FOCUS UNIVERSAL INC. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company develops universal wireless sensor technology and also wholesales handheld meters and filtration products. Its Ubiquitor sensor system had completed an initial 1,000-unit production run; the company said it planned to pursue broader production and sales, but provided no quantified sales guidance.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $128,896 | $86,603 | $211,086 | $170,990 |
| Gross profit | $83,733 | $74,914 | $145,588 | $153,571 |
| Gross margin | 65.0% | 86.5% | 69.0% | 89.8% |
| Operating expenses | $187,693 | $170,558 | $362,789 | $363,573 |
| Net loss | $104,970 | $93,575 | $213,685 | $209,379 |
| Net loss per share | Less than $0.01 | Less than $0.01 | $0.01 | $0.01 |
- Q2 revenue rose about 49% year over year, but gross margin fell sharply as cost of revenue increased to $45,163 from $11,689. Six-month revenue rose about 23%, while gross profit declined about 5%.
- Q2 net loss increased about 12%; six-month net loss increased about 2%. Six-month R&D expense rose to $109,929 from $82,982, while general and administrative expense declined.
- At June 30, cash was $650,896, current assets $765,019, current liabilities $483,417, and working capital $281,602. The current ratio was approximately 1.58, compared with 1.13 at December 31, 2016. Total assets were $779,832 and stockholders’ equity was $296,415.
- Six-month operating cash use was $109,177, versus $259,109 in 2016. Investing cash flow was zero; financing provided $420,000 from a convertible note. Cash increased $310,823 to $650,896.
- The June 30 note was unsecured, bears 10% annual interest, matures June 30, 2020, and is convertible at $1.75 per share. The company recorded a $420,000 beneficial conversion feature and an equal debt discount; the balance sheet reports no net carrying value for the note. It recognized no discount-amortization interest expense in the first half. On July 28, it received an additional $80,000 on the same terms.
Changes, outlook, and risks
- Management attributed sales growth in part to distributing products through established channels after the Perfecular merger. The company said it was emphasizing sensor and air-filter sales and had discontinued its marketing and advertising business segment.
- Management warned that operating cash and cash on hand may not be sufficient for the next 12 months. It expects to rely on cash from operations, borrowings, or debt or equity offerings; financing may not be available on favorable terms or at all. It said failure to generate adequate profits or obtain funding could require it to cease or curtail operations.
- Customer and supplier concentration is significant: one customer accounted for all accounts receivable at both reporting dates, and one vendor accounted for 94% of accounts payable at June 30, 2017.
- A new two-year lease began May 1, 2017, at $3,500 monthly, increasing to $3,605 after one year. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
- Management concluded disclosure controls were effective, but separately 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.
- No formal financial guidance was provided. Management’s forward-looking statements are subject to risks and actual results may differ; the filing does not include a separate risk-factor discussion because the company is a smaller reporting company.
Important facts for investors to verify
- Whether revenue growth can continue and whether gross margins recover from the substantial year-over-year decline.
- The company’s cash runway and access to additional financing, including the terms, conversion, and accounting treatment of the $420,000 and subsequent $80,000 notes.
- Exposure to the single customer and heavily concentrated vendor, and any changes in those relationships or payment terms.
- Progress toward commercial-scale Ubiquitor production and sales, and related hiring, marketing, and R&D needs.
- Remediation of the disclosed material weakness in financial-reporting controls.