Back to GetFilings.com
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-11860
Focus Enhancements, Inc.
(Name of Issuer in its Charter)
Delaware 04-3144936
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1370 Dell Ave
Campbell, CA 95008
(Address of Principal Executive Offices)
(408) 866-8300
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of Act:
Title of Each Class
-----------------------------
Common Stock, $0.01 par value
Name of Exchange on which Registered
------------------------------------
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such other shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of the close of business May 12, 2004, there were 49.8 million shares of
Focus Enhancement's common stock issued and outstanding.
FOCUS ENHANCEMENTS, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1. Legal proceedings 27
Item 2. Changes in securities 27
Item 3. Defaults upon senior securities 27
Item 4. Submission of matters to a vote of security holders 28
Item 5. Other information 28
Item 6. Exhibits and reports on Form 8-K 28
SIGNATURES 29
CERTIFICATIONS 30
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Focus Enhancements, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per-share amounts)
(Unaudited)
Three Months Ended
--------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net revenue $ 4,094 $ 4,090
Cost of revenue 2,762 2,403
-------------- --------------
Gross margin 1,332 1,687
Operating expenses:
Sales, marketing and support 1,054 998
General and administrative 557 376
Research and development 1,106 1,057
Amortization of intangible assets 164 172
-------------- --------------
2,881 2,603
-------------- --------------
Loss from operations (1,549) (916)
Interest expense, net (46) (51)
Other net income 6 --
-------------- --------------
Loss before income taxes (1,589) (967)
Income tax expense -- 2
-------------- --------------
Net loss $ (1,589) $ (969)
-------------- --------------
Net loss per share
Basic and diluted $ (0.04) $ (0.03)
Weighted average common and common equivalent shares
Basic and diluted 42,905 37,108
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
Focus Enhancements, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
March 31, December 31,
2004 2003
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 2,701 $ 3,731
Accounts receivable, net of allowances of $345 and $384 1,659 2,385
Inventories 3,206 3,493
Prepaid expenses and other current assets 305 368
------------ ------------
Total current assets 7,871 9,977
Long-term assets:
Property and equipment, net 182 146
Other assets 246 151
Intangible assets, net 1,362 635
Goodwill 5,854 5,191
------------ ------------
Total long-term assets 7,644 6,123
------------ ------------
$ 15,515 $ 16,100
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,930 $ 2,292
Accrued liabilities 1,499 1,989
Current portion of long-term debt 31 --
Borrowings under line-of-credit 453 --
Loan payable 251 --
------------ ------------
Total current liabilities 4,164 4,281
Long-term liabilities:
Convertible promissory notes payable to shareholder -- 3,867
Long-term debt, net of current portion 196 --
------------ ------------
Total long-term liabilities 196 3,867
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 3,000,000 shares; 3,161 and
1,904 shares issued at March 31, 2004 and December 31, 2003,
respectively (aggregate liquidation preference $3,917) -- --
Common stock, $0.01 par value; 100,000,000 shares authorized, 45,876,274
and 42,800,240 shares issued at March 31, 2004 and December 31, 2003,
respectively 459 428
Additional paid-in capital 77,154 71,295
Accumulated deficit (64,610) (63,021)
Cumulative foreign currency translation adjustments (1) --
Notes receivable from related parties (1,097) --
Treasury stock at cost, 497,500 shares at March 31, 2004 and
December 31, 2003, respectively (750) (750)
------------ ------------
Total stockholders' equity 11,155 7,952
------------ ------------
$ 15,515 $ 16,100
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
Focus Enhancements, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended,
--------------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,589) $ (969)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 189 223
Changes in assets and liabilities:
Decrease in accounts receivable 903 270
Decrease in inventories 555 56
Decrease (increase) in prepaid expenses and other assets (124) 53
Increase (decrease) in accounts payable (695) 372
Decrease in accrued liabilities (136) (66)
------------- --------------
Net cash used in operating activities (897) (61)
Cash flows from investing activities:
Acquisition of COMO Computer and Motion GmbH net of cash acquired (3) --
Increase in other assets (194) --
Purchases of property and equipment (15) (14)
------------- --------------
Net cash used in investing activities (212) (14)
Cash flows from financing activities:
Payments under capital lease obligations -- (16)
Proceeds from exercise of common stock options and warrants 79 34
------------- --------------
Net cash provided by financing activities 79 18
Decrease in cash and cash equivalents (1,030) (57)
Cash and cash equivalents at beginning of period 3,731 1,310
------------- --------------
Cash and cash equivalents at end of period $ 2,701 $ 1,253
============= ==============
Non-Cash Activity
Conversion of notes payable and accrued interest to related party into
common and preferred stock $ 4,454 $ --
============= ==============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation - Interim Financial Information
The condensed consolidated financial statements of Focus Enhancements, Inc.
("Focus" or "the Company") as of March 31, 2004 and December 31, 2003, and for
the three-month periods ended March 31, 2004 and March 31, 2003, are unaudited
and should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2003 included in Focus' Annual
Report on Form 10-K for the year ended December 31, 2003.
In the opinion of management, the condensed consolidated financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of Focus' financial position, operating
results and cash flows for the periods presented. The results of operations and
cash flows for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for any future period.
Focus' fiscal year ends on December 31 and the interim quarters include 13 weeks
and end on the last Sunday of the period. For convenience, the accompanying
condensed consolidated financial statements are shown as ending on March 31,
2004 and 2003, although the first quarters of fiscal year 2004 and fiscal year
2003 ended on April 4, 2004 and March 30, 2003, respectively.
2. Consolidation and Foreign Currency Translation
The interim unaudited condensed consolidated financial statements include Focus'
accounts and those of its wholly owned subsidiaries. All inter-company accounts
and transactions have been eliminated upon consolidation.
The functional currency of Focus' foreign subsidiary, COMO Computer & Motion
("COMO" - see Note 5, "Business Combinations"), is the Euro. Gains and losses
resulting from the translation of COMO's financial statements are reported as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in net loss.
3. Pro Forma Stock Compensation Expense
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. Stock options issued under Focus' stock option plans have no
intrinsic value at grant date. Accordingly, under APB Opinion No. 25, no
compensation cost is recognized.
Focus has elected to continue with the accounting prescribed in APB Opinion No.
25 and, as a result, must make pro forma disclosures of net income and earnings
per share and other disclosures as if the fair value based method of accounting
had been applied. The estimated fair value of the options is amortized to
expense over the vesting period of the option. The following table presents the
effect on reported net loss and net loss per share of accounting for employee
stock options under the fair value method:
6
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
(In thousands, except per-share data) Three Months Ended
------------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Reported net loss $ (1,589) $ (969)
Option fair value amortization (273) (212)
------------- -------------
Pro forma net loss $ (1,862) $ (1,181)
============= =============
Reported net loss per share $ (0.04) $ (0.03)
Net effect per share of option fair value amortization (0.00) (0.00)
------------- -------------
Basic and diluted pro forma net loss per share $ (0.04) $ (0.03)
============= =============
Common stock equivalents have been excluded from all calculations of net loss
per share and pro forma net loss per share for the periods presented because the
effect of including them would be anti-dilutive.
