Focus Universal Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2015 (the company’s fiscal second quarter and first half). The interim financial statements are unaudited. Focus Universal provides online marketing, advertising, and website-design services and describes itself as a development-stage company.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2015 | Three months ended Sep. 30, 2014 | Six months ended Sep. 30, 2015 | Six months ended Sep. 30, 2014 |
|---|---|---|---|---|
| Revenue | $9,630 | $13,450 | $11,638 | $20,150 |
| Gross profit | $7,605 | $9,450 | $7,588 | $11,150 |
| Operating expenses | $44,420 | $24,994 | $69,107 | $48,231 |
| Net loss | $39,493 | $15,544 | $65,670 | $37,081 |
| Operating cash flow | Not separately presented for the quarter | $(73,745) | $(36,473) |
For the six-month period, revenue fell about 42% year over year while operating expenses rose about 43%. Gross margin was approximately 65%, compared with 55% in the prior-year period. The company reported a six-month loss per share of less than $0.01.
At September 30, cash was $148,969; current assets were $177,105 and current liabilities were $297,234, resulting in a $120,129 working-capital deficit. Total liabilities were $297,804, including $190,000 borrowed from a related party and a $100,000 stockholder loan. Stockholders’ deficit was $94,484 and accumulated deficit was $172,865. Six-month investing cash outflow was $1,640; financing cash inflow was $146,349, principally related-party borrowing. Cash increased by $70,964 during the period.
Changes, outlook, risks, and unusual items
- Management attributed lower revenue to the December 2014 change in control and the loss of clients associated with prior management. It has outsourced internet-marketing work to MorePro Marketing and says it has not yet rebuilt a significant client base.
- Management plans to develop subscription services, seek additional clients, and explore acquisitions or other growth opportunities; management consultants had not yet been engaged. The filing provides no quantified revenue or earnings guidance.
- The company states that cash on hand and operating cash generation may not fund the next 12 months’ needs. It intends to seek capital through operations, borrowings, or debt or equity offerings, but warns that financing may not be available and that it may have to curtail or cease operations. The filing says accumulated losses and insufficient cash raise substantial doubt about its ability to continue as a going concern.
- After quarter-end, the company repaid $50,000 of the related-party revolving loan on October 2, leaving $140,000 outstanding as of the filing; it repaid the $100,000 stockholder loan, plus accrued interest, on October 22. The revolving note carries 0.43% annual interest, is due May 20, 2016, and permits borrowing up to $1 million.
- On October 21, Xu Tang sold 3,260,000 shares, or 49.5% of outstanding shares, to eight buyers. Xu Tang and Yan Chen resigned from management and the board; Dr. Edward Lee became president, and Drs. Jennifer Gu and Edward Lee joined the board. These were post-period ownership and governance changes.
- The company leases office and warehouse space through April 2017 and subleases part of it to related party Perfecular Inc. for $5,000 monthly. The filing reports $25,000 of sublease income for the six months and $11,203 due from the related party at September 30. It also discloses a $625 monthly MorePro consulting fee.
- No material legal proceedings or significant off-balance-sheet arrangements were reported. Management stated that disclosure controls were effective and that it had identified no significant control deficiencies or material weaknesses.
Important facts for investors to verify
- Whether new client additions, retention, and recurring subscription revenue improve after the client losses and service transition.
- Available cash, ongoing operating cash burn, and the company’s ability to obtain funding while addressing its going-concern uncertainty.
- Repayment status and terms of related-party financing, including any further advances, and the related-party sublease receivable and arrangements.
- The consequences of the October 2015 ownership and board changes for strategy, execution, and control.
- The MD&A’s expense detail contains an apparent inconsistency: it describes $16,050 of general and administrative expense as a six-month amount, while the financial statements and expense table report $27,689 for six months and $16,050 for the quarter. The filing text does not reconcile this difference.