Focus Universal Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results include wholly owned subsidiary Perfecular Inc. The company develops universal wireless sensor/instrument technology (Ubiquitor) and also wholesales filters and handheld meters. Comparative 2017 results were restated.
Financial performance
Three months ended June 30: Revenue was $39,780 versus $628,631 in 2017; gross profit was $30,019 versus $83,733, with gross margin of approximately 75.5% versus 13.3%. Operating expenses rose to $736,381 from $187,923, including professional fees of $513,736. Operating loss was $706,362 versus $104,190, and net loss was $1,095,278 versus $104,970. Basic and diluted loss per share was $0.03; the prior-period amount was reported as zero when rounded.
Six months ended June 30: Revenue was $108,332 versus $898,084; gross profit was $80,647 versus $145,588, with gross margin of approximately 74.5% versus 16.2%. Operating expenses totaled $936,723 versus $363,289, and operating loss was $856,076 versus $217,701. Net loss was $1,299,111 versus $213,685, or $0.04 per share versus $0.01.
Cash flow and liquidity: Six-month operating cash outflow was $528,684, compared with $109,177 in 2017; investing cash flow was nil. Financing provided $3,855,512, principally from stock sales, producing a $3,326,828 net increase in cash. June 30 cash was $3,721,226, versus $394,398 at year-end 2017. Working capital was $3,427,672, versus a $4,805 deficit; current liabilities were $380,730. No convertible note remained on the June 30 balance sheet after conversion. The company also had a $50,000 demand loan from its CEO, repaid July 12, 2018. Total assets were $3,820,858 and stockholders’ equity was $3,440,128.
Changes, unusual items, and outlook
- Revenue fell sharply as the company phased out older products while developing new products. Management reported that Ubiquitor pilot manufacturing runs had been completed previously and that it was continuing development and preparing for production; the filing provides no formal revenue or earnings guidance.
- Interest expense included $336,713 of amortization of discounts on convertible notes. The noteholder converted the notes on June 27, 2018 into 313,686 shares valued at $548,949.
- Professional fees increased substantially; management attributed the increase mainly to private-placement services and professionals engaged for a potential investment. General and administrative expense also increased, including marketing costs.
- 2017 comparative revenue and cost of revenue were restated to report vendor-direct shipments gross rather than net; related-party revenue was separately presented. The restatement changed reported revenue and cost of revenue but did not change gross profit or net loss.
- At June 30, subscriptions receivable were $6,267,360 for 3,581,328 shares at $1.75 per share. The company reported receiving an additional $5,658,243 for subscription receivables from July 1 through July 17. A private placement reported in Part II totaled 6,069,613 shares and $10,621,823 at $1.75 per share; the filing says proceeds had not yet been deployed and sets out proposed uses, including $4.62 million for a building purchase, $1.5 million for manufacturing, and $1.2 million for R&D. Management may redirect funds.
- Management cited a six-month net loss, operating cash outflow, and accumulated deficit of $3,277,905 as raising doubt about the company’s ability to continue as a going concern. It depends on shareholder support, financing, debt repayment capacity, and achieving profitable operations; financing and commercialization are not assured.
- The company reported no material legal proceedings or off-balance-sheet arrangements. Lease commitments were $21,630 for the remainder of 2018 and $14,420 for 2019. One vendor represented 80% of accounts payable at June 30. Related-party revenue came from a company owned by the CEO.
- Management described disclosure controls as effective, but also concluded that internal control over financial reporting had a material weakness, principally due to inadequate staffing and technical expertise and reliance on outside consultants. No remediation details are provided.
Important facts for investors to verify
- Actual cash received and outstanding subscription receivables after the placement, and how proceeds were ultimately used, particularly for the proposed building purchase.
- Cash runway, financing needs, and progress toward resolving the going-concern uncertainty.
- Whether Ubiquitor production, customer adoption, and revenue growth materialize as planned while legacy-product sales decline.
- Composition and recurrence of elevated professional fees and the unusually large debt-discount amortization charge.
- Remediation of the material weakness in financial reporting controls and the accuracy of future filings.
- Customer and supplier concentration, including the terms and extent of related-party transactions.