4. Management's Plans
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. For the three
months ended March 31, 2004 and the year ended December 31, 2003, Focus incurred
a net loss of $1.6 million and $1.7 million, respectively, and used net cash in
operating activities of $0.9 million and $2.6 million, respectively.
Additionally, in January 2004, Microsoft ceased placing orders for Focus' FS454
product. Shipments of the FS454, which were primarily to this significant
customer, represented 25% and 37% of Focus' total revenues for the three months
ended March 31, 2004 and the year ended December 31, 2003, respectively. These
factors indicate that Focus may potentially be unable to continue as a going
concern.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should
Focus be unable to continue as a going concern. The Company's continuation as a
going concern is dependent upon its ability to generate sufficient cash flows to
meet its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to return to profitability and significant positive
cash flows.
Focus has historically met cash needs from the proceeds of debt, the sale of
common stock in private placements, and the exercise of employee stock options
and warrants. Management continues to assess its product lines in light of
technology trends and economic conditions, to identify how to enhance existing
product lines or create new distribution channels. In addition, although no
assurances can be given, Focus is developing, and expects to release, three new
products during 2004.
Focus' management believes that net proceeds of $5.2 million received in April
2004 from a private equity placement transaction (see Note 12, "Subsequent
Events"), in addition to current cash balances, should be sufficient to meet all
currently planned expenditures and sustain operations through December 31, 2004.
However, Focus' continued significant investment in research and development,
primarily in the area of Ultra Wideband, could require it to find a partner to
fund a portion of the continued development and/or raise additional funds to
support its working capital needs.
There is no assurance that management's plans will be successful or if
successful, that they will result in Focus continuing as a going concern.
7
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
5. Business Combinations
COMO Computer & Motion GmbH
- ---------------------------
On February 27, 2004, Focus completed the acquisition of COMO, located in Kiel,
Germany, pursuant to which COMO became a wholly owned subsidiary of Focus. Under
the terms of the agreement, Focus acquired COMO through the issuance of 795,162
shares of its common stock. Focus may also issue up to an additional 46,266
shares of its common stock to COMO's shareholders, in the event certain
conditions are met at the end of 2004 and 2005. In connection with this
transaction, Focus paid vFinance Investments, Inc., (a related party) a success
fee of $100,000 and 30,000 shares of Focus' common stock. The aggregate number
of shares of common stock issued by Focus relative to the acquisition of COMO,
including the earn out shares, was 871,428.
Founded in 1990, COMO develops, manufactures and distributes digital video
solutions. The acquisition will enable Focus to add new features to its video
technology product line, including content storage and management functionality,
and will provide the presence of an office in Germany, thereby facilitating
support of Focus' European distributors and customers.
COMO's results of operations are included in Focus' financial statements from
the date of acquisition, and the assets and liabilities were recorded based on
their fair values as of the date of acquisition. There were no employee stock
options or warrants assumed as a result of the acquisition. Pro forma results of
operations have not been presented because the effect of the acquisition was not
material to Focus' financial position or results of operations.
The purchase price of approximately $1.7 million, consisting of 871,428 shares
of Focus common stock and acquisition costs of approximately $220,000, has been
allocated based on the preliminary estimated fair value of net tangible and
intangible assets acquired, and liabilities assumed, to the following assets and
liabilities:
(In thousands) Purchase Price
Allocation
--------------
Assets acquired $ 1,520
Intangible assets: Existing technology 890
Goodwill 663
Liabilities assumed (1,420)
--------------
$ 1,653
==============
Existing technology is being amortized on a straight-line basis over an
estimated useful life of three years.
Visual Circuits Corporation
- ---------------------------
On January 28, 2004, Focus announced that it had entered into an Agreement and
Plan of Reorganization to acquire substantially all the assets and assume
certain liabilities of Visual Circuits Corporation ("Visual Circuits"), located
in Minneapolis, Minnesota, in exchange for approximately 3.8 million shares of
Focus' common stock, subject to certain adjustments. Founded in 1991, Visual
Circuits is a manufacturer and developer of integrated hardware, software and
network products that manage, schedule, distribute, store and present digital
video in commercial-market media applications. The acquisition is subject to the
approval of Visual Circuits' shareholders. A special meeting of Visual Circuits'
shareholders is scheduled for May 28, 2004 and the acquisition is expected to
close as soon as practical thereafter.
8
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
6. Goodwill and Intangible Assets
The following table provides a summary of the change in the carrying amount of
goodwill:
(In thousands) Goodwill
-----------
Balance as of December 31, 2003 $ 5,191
Additional goodwill resulting from the acquisition of COMO 663
-----------
Balance as of March 31, 2004 $ 5,854
===========
The following tables provide a summary of the carrying amounts of intangible
assets:
(In thousands) March 31, 2004
---------------------------------------------
Accumulated Net
Gross Amount Amortization Amount
----------- ------------ -----------
Existing technology $ 2,885 $ (1,558) $ 1,327
Tradename 176 (141) 35
----------- ----------- -----------
$ 3,061 $ (1,699) $ 1,362
=========== =========== ===========
December 31, 2003
---------------------------------------------
Accumulated Net
Gross Amount Amortization Amount
----------- ------------ -----------
Existing technology 1,995 (1,406) 589
Tradename 176 (130) 46
----------- ----------- -----------
$ 2,171 $ (1,536) $ 635
=========== =========== ===========
The total expected future amortization related to intangible assets is provided
in the table below:
(In thousands) Amortization
------------
Nine months ended December 31, 2004 $ 636
Fiscal year 2005 354
Fiscal year 2006 323
Fiscal year 2007 49
------------
Total $ 1,362
============
9
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
7. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market:
(In thousands)
March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials $ 1,742 $ 2,048
Work in process 252 72
Finished goods 1,212 1,373
-------------- ----------------
$ 3,206 $ 3,493
============== ================
8. Commitments
(In thousands)
March 31, 2004 December 31, 2003
-------------- -----------------
Short-term debt:
Current portion of notes payable to bank $ 31 $ --
Borrowings under line-of-credit 453 --
Loan payable 251 --
-------------- -----------------
735 --
Long-term debt:
Notes payable to bank (long-term
portion) 196 --
Convertible promissory notes payable
to shareholder -- 3,867
-------------- ----------------
196 3,867
-------------- ----------------
$ 931 $ 3,867
============== ================
Short- and long-term debts were assumed by Focus as a result of the acquisition
of COMO in February 2004 - see Note 5, "Business Combinations".
The short-term debt consists of the current portion of two notes payable, which
in aggregate, and including the long-term portion, total approximately $227,000,
a line-of-credit with an outstanding balance of approximately $453,000 and a
loan with a German small business lending institution. The notes payable and
line-of-credit are denominated in Euros and are both with a local German bank.
Interest is payable on the notes at an average of 6% and on the line-of-credit
at 11%. The two notes of $172,000 and $55,000 will be paid through December 2011
and December 2006, respectively. The notes payable and line-of-credit are
partially secured by personal guarantees from the two shareholders from whom
Focus purchased the shares of COMO common stock. These personal guarantees total
approximately $344,000.
