FOCUS UNIVERSAL INC. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Figures are unaudited and in U.S. dollars. Focus Universal’s business changed substantially following its December 2015 acquisition of Perfecular, a sensor and filter products business; comparisons with 2015 are therefore not like-for-like.
Business context and strategy
The company describes its current business as wholesaling handheld sensors and air filters, while developing the Ubiquitor universal wireless sensor system and researching anti-counterfeit authentication technology. Management says it discontinued its digital marketing services in April 2016 and is emphasizing product sales and business-to-business distribution. It completed an initial production run of 1,000 Ubiquitor devices; the filing does not provide sales or commercial adoption results for the product.
Financial performance
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $86,603 | $2,008 | $170,990 | $2,008 |
| Gross profit (loss) | $74,914 | $(17) | $153,571 | $(1,717) |
| Gross margin | 86.5% | — | 89.8% | — |
| Operating expenses | $170,558 | $34,687 | $363,573 | $68,558 |
| Operating loss | $(95,644) | $(34,704) | $(210,002) | $(70,275) |
| Net loss | $(93,575) | $(26,177) | $(209,379) | $(61,748) |
| Basic and diluted loss per share | $(0.00)* | $(0.00)* | $(0.01) | $(0.01) |
*The filing says the quarterly loss per share was less than $0.01. Perfecular contributed $86,603 of Q2 revenue and $169,210 for the first half. Management attributes the revenue increase primarily to the acquired business. Operating expenses included $135,204 attributable to Perfecular in Q2 and $276,075 for the first half. Increased officer compensation, general and administrative costs, professional fees, and research and development contributed to higher expenses.
Financial position, cash flow, and liquidity
- Cash: $483,550 at June 30, down from $832,013 at December 31, 2015. Total assets were $637,637, compared with $1,031,571.
- Working capital: $293,756, versus $505,781 at year-end; current assets were $608,598 and current liabilities $314,841.
- Debt and liabilities: Total liabilities were $316,012, including $314,841 current liabilities. Related-party and shareholder loans outstanding at year-end were repaid in February 2016; no loan balances remained at June 30. Customer deposits declined to $47,598 from $140,029.
- Six-month cash flow: $259,109 used in operating activities, $6,452 used in investing activities, and $82,902 used in financing activities; cash declined by $348,463. Operating cash use reflected the net loss and working-capital changes, including a $92,431 decrease in customer deposits.
- Other: Six-month rent expense was $47,225. The company reported no off-balance-sheet arrangements.
Changes, outlook, and risks
- Revenue rose from a very small 2015 base, but the 2016 results include Perfecular while the reported 2015 comparison largely reflects the former internet marketing business. The filing also provides unaudited pro forma 2015 combined net losses of $58,885 for Q2 and $270,634 for the first half; these are not the reported historical results.
- Management says cash on hand and operating cash generation may not be sufficient for the next 12 months. It expects to consider cash on hand, operating cash, borrowing, debt or equity offerings, or a combination. Financing availability and terms are not assured; management warns that inability to fund working capital could require curtailing or ceasing operations.
- No quantified revenue or earnings guidance is provided. Management expects more diversified revenue after the Perfecular merger but cautions that cash flows may fluctuate with revenue, collections, and payment timing.
- Concentration risks are significant: one customer accounted for 100% of accounts receivable and one vendor for 97% of accounts payable at June 30.
- Management 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. It said disclosure controls had deficiencies and warned that weaknesses could result in future material misstatements.
- The company reported no material legal proceedings. A third-party sublease began in July 2016 at $4,400 per month and runs through January 7, 2017. The company also disclosed a provisional patent application for Ubiquitor filed in January 2016.
Important facts for investors to verify
- Whether the company can fund operations for the next 12 months and what financing, if any, it secures.
- Whether revenue growth continues and how dependent sales remain on the acquired business, key customer, and key vendor.
- Ubiquitor commercialization progress, including production, distribution agreements, customer demand, and related cash requirements.
- Plans and measurable progress to remediate the material weakness in financial reporting controls.
- The quality and collectability of receivables, customer-deposit movements, and related-party transactions and balances.