Cash used in operations was $1,139,589 for the first nine months, compared with $262,477 in 2017. Investing cash outflow was $4,524,944, principally for the Ontario property. Financing provided $9,911,592.
- Cash and cash equivalents were $4,641,457 at September 30, 2018, versus $394,398 at December 31, 2017. Working capital was $4,670,684, compared with a deficit of $4,805 at year-end 2017.
- Total assets were $9,445,650, including $4,529,645 of net property and equipment. Total liabilities were $229,949; the balance sheet reported no convertible note liability at quarter-end.
Material changes and financing
- The company raised capital through a private placement of 6,069,613 shares at $1.75 per share for stated gross proceeds of $10,621,823. Shares outstanding were 40,907,010 at September 30 and November 1, 2018.
- In September, it purchased an Ontario, California warehouse and office for its own use. The filing gives differing purchase amounts: $4,514,988, $4,521,288, and $4,524,944 in different sections.
- The holder of 2017 convertible notes elected conversion in June 2018. The company reported no convertible note balance at quarter-end.
- The company issued 262,691 shares for consultant services valued at $497,377 and reported $28,000 of additional stock compensation to be issued.
- The company subleased its former Walnut location and stated it was no longer obligated to pay that lease.
Outlook, risks, and unusual items
- Management described the Ubiquitor as in development and limited production, with plans to fund product development, manufacturing, equipment, marketing, and potential acquisitions. The filing provides no revenue or earnings guidance.
- Management stated that the net loss, operating cash outflow, and accumulated deficit of $3,620,435 raise doubt about the company’s ability to continue as a going concern. Continued operations depend on financial support, debt repayment capacity, additional equity financing, and achieving profitable operations; there is no assurance of adequate financing.
- Customer and supplier concentration is significant: one customer represented all accounts receivable at December 31, 2017, and one vendor represented 97% of accounts payable at September 30, 2018.
- Management identified a material weakness in internal control over financial reporting, attributing it principally to inadequate staffing and technical expertise and reliance on outside consultants. The filing also says disclosure controls were effective, creating a distinction between disclosure controls and financial-reporting controls that investors should note.
- The filing restated 2017 comparative revenue and cost of revenue to correct gross-versus-net accounting for vendor-direct shipments and separately presented related-party revenue. It reports no material legal proceedings and no off-balance-sheet arrangements.
Important facts to verify
- Reconcile the property’s purchase price and cash-flow amount across the filing.
- Clarify the reported interest expense and debt-discount amortization: the statements and cash-flow reconciliation do not appear to agree with the amount described in the convertible-note note.
- Check the restatement disclosures: the 2017 quarterly net loss in the financial statements is $(140,617), while the restatement table appears to show $(104,617).
- Confirm the status and collection of the $189,257 subscription receivable, the private-placement proceeds recorded as cash, and the related share issuances.
- Monitor Ubiquitor commercialization, cash burn, customer/vendor concentration, and remediation of the material weakness in financial reporting controls.