The loan with the German small business lending institution consists of two
contracts of similar amounts signed in 1995 and 1996. Interest rates applicable
to the two contracts average 8%. In addition, there is profit-linked
remuneration, as defined, of approximately 3%, which accumulates and is payable
upon profits generated by COMO up to two years after the termination of the
contracts. As a result of Focus' acquisition of COMO, the lending institution
has notified COMO that these loans must be repaid by June 30, 2004, and
accordingly, an accrual for profit-linked remuneration of approximately $60,000
has been classified in "Accrued liabilities" in the condensed consolidated
balance sheets. This loan is partially secured by personal guarantees from the
two shareholders from whom Focus purchased the shares of COMO common stock.
These personal guarantees total approximately $123,000.
10
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
Convertible Promissory Notes
- ----------------------------
Convertible promissory notes payable at December 31, 2003 consisted of three
promissory notes totaling $3.9 million payable to Carl Berg, a Company director
and shareholder. The notes bore interest at prime plus 1%, payable quarterly,
and were collateralized by substantially all of the assets of Focus. Focus was
obligated under certain circumstances, including at the election of Mr. Berg and
Focus, to convert the outstanding balances of the notes, and any unpaid
interest, into shares of Focus common stock or preferred stock, as specified in
the respective note agreements.
On March 19, 2004, Mr. Berg converted his approximately $3.9 million of debt and
$587,000 of accrued interest into common and preferred stock. This conversion
resulted in the issuance of 2,173,193 shares of Focus' common stock and 840
shares of Series B preferred stock and 417 shares of Series C preferred stock,
which are convertible into an additional 840,000 and 417,000 shares of Focus'
common stock, respectively. Following the conversion, and assuming conversion of
the preferred stock, Mr. Berg owned approximately 11% of the Company's
outstanding common and preferred stock.
General
- -------
From time to time, Focus is party to certain claims and legal proceedings that
arise in the ordinary course of business which, in the opinion of management,
will not have a material adverse effect on Focus' financial position or results
of operations.
Focus indemnifies its customers from third party claims alleging patent or
copyright infringement relating to the use of the Company's products. Such
indemnification provisions are accounted for in accordance with SFAS No. 5 and
are generally limited to the amount paid by the customer. Historically, costs
related to these indemnification arrangements have not been significant.
9. Stockholders' Equity
The acquisition of COMO in February 2004 resulted in the issuance of 825,162
shares of Focus' common stock, consisting of 795,162 shares issued to COMO's
shareholders and 30,000 shares issued to vFinance Investments, Inc., for
investment banking services related to the acquisition. Focus may also issue up
to an additional 46,266 shares of common stock to COMO's shareholders in the
event certain conditions are met at the end of 2004 and 2005.
On March 19, 2004, Carl Berg, a Company director and shareholder, converted his
approximately $3.9 million of convertible promissory notes and $587,000 of
accrued interest into common and preferred stock, as discussed in note 8,
"Commitments".
As of March 31, 2004, Focus was obligated under certain circumstances, to issue
the following additional shares of common stock pursuant to derivative
securities, instruments or agreements:
(In thousands) Shares of
Common Stock
-------------
Warrants to purchase common stock (1) 380
Options to purchase common stock 5,315
Preferred Stock convertible into common stock 3,161
-------------
8,856
=============
(1) Does not include warrants issued in connection with a private placement,
which closed on April 14, 2004. See Note 12, "Subsequent Events".
11
Focus Enhancements, Inc.
Notes to Condensed Consolidated Financial Statements
10. Related Party Transactions
vFinance Investments Inc.
- -------------------------
Focus has engaged the services of vFinance Investments Inc., to act as the
Company's financial advisor. Timothy Mahoney, a member of Focus' Board of
Directors is the Chairman and C.O.O. of vFinance, Inc., the parent company to
vFinance Consulting, and owns approximately 20% of the shares of vFinance Inc.
Focus paid vFinance Consulting $100,000 in fees and 30,000 shares of common
stock in the three months ended March 31, 2004 related to merger and acquisition
services and $15,000 in fees in the three months ended March 31, 2003 related to
the development of a strategic business plan.
Notes receivable from related parties
- -------------------------------------
Notes receivable from shareholders, totaling $1,097,000 at March 31, 2004, are
due from the two former COMO shareholders, who are now employees of Focus, from
whom Focus purchased the shares of COMO common stock. The notes receivable are
non-interest bearing, are due on demand and are collateralized by 610,094 shares
of Focus common stock.
11. Bill and Hold Transaction
For the three months ended March 31, 2003, product revenue relating to products
sold and, at the customer's request, stored by Focus, totaled approximately
$362,000. Such revenue pertained to the sale of product to Focus' distributor in
Asia and was recognized during the first quarter of 2003 as the product
specifications of the purchase contract had been met during this quarter, the
product was accepted by the buyer, title had passed to the buyer, there was no
right of return in the contract, the distributor requested that the product be
stored and, the product was segregated from Focus' regular inventory and was
ready for shipment. Full payment for the product was received in March 2003 and
the distributor requested that the product be shipped in May 2003.
12. Subsequent Events
On April 14, 2004, Focus completed a private placement to sell approximately 3.9
million shares of its common stock to third party investors, receiving proceeds
of approximately $5.2 million, net of offering costs of approximately $400,000.
The shares were issued at $1.45 per share, an approximate 11% discount to the
closing price of Focus' common stock on April 5, 2004. In connection with the
private placement, Focus issued warrants to the investors and to a placement
agent to purchase a total of approximately 940,000 shares of common stock at an
exercise price of $2.00 per share. No compensation expense was recorded given
that the warrants were issued in connection with the issuance of common stock.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in Focus' Annual Report on Form
10-K for the year ended December 31, 2003.
Certain Factors That May Affect Future Results
Discussions of certain matters in this Quarterly Report on Form 10-Q may
constitute forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could".
In particular, statements contained in this document that are not historical
facts (including, but not limited to, statements concerning anticipated
revenues, anticipated operating expense levels, potential new products and
orders, and such expense levels relative to our total revenues) constitute
forward-looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Our actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, without limitation, the availability of
capital to fund our future cash needs, reliance on major customers, history of
operating losses, market acceptance of our products, technological obsolescence,
competition, successful integration of acquisitions, component supply problems
and protection of proprietary information, as well as the accuracy of our
internal estimates of revenue and operating expense levels. For a discussion of
these factors and some of the factors that might cause such a difference see
also " - Risks Factors." These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements. We do not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
RESULTS OF OPERATIONS
Net Revenue
Three Months Ended
-------------------------------------
Increase/ %increase/ -
(Dollars in thousands) March 31, 2004 March 31, 2003 (decrease) decrease
------------------------------------- -------------------------------------
System products $ 2,935 $ 3,578 $ (643) -18.0%
Semiconductor products 1,159 512 647 126.4%
------------------------------------ -------------------------------------
$ 4,094 $ 4,090 $ 4 0.1%
==================================== =====================================
Revenue for the three months ended March 31, 2004 was $4.1 million, flat as
compared with the three months ended March 31, 2003. The decrease in revenue
from sales of systems products was offset by an increase in revenue from sales
of our semiconductor products.
