Focus Universal Inc. — Form 10-Q Summary
Reporting period: The financial statements and MD&A cover the three and six months ended June 30, 2019, compared with 2018. The cover page, however, says “quarterly period ended June 30, 2018,” which conflicts with the rest of the filing. The company develops universal smart-sensor technology and sells sensors and filters; in March 2019 it acquired AVX Design & Integration, an automation installation business.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2019 / 2018 | $420,337 / $39,780 | $663,075 / $108,332 |
| Gross profit, 2019 / 2018 | $138,385 / $30,019 | $258,995 / $80,647 |
| Gross margin, 2019 / 2018 | 32.9% / 75.5% | 39.1% / 74.4% |
| Net loss, 2019 / 2018 | $490,044 / $1,095,278 as reported | $937,327 / $1,299,111 |
| Operating cash flow, 2019 / 2018 | Not provided by quarter | $(450,906) / $(528,660) |
- For the first half, AVX contributed $451,237 of revenue. Revenue growth primarily reflects the acquisition; cost of revenue also rose substantially, and gross margin declined year over year.
- At June 30, 2019, cash was $3,424,779, current assets $3,846,077, current liabilities $468,786, and working capital $3,377,291. Cash declined by $1,030,972 during the six months.
- Total assets were reported as $9,067,031 and total liabilities as $599,707. Liabilities included a $50,000 short-term promissory note and $183,407 of operating lease liabilities. The company reported no outstanding convertible notes at period-end; the earlier notes converted in 2018.
- Investing cash outflow was $217,292, primarily for property and equipment. Financing cash outflow was $362,774, primarily related to the acquisition. The company reported an accumulated deficit of $4,940,785.
Changes, outlook, and risks
- The March 2019 AVX acquisition added automation installation services and was funded with cash, company shares, and a promissory note. The purchase-price allocation was preliminary.
- Management describes plans to expand AVX’s technician capacity and market reach, increase marketing, and bring the Ubiquitor sensor system into full production and distribution. The filing provides no quantified revenue, earnings, or cash-flow guidance.
- Management states that the net loss, operating cash outflow, accumulated deficit, and need for shareholder support or additional financing raise doubt about the company’s ability to continue as a going concern. It cautions that adequate long-term financing and successful commercialization are not assured.
- One customer represented 49% of accounts receivable at June 30, 2019; one vendor represented 21% of accounts payable. The company also reported a material weakness in internal control over financial reporting, citing inadequate staffing and technical expertise and reliance on outside consultants. Separately, management said disclosure controls and procedures were effective.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It identified preparations for a potential Nasdaq listing among the reasons for professional fees; no listing outcome is stated.
Key facts for investors to verify
- Resolve the period-date conflict on the cover page and the apparent second-quarter 2018 net-loss inconsistency: the statement shows loss before taxes of $1,905,278 but reports net loss of $1,095,278.
- Reconcile balance-sheet totals: the comparative balance sheet reports December 31, 2018 assets of $9,227,911, while total liabilities and stockholders’ equity are shown as $9,277,911.
- Confirm the AVX acquisition consideration and share count. The filing refers to a purchase price of $875,000 but its allocation totals $890,716; it also gives 39,286 shares in one description and 29,286 shares in the purchase-price allocation.
- Assess the company’s cash runway, financing needs, and progress toward profitable operations and Ubiquitor commercialization, given the going-concern disclosure.
- Monitor customer and vendor concentration and remediation of the disclosed material weakness in financial reporting controls.