FOCUS UNIVERSAL INC. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. The company develops universal wireless sensor technology and instruments, while also wholesaling handheld meters and filtration products.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $220,643 | $257,349 | $943,110 | $993,961 |
| Gross profit | $74,103 | $66,438 | $219,691 | $219,333 |
| Gross margin | 33.6% | 25.8% | 23.3% | 22.1% |
| Operating loss | $(101,512) | $(105,089) | $(318,713) | $(315,341) |
| Net loss | $(140,617) | $(99,956) | $(354,301) | $(309,336) |
- Quarterly revenue decreased about 14%; year-to-date revenue decreased about 5%. Gross profit was nearly flat year to date, while gross margin improved.
- Operating expenses were $175,615 for Q3 and $538,404 year to date. Year-to-date research and development rose to $168,451 from $136,237; general and administrative expense declined to $177,791 from $212,969.
- Q3 net loss widened, principally alongside $39,855 of net interest expense versus $65 of income in the prior-year quarter. The company attributes interest expense to amortization of the convertible notes’ debt discount.
- At September 30, cash was $577,597; working capital was $261,371, compared with $57,325 at December 31, 2016. Current liabilities were $508,280. The balance sheet reports a $39,927 net carrying amount for convertible notes, after a $460,073 discount.
- For the nine months, operating cash outflow was $262,477, investing cash flow was zero, and financing provided $500,000 from convertible notes. Cash increased by $237,523.
Business, outlook, and material risks
- The company reports one operating segment. It sells sensors and filters through distributors and is developing the Ubiquitor, a smartphone-connected sensor gateway. It reports completing an initial production run of 1,000 devices; broad commercial adoption or revenue from the product is not established in this filing.
- Management said it expects more diversified revenue streams but also stated cash on hand and operating cash generation may not be sufficient for the next 12 months. It plans to rely on operations, borrowing, debt or equity financing, with no assurance financing will be available on favorable terms or at all. Failure to obtain funds or generate adequate profits could require curtailing or ceasing operations.
- The company disclosed going-concern doubts, citing year-to-date net loss of $354,301, operating cash outflow of $262,477, accumulated deficit of $1,670,394, and dependence on shareholder support and additional financing.
- Customer and supplier concentration is significant: one customer represented all accounts receivable at September 30, and one vendor represented 95% of accounts payable. Cost of revenue is described as principally related party; the filing identifies Tianjin Guanglee as an OEM.
- Two unsecured notes issued in June and July 2017 total $500,000, bear 10% annual interest, mature in 2020, and are convertible at $1.75 per share. The beneficial conversion features resulted in a substantial debt discount and reported interest expense.
- After quarter-end, the company entered a financial advisory agreement requiring a $20,000 monthly fee, at least $4,000 in cash and the balance in restricted securities, plus an 8% fee on the enterprise value of acquisitions introduced by the adviser.
- 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. This disclosure appears alongside management’s conclusion that disclosure controls were effective.
- No material legal proceedings or off-balance-sheet arrangements were reported. The filing provides no formal revenue or earnings guidance.
Important facts for investors to verify
- The statement of operations displays nine-month loss before income taxes as $(34,788), which does not reconcile with reported operating loss, other expense, tax provision, or net loss. The arithmetic using the other reported line items implies a different value; confirm against the filed financial statements.
- The note says debt-discount amortization interest expense was $35,255 and $4,672, totaling $39,927, while the nine-month statement reports net interest expense of $39,802. Reconcile the difference and the note’s stated discount amortization.
- Assess financing needs, going-concern risk, convertible-note dilution, and whether Ubiquitor commercialization can produce meaningful sales.
- Evaluate the company’s exposure to its concentrated customer and vendor relationships, related-party sourcing, and the disclosed internal-control material weakness.