For the three months ended March 31, 2004, net sales of system products
(professional and consumer) to distributors, retailers and VAR's were
approximately $2.9 million compared to $3.6 million for the same period in 2003,
a decrease of $644,000. The decrease in sales of our systems products mainly
reflects lower Mixer product sales, and to a lesser extent, the discontinuance
13
of certain non-profitable products, partially offset by the introduction of new
products, including FireStore. The decrease in Mixer product sales occurred
primarily in Asia, as video enthusiasts move from stand-alone editing systems to
computer based or non-linear editing systems. Although this shift in technology
began in the United States and Europe in prior years, certain markets, including
Asia, were initially slower to adopt non-linear editing.
Sales of semiconductor products to distributors and OEM customers were
approximately $1,159,000 in the three months ended March 31, 2004 compared to
$512,000 for the same period in 2003, an increase of $647,000. This increase
mainly reflects sales of our FS454 chip, which was included in Microsoft's Xbox,
partially offset by decreased sales of our FS401 chip. The decrease in FS401
sales is primarily related to the timing of our design wins as well as our
customers' production schedules.
In January 2004, Microsoft ceased placing orders for Focus' FS454 product.
Shipments of the FS454, which were primarily to this significant customer,
represented 25% and 37% of Focus' total revenues for the three months ended
March 31, 2004 and the year ended December 31, 2003, respectively.
As of March 31, 2004, we had a sales order backlog of approximately $330,000, a
decrease of $746,000 when compared to the fourth quarter of 2003. This decrease
in backlog reflects the cessation of orders from Microsoft for our FS454 chip.
Three customers had sales in excess in of 10% of our revenue in the three months
ended March 31, 2004. The aggregate sales to these customers accounted for 47%
of our total revenue. One customer accounted for 10% of our revenue for the
three months ended March 31, 2003.
Gross margin
Three Months Ended
------------------------------------
(Dollars in thousands) March 31, 2004 March 31, 2003 Increase/ (decrease)
------------------------------------ -------------------
Gross margin $ 1,332 $ 1,687 $ (355)
====================================
Gross margin rate 32.5% 41.2% -8.7%
====================================
Our gross margin rate for the three months ended March 31, 2004, decreased to
32.5% from 41.2% for the three months ended March 31, 2003, a decrease of 8.7
percentage points. The decrease in the gross margin rate reflects the below
average gross margin business that we conducted with one of our significant
customers, which did not occur in three months ended March 31, 2003. This
significant customer represented approximately 25% of our revenue for the three
months ended March 31, 2004. Sales to this customer were made at a gross profit
margin percentage of less than 30%, primarily as a result of volume discounts
provided.
14
Operating expenses
(Dollars in thousands) Three Months Ended
-------------------------------------------------
March 31, 2004 March 31, 2003 Increase / (decrease)
----------------------- ----------------------- -----------------------
% of % of % of
revenue revenue revenue
Sales, marketing and support $ 1,054 25.8% $ 998 24.4% $ 56 1.4%
General and administrative 557 13.6% 376 9.2% 181 4.4%
Research and development 1,106 27.0% 1,057 25.8% 49 1.2%
Amortization of intangible assets 164 4.0% 172 4.2% (8) -0.2%
----------------------- ----------------------- -----------------------
$ 2,881 70.4% $ 2,603 63.6% $ 278 6.8%
======================= ======================= =======================
Sales, marketing and support
- ----------------------------
Sales, marketing and support expenses for the three months ended March 31, 2004
were $1,054,000, an increase of $56,000 from $998,000 in the three months ended
March 31, 2003. An increase in headcount resulting from the acquisition of COMO
Computer & Motion GmbH ("COMO") was partially offset by lower commissions and
advertising expenditures.
General and administrative
- --------------------------
General and administrative expenses for the three months ended March 31, 2004
were $557,000, an increase of $181,000 from $376,000 for the three months ended
March 31, 2003. The increase in general and administrative expenses was mainly
due to the change in classification of certain personnel costs from research and
development in 2003 to general and administrative in 2004, and to a lesser
extent, an increase in public relations and auditing fees.
Research and development
- ------------------------
Research and development expenses for the three months ended March 31, 2004 were
$1,106,000, an increase of $49,000 from $1,057,000 for the three months ended
March 31, 2003. The increase in research and development expenses reflects
additional expenses resulting mainly from the acquisition of COMO, partially
offset by a change in classification of certain personnel costs year-over-year
from research and development in 2003 to general and administrative in 2004.
Amortization
- ------------
Amortization expense for the three months ended March 31, 2004 was $164,000, a
decrease of $8,000 from $172,000 for the three months ended March 31, 2003. The
decrease reflects the completion of amortization of our remaining capitalized
software development expenses in 2003, partially offset by amortization expense
associated with the intangible assets that resulted from the acquisitions of
DVUlimited in September 2003 and COMO in February 2004.
15
Interest expense, net and Other income, net
(Dollars in thousands) Three Months Ended
------------------------------- Increase / %increase / -
March 31, 2004 March 31, 2003 (decrease) decrease
-------------- --------------
Interest expense, net $ (46) $ (51) $ (5) -9.8%
============== ==============
Other income, net 6 -- 6 n/a
============== ==============
Net interest expense for the three months ended March 31, 2004 was $46,000,
compared to $51,000 in the three months ended March 31, 2003. The decrease in
net interest expense reflects the conversion in March 2004 of convertible
promissory notes into common and preferred stock, partially offset by interest
expense associated with short- and long-term debt assumed with the acquisition
of COMO in February 2004.
16
LIQUIDITY AND CAPITAL RESOURCES
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. For the three
months ended March 31, 2004 and the year ended December 31, 2003, we incurred
net losses of $1.6 million and $1.7 million, respectively, and used cash in
operating activities of $0.9 million, and $2.6 million, respectively. These
factors indicate that we may potentially be unable to continue as a going
concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should we be unable to
continue as a going concern. Our continuation as a going concern is dependent
upon our ability to generate sufficient cash flows to meet our obligations on a
timely basis, to obtain additional financing as may be required, and ultimately
to return to profitability and significant positive cash flows.
Since inception, we have financed our operations primarily through the public
and private sale of common stock, proceeds from the exercise of options and
warrants, short-term borrowings from private lenders, and favorable credit
arrangements with vendors and suppliers.
First Quarter of Fiscal Year 2004 compared to the First Quarter of Fiscal Year
2003
As of or for Three Months Ended
-----------------------------------
(Dollars in thousands) March 31, 2004 December 31, 2003
-------------- -----------------
Cash and cash equivalents $ 2,701 $ 3,731
Working capital $ 3,707 $ 5,696
March 31, 2004 March 31, 2003
-------------- --------------
Days sales outstanding (DSO) 36.5 52.5
Inventory turns - annualized 3.4 2.8
Net cash used in operating activities $ (897) $ (61)
Net cash used in investing activities $ (212) $ (14)
Net cash provided by financing activities $ 79 $ 18
17
Net cash used in operating activities
- -------------------------------------
(In thousands) Three Months Ended,
------------------------------------
March 31, 2004 March 31, 2003
-------------- -------------- Change in
cash (used), cash (used), cash (used),
provided provided provided
-------------- -------------- ---------
Net loss $ (1,589) $ (969) $ (620)
Non-cash income statement items 189 223 (34)
Decrease in accounts receivable 903 270 633
Decrease in inventories 555 56 499
Decrease (increase) in prepaid expenses
and other assets (124) 53 (177)
Increase (decrease) in accounts payable (695) 372 (1,067)
Decrease in accrued liabilities (136) (66) (70)
-------------- -------------- ---------
$ (897) $ (61) $ (836)
============== ============== =========
Net cash used in operating activities for the three months ended March 31, 2004
and 2003 was $897,000 and $61,000, respectively. The increase in net cash used
in operating activities mainly reflects an increase in the net loss as well as
an increase in cash used for accounts payable, partially offset by an increase
in cash provided from accounts receivable and inventories. The increase in cash
used for accounts payable in the three months ended March 31, 2004, reflects
payments relating to payable balances outstanding at December 31, 2003
associated with FS454 chip production, which was primarily used in Microsoft'
Xbox. In January 2004, Microsoft ceased placing orders for the FS454 chip from
us. The increase in cash provided by accounts receivable and inventories
reflects significant decreases in our accounts receivable and inventories
balances from December 31, 2003. These decreases are a result of a decrease in
FS454 production and related sales, which were primarily to Microsoft.
Two customers had accounts receivable balances in excess of 10% of our total
accounts receivable at March 31, 2004 and those customers accounted for 42% of
our total accounts receivable at that date.
We expect that our operating cash flows may fluctuate in future periods as a
result of fluctuations in our operating results, shipment timetable and accounts
receivable collections, inventory management, and the timing of payments among
other factors.
Net cash used in investing activities
- -------------------------------------
Net cash used in investing activities was $212,000 for the three months ended
March 31, 2004, compared to $14,000 for the three months ended March 31, 2003.
The increase in cash used in investing activities mainly reflects an increase in
other assets associated with transaction costs incurred during the three months
ended March 31, 2004 with respect to the pending acquisition of Visual Circuits
(see Note 5, "Business Combinations").
Net cash provided by investing activities
- -----------------------------------------
Net cash provided by financing activities increased $61,000 to $79,000 for the
three months ended March 31, 2004, compared to $18,000 for the three months
ended March 31, 2003, reflecting increased proceeds from warrant and employee
option exercises.
Capital Resources and Liquidity Outlook
- ---------------------------------------
We have incurred losses and used net cash in operating activities for the three
months ended March 31, 2004 and each of the two years in the period ended
December 31, 2003, and as such, have been dependent upon raising money for
18
short- and long-term cash needs through debt, proceeds from the exercise of
options and warrants, and the sale of our common stock in private placements.
For the year ended December 31, 2003, we received approximately $1.9 million in
net proceeds from private offerings of common stock. In April 2004 we received
net proceeds of approximately $5.2 million from the sale of approximately 3.9
million shares of our common stock to a group of third party investors in a
private placement transaction.
At December 31, 2003, we owed Carl Berg, a Company director and shareholder,
approximately $4.4 million in principal and accrued interest on various notes.
On March 19, 2004, Mr. Berg converted the outstanding principal and accrued
interest balance into common and preferred stock. At March 31, 2004, our
remaining debt obligations consisted of approximately $931,000 in
Euro-denominated short- and long-term debt assumed in connection with the
acquisition of COMO - see Note 8, "Commitments".
In January 2004, Microsoft ceased placing orders for our FS454 product.
Shipments of the FS454, which were primarily to this significant customer,
represented 25% and 37% of our total revenues for the three months ended March
31, 2004 and the year ended December 31, 2003, respectively. We recorded gross
margins as a percentage of sales, before commissions and selling expenses, of
below 30% relative to sales of the FS454 chip. The loss of Microsoft orders for
the FS454 will have a material adverse effect on our revenues, operating profit
and liquidity, especially when compared to the third and fourth quarter of 2003
and the first quarter of 2004, as we began our initial shipments to the customer
in the third quarter of 2003 and continued sales through the first quarter of
2004. However, as the product was manufactured by one of our contract
manufacturers, we were able to meet the customer's requirements without an
increase in our staffing and operations. Although there can be no assurances, we
do not anticipate any significant adjustments to our staffing or operations or
significant adjustments to the carrying value of our FS454 inventory, as a
result of this loss.
In addition to regularly reviewing our cost structure, we released several new
products in 2003, which are expected to generate additional revenue in 2004 and
beyond, and are continually reviewing our product lines to identify how to
enhance existing, or create new, distribution channels. Additionally, although
no assurances can be given, we expect to release three new products in 2004.
There can be no assurances as to the amount of revenue these new products will
produce.
We believe that the net proceeds of $5.2 million received in April 2004 from a
private equity placement transaction, in addition to current cash balances,
should be sufficient to meet all currently planned expenditures and sustain
operations through December 31, 2004. However, our continued significant
investment in research and development, primarily in the area of Ultra Wideband,
could require us to find a partner to fund a portion of the continued
development and/or raise additional funds to support our working capital needs.
There is no assurance that management's plans will be successful or if
successful, that they will result in Focus continuing as a going concern.
Summary of Certain Contractual Obligations as of March 31, 2004
(In thousands)
< 1 year 2-3 Years Total
----------- ----------- ----------
Operating leases $ 426 $ 241 $ 667
=========== =========== ==========
19
RISK FACTORS
Risks Related to Our Business
- -----------------------------
We have a long history of operating losses.
As of March 31, 2004, we had an accumulated deficit of $64.6 million. We
incurred net losses of $1.6 million, $1.7 million and $6.0 million for the three
months ended March 31, 2004 and the years ended December 31, 2003 and 2002,
respectively. There can be no assurance that we will ever become profitable.
Additionally, our auditors have included an explanatory paragraph in their
report on our financial statements for the year ended December 31, 2003 with
respect to substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of that uncertainty.
We may need to raise additional capital, which will result in further dilution
of existing and future stockholders.
Historically, we have met our short- and long-term extra cash needs through debt
and the sale of common stock in private placements because cash flow from
operations has been insufficient to fund our operations.
Future capital requirements will depend on many factors, including cash flow
from operations, continued progress in research and development programs,
competing technological and market developments, and our ability to market our
products successfully. If we require additional equity or debt financing in the
future, there can be no assurance that sufficient funds will be raised.
Moreover, any equity financing or convertible debt would result in dilution to
our then-existing stockholders and could have a negative effect on the market
price of our common stock. Furthermore, any additional debt financing will
result in higher interest expense.
We recently completed the acquisition of COMO and expect to complete the
acquisition of Visual Circuits Corporation in the second quarter of 2004.
Although these acquisitions were, or will be, effected through the issuance of
common stock, cash may be needed to fund operations because the businesses
associated with these acquisitions are not currently profitable. To that end, in
April 2004 we raised net proceeds of approximately $5.2 million through the sale
of approximately 3.9 million shares of our common stock to a group of third
party investors in a private placement transaction. See Note 12, "Subsequent
Events".
We are dependent upon a significant stockholder to meet our interim financing
needs.
We have relied upon the ability of Carl Berg, a director and significant owner
of our common stock, for interim financing needs. As of December 31, 2003, we
had an aggregate of approximately $4.4 million in debt and accrued interest
outstanding to Mr. Berg. On March 19, 2004, Mr. Berg converted this debt and
accrued interest to common and preferred stock. Additionally, Mr. Berg has
provided Samsung Semiconductor Inc., our contracted ASIC manufacturer, with a
personal guarantee to secure our working capital requirements for ASIC purchase
order fulfillment. There can be no assurances that Mr. Berg will continue to
provide such interim financing or personal guarantees, should we need additional
funds or increased credit facilities with our vendors.
We have a significant amount of convertible securities that will dilute existing
stockholders upon conversion.
At May 10, 2004, we had 3,161 shares of preferred shares issued and outstanding,
and 1.2 million warrants and 5.3 million options, which are all exercisable into
shares of common stock. The 3,161 shares of preferred stock are convertible into
approximately 3.2 million shares of our voting common stock. See Note 10,
"Related Party Transactions". Furthermore, we may grant 1.4 million additional
stock options to our employees, officers, directors and consultants under our
current stock option plans. We also may issue additional shares in acquisitions.
Any additional grant of options under existing or future plans or issuance of
shares in connection with an acquisition will further dilute existing
stockholders.
20
Any acquisitions of companies or technologies by us, including our proposed
acquisition of Visual Circuits Corporation's assets, and recently completed
acquisition of COMO may result in distraction of our management and disruptions
to our business.
We may acquire or make investments in complementary businesses, technologies,
services or products if appropriate opportunities arise, as was the case in
January 2004 when we announced that we had entered into a definitive agreement
to acquire substantially all the assets of Visual Circuits Corporation, and in
February 2004 when we acquired the stock of COMO. From time to time, we may
engage in discussions and negotiations with companies regarding the possibility
of acquiring or investing in their businesses, products, services or
technologies. We may not be able to identify suitable acquisition or investment
candidates in the future, or if we do identify suitable candidates, we may not
be able to make such acquisitions or investments on commercially acceptable
terms or at all. If we acquire or invest in another company, we could have
difficulty assimilating that company's personnel, operations, technology or
products and service offerings. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our expenses
and adversely affect the results of operations. Furthermore, we may incur
indebtedness or issue equity securities to pay for any future acquisitions
and/or pay for the legal, accounting or finders fees, typically associated with
an acquisition. The issuance of equity securities could be dilutive to our
existing stockholders. In addition, the accounting treatment for any acquisition
transaction may result in significant goodwill, which, if impaired, will
negatively affect our consolidated results of operations. The accounting
treatment for any potential acquisition may also result in a charge for
in-process research and development expense, which will negatively affect our
consolidated results of operations.
We rely on certain vendors for a significant portion of our manufacturing.
Approximately 49% of the components for our products are manufactured on a
turnkey basis by two vendors, Furthertech Company Ltd. and Samsung Semiconductor
Inc. In addition, a single vendor in Mexico assembles certain of our products.
If these vendors experience production or shipping problems for any reason, we
in turn could experience delays in the production and shipping of the Company's
products, which would have an adverse effect on our results of operations.
We are dependent on our suppliers.
We purchase all of our parts from outside suppliers and from time to time
experience delays in obtaining some components or peripheral devices.
Additionally, we are dependent on sole source suppliers for certain components.
There can be no assurance that labor problems, supply shortages or product
discontinuations will not occur in the future which could significantly increase
the cost, or delay shipment, of our products, which in turn could adversely
affect our results of operations.
We depend on a few customers for a high percentage of our revenues and the loss
or failure to pay of any one of these customers could result in a substantial
decline in our revenues and profits.
For the three months ended March 31, 2004, three customers in aggregate provided
47% of our total revenues and as of March 31, 2004 comprised 47% of our accounts
receivable balance. We presently have no reason to believe that these customers
lack the financial resources to pay. We do not have long-term contracts
requiring any customer to purchase any minimum amount of products. There can be
no assurance that we will continue to receive orders of the same magnitude as in
the past from existing customers or will be able to market our current or
proposed products to new customers. However, the loss of any major customer, the
failure of any such identified customer to pay us, or to discontinue issuance of
additional purchase orders, would have a material adverse effect on our
revenues, results of operation, and business as a whole absent the timely
replacement of the associated revenues and profit margins associated with such
business. Furthermore, many of our products are dependent upon the overall
success of our customers' products, over which we often have no control.
To that point, in January 2004, Microsoft ceased placing orders for our FS454
product. Shipments of the FS454, which were primarily to this significant
customer, represented 25% and 37% of our total revenues for the three months
21
ended March 31, 2004 and the year ended December 31, 2003, respectively. The
loss of Microsoft orders for the FS454 will have a material adverse effect on
our revenues, operating profit and liquidity, especially when compared to the
third and fourth quarter of 2003 and the first quarter of 2004, as we began our
initial shipments to Microsoft in the third quarter of 2003 and continued sales
through the first quarter of 2004. However, as the product was manufactured by
one of our contract manufacturers, we were able to meet Microsoft's requirements
without an increase in our staffing and operations. Although there can be no
assurances, we do not anticipate any significant adjustments to our staffing or
operations or significant adjustments to the carrying value of our FS454
inventory, as a result of this loss.
Our quarterly financial results are subject to significant fluctuations.
We have been unable in the past to accurately forecast our operating expenses or
revenues. Revenues currently depend heavily on volatile customer purchasing
patterns. If actual revenues are less than projected revenues, we may be unable
to reduce expenses proportionately, and our operating results, cash flows and
liquidity would likely be adversely affected.
Our products may become obsolete very quickly.
The computer peripheral markets are characterized by extensive research and
development and rapid technological change resulting in short product life
cycles. Development by others of new or improved products, processes or
technologies may make our products or proposed products obsolete or less
competitive. We must devote substantial efforts and financial resources to
enhance our existing products and to develop new products, including our
investment in Ultra Wideband technology, which is currently averaging
approximately $500,000 per quarter and is expected to increase significantly
through the remainder of 2004. There can be no assurance that we will succeed
with these efforts.
We may not be able to protect our proprietary information.
As of March 31, 2004, we held four patents and one pending application, which
combined five previous provisional patent applications, in the United States.
Certain of these patents have also been filed and issued in countries outside
the United States. We treat our technical data as confidential and rely on
internal non-disclosure safeguards, including confidentiality agreements with
employees, and on laws protecting trade secrets, to protect our proprietary
information. There can be no assurance that these measures will adequately
protect the confidentiality of our proprietary information or prove valuable in
light of future technological developments.
Delays in product development could adversely affect our market position or
customer relationships.
We have experienced delays in product development in the past and may experience
similar delays in the future. Given the short product life cycles in the markets
for our products, any delay or unanticipated difficulty associated with new
product introductions or product enhancements could cause us to lose customers
and damage our competitive position. Prior delays have resulted from numerous
factors, such as:
o changing product specifications; difficulties in hiring and retaining
necessary personnel;
o difficulties in reallocating engineering resources and other resource
limitations;
o difficulties with independent contractors;
o changing market or competitive product requirements;
o unanticipated engineering complexity;
o undetected errors or failures in software and hardware; and
o delays in the acceptance or shipment of products by customers.
22
If we are unable to respond to rapid technological change in a timely manner,
then we may lose customers to our competitors.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our products. Our industry is
characterized by rapid technological change, changes in user and customer
requirements and preferences and frequent new product and service introductions.
If competitors introduce products and services embodying new technologies, or if
new industry standards and practices emerge, then our existing proprietary
technology and systems may become obsolete. Our future success will depend on
our ability to do the following:
o both license and internally develop leading technologies useful in our
business;
o enhance our existing technologies;
o develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
To develop our proprietary technology entails significant technical and business
risks. We may use new technologies ineffectively, or we may fail to adapt our
proprietary technology and transaction processing systems to customer
requirements or emerging industry standards. If we face material delays in
introducing new services, products and enhancements, then our customers may
forego the use of our services and use those of our competitors.
We typically operate without a significant amount of backlog.
We typically operate with a small amount of backlog. Accordingly, we generally
do not have a material backlog of unfilled orders, and revenues in any quarter
are substantially dependent on orders booked in that quarter. Any significant
weakening in current customer demand would therefore have and has had in the
past an almost immediate adverse impact on our operating results.
During much of the first half of 2003, our common stock did not meet the minimum
bid price requirement to remain listed on the Nasdaq SmallCap Market. If we were
to be delisted, it could make trading in our stock more difficult.
Our voting common stock is traded on the Nasdaq SmallCap Market. There are
various quantitative listing requirements for a company to remain listed on the
Nasdaq SmallCap Market.
We are required to maintain a minimum bid price of $1.00 per share for our
common stock. Between April 1, 2003 and March 31, 2004, Focus voting common
stock closed below $1.00 a share on 64 of 314 trading days. On March 18, 2003,
we were notified by the Nasdaq that our common stock did not meet the minimum
bid price requirement to remain listed on the Nasdaq SmallCap Market. However,
on May 21, 2003, we received notification from Nasdaq that we had regained
compliance and the matter was closed.
We must maintain stockholders' equity of $2.5 million. At March 31, 2004, we had
total stockholders' equity of $11.2 million. To the extent we incur net losses
and do not raise additional capital, our stockholders' equity will be reduced.
If we fail to meet these Nasdaq SmallCap requirements, our common stock could be
delisted, eliminating the only established trading market for our shares. Any
sales of our voting common stock at a discount to market may reduce the trading
price of our common stock to a level below the Nasdaq minimum bid price
requirement.
In the event we are delisted from the Nasdaq SmallCap Market, we would be forced
to list our shares on the OTC Electronic Bulletin Board or some other quotation
medium, such as pink sheets, depending on our ability to meet the specific
listing requirements of those quotation systems. As a result an investor might
find it more difficult to dispose of, or to obtain accurate price quotations
for, such shares. Delisting might also reduce the visibility, liquidity, and
price of our voting common stock.
23
Our common stock price is volatile.
The market price for our voting common stock is volatile and has fluctuated
significantly to date. For example, between January 1, 2003 and March 31, 2004,
the per share price has fluctuated between $0.50 and $4.20 per share, closing at
$1.39 on May 11, 2004. The trading price of our voting common stock is likely to
continue to be highly volatile and subject to wide fluctuations in response to
factors including the following:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations, new sales formats or new
products or services by us or our competitors;
o cyclical nature of consumer products using our technology;
o changes in financial estimates by us or securities analysts;
o changes in the economic performance and/or market valuations of other
multi-media, video scan companies;
o announcements by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o additions or losses of significant customers; and
o sales of common stock or issuance of other dilutive securities.
In addition, the securities markets have experienced extreme price and volume
fluctuations in recent times, and the market prices of the securities of
technology companies have been especially volatile. These broad market and
industry factors may adversely affect the market price of common stock,
regardless of actual operating performance. In the past, following periods of
volatility in the market price of stock, many companies have been the object of
securities class action litigation, including us. If we are sued in a securities
class action, then it could result in additional substantial costs and a
diversion of management's attention and resources.
Risks Related to Our Industry
- -----------------------------
International sales are subject to significant risk.
Our revenues from outside the United States are subject to inherent risks
related thereto, including currency rate fluctuations, the general economic and
political conditions in each country. There can be no assurance that the
economic crisis and currency issues currently being experienced in certain parts
of the world will not reduce demand for our products and therefore have a
material adverse effect on our revenue or operating results.
Our businesses are very competitive.
The computer peripheral markets are extremely competitive and are characterized
by significant price erosion over the life of a product. We currently compete
with other developers of video conversion products and with video-graphic
integrated circuit developers. Many of our competitors have greater market
recognition and greater financial, technical, marketing and human resources.
Although we are not currently aware of any announcements by our competitors that
would have a material impact on our operations, there can be no assurance that
we will be able to compete successfully against existing companies or new
entrants to the marketplace.
The video production equipment market is highly competitive and is characterized
by rapid technological change, new product development and obsolescence,
evolving industry standards and significant price erosion over the life of a
product. Competition is fragmented with several hundred manufacturers supplying
a variety of products to this market. We anticipate increased competition in the
video post-production equipment market from both existing manufacturers and new
market entrants. Increased competition could result in price reductions, reduced
margins and loss of market share, any of which could materially and adversely
affect our business, financial condition and results of operations. There can be
no assurance that we will be able to compete successfully against current and
future competitors in this market.
24
Often our competitors have greater financial, technical, marketing, sales and
customer support resources, greater name recognition and larger installed
customer bases than we possess. In addition, some of our competitors also offer
a wide variety of video equipment, including professional video tape recorders,
video cameras and other related equipment. In some cases, these competitors may
have a competitive advantage based upon their ability to bundle their equipment
in certain large system sales.
We are exposed to general economic conditions that have resulted in
significantly reduced sales levels. If such adverse economic conditions were to
continue or worsen, our business, financial condition and operating results
could be adversely impacted.
If the adverse economic conditions in the United States and throughout the world
continue or worsen, we may continue to experience a material adverse impact on
our business, operating results, and financial condition. We continue to take
actions and charges to reduce our cost of sales and operating expenses in order
to address these adverse conditions. A prolonged continuation or worsening of
sales trends may require additional actions and charges to reduce cost of sales
and operating expenses in subsequent quarters. We may be unable to reduce cost
of sales and operating expenses at a rate and to a level consistent with such a
future adverse sales environment. If we must undertake further expense
reductions, we may incur significant incremental special charges associated with
such expense reductions that are disproportionate to sales, thereby adversely
affecting our business, financial condition and operating results. Continuing
weakness in the economy could decrease demand for our products, increase
delinquencies in payments and otherwise have an adverse impact on our business.
Recent corporate bankruptcies, accounting irregularities, and alleged insider
wrong doings have negatively affected general confidence in the stock markets
and the economy, causing the U.S. Congress to enact sweeping legislation, which
will increase the costs of compliance.
In an effort to address these growing investor concerns, the U.S. Congress
passed, and on July 30, 2002, President Bush signed into law, the Sarbanes-Oxley
Act of 2002. This sweeping legislation primarily impacts investors, the public
accounting profession, public companies, including corporate duties and
responsibilities, and securities analysts. Some highlights include establishment
of a new independent oversight board for public accounting firms, enhanced
disclosure and internal control requirements for public companies and their
insiders, required certification by CEO's and CFO's of SEC financial filings,
prohibitions on certain loans to offices and directors, efforts to curb
potential securities analysts' conflicts of interest, forfeiture of profits by
certain insiders in the event financial statements are restated, enhanced board
audit committee requirements, whistleblower protections, and enhanced civil and
criminal penalties for violations of securities laws. Such legislation and
subsequent regulations will increase the costs of securities law compliance for
publicly traded companies such as us.
Continued terrorism threats and war in the Middle East have had a negative
impact on the U.S. economy.
The adverse consequences of war and the effects of terrorism have had a negative
affect on the U.S. economy. Further conflicts in the Middle East could
negatively impact our ability to raise additional funds if needed and our
revenues will be adversely affected if consumers and businesses continue to cut
back spending.
25
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 2004 we did not hold any short-term investments that would be
exposed to market risk from adverse movements in interest rates.
In connection with the acquisition of COMO, we assumed approximately $931,000 in
Euro-denominated short- and long-term debt. The average interest rate applicable
to these debt obligations is 9%.
Also as a result of the COMO acquisition, we had net tangible assets denominated
in Euros of approximately $100,000 as at March 31, 2004.
Item 4. Controls and Procedures
Management of the Company, with the participation of the President and Chief
Executive Officer and the Chief Financial Officer (its principal executive
officer and principal financial officer, respectively), evaluated Focus'
disclosure controls and procedures as of the end of the period covered by this
Report.
Based on that evaluation, the President and Chief Executive Officer and the
Chief Financial Officer have concluded that, as of the end of the period covered
by this Report, Focus' disclosure controls and procedures are effective to
ensure that information required to be disclosed by Focus in the reports filed
or submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by Focus in such reports is
accumulated and communicated to Focus' management, including the President and
Chief Executive Officer and the Chief Financial Officer of Focus, as appropriate
to allow timely decisions regarding required disclosure.
There was no change in Focus' internal control over financial reporting that
occurred during Focus' first fiscal quarter of 2004 that has materially
affected, or is reasonably likely to materially affect, Focus' internal control
over financial reporting.
26
PART II - OTHER INFORMATION
Item 1. Legal proceedings
From time to time, Focus is party to certain other claims and legal
proceedings that arise in the ordinary course of business of which, in
the opinion of management, do not have a material adverse effect on
Focus' financial position or results of operation.
Item 2. Changes in securities
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) None
(b) None
(c) and (d) On April 14, 2004, the Company completed the sale of
3,862,070 shares of its common stock in a private placement to
independent third party investors, receiving proceeds of
approximately $5.2 million, net of offering costs of approximately
$400,000. The shares were sold at an approximate 11% discount to
the closing price of the Company's common stock as of April 5,
2004, the date the commitment to purchase/sell was reached by the
parties. Additionally, the Company issued warrants to the
investors and a placement agent to purchase 940,414 shares of
common stock at an exercise price of $2.00 per share. The shares
were sold to accredited investors pursuant to an exemption from
registration under the federal securities laws. Focus will use the
funds from the sale of the 3,862,070 shares of common stock for
general corporate purposes. The shares, including the underlying
warrants, will be registered on a Registration Statement on Form
S-3 pursuant to a registration rights agreement with the
investors.
On March 19, 2004, Mr. Berg converted his approximately $3.9
million of debt and $587,000 of accrued interest into common and
preferred stock. This conversion resulted in the issuance of
2,173,193 shares of Focus' common stock, 840 shares of Series B
preferred stock and 417 shares of Series C preferred stock, which
are convertible into an additional 840,000 and 417,000 shares of
Focus' common stock, respectively. Following the conversion, Mr.
Berg owned approximately 11% of the Company's outstanding common
and preferred stock. The conversion was exempt for registration
under the federal securities laws as Mr. Berg is an accredited
investor under applicable securities laws.
On February 27, 2004, Focus completed the acquisition of COMO,
located in Kiel, Germany, pursuant to which COMO became a wholly
owned subsidiary of Focus. Under the terms of the agreement, Focus
acquired COMO through the issuance of 795,162 shares of its common
stock. Focus may also issue up to an additional 46,266 shares of
its common stock to COMO's shareholders, in the event certain
conditions are met at the end of 2004 and 2005. In connection with
this transaction, Focus paid vFinance Investments, Inc., (a
related party) a success fee of $100,000 and 30,000 shares of the
Focus' common stock. The aggregate number of shares of common
stock issued by Focus relative to the acquisition of COMO,
including the earn out shares, was 871,428. The shares were issued
to the two owners of COMO located in Germany in a private
transaction pursuant to an exemption from registration under the
federal securities laws. Focus has filed a Registration Statement
on Form S-3 to register the shares.
(e) None
Item 3. Defaults upon senior securities
None.
27
Item 4. Submission of matters to a vote of security holders
Focus will hold its annual meeting of shareholders at its corporate
headquarters located at 1370 Dell Avenue, Campbell, CA on Friday, July
30, 2004. Shareholders of record on June 11, 2004 will be entitled to
vote on matters to be considered at the meeting. Focus expects to mail
its proxy materials to shareholders on or about June 23, 2004.
Item 5. Other information
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 - Rule 13a-14(a) Certification of CEO
Exhibit 31.2 - Rule 13a-14(a) Certification of CFO
Exhibit 32.1 - CEO 906 Certification
Exhibit 32.2 - CFO 906 Certification
(b) Reports on Form 8-K
On January 28, 2004, Focus filed on Form 8-K to announce it had
entered into an agreement to acquire substantially all the assets
and liabilities of Visual Circuits Corporation and had signed a
letter of intent to acquire COMO Computer and Motion GmbH.
On April 7, 2004, Focus filed a Current Report on Form 8-K to
announce:
o It had obtained binding commitments to raise $5.6 million of
gross proceeds through a private placement; and
o Carl Berg, a director of Focus, converted his approximately
$4.5 million of debt and accrued interest into preferred and
common stock.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 17, 2004 Focus Enhancements, Inc.
------------------------------------------
Date Registrant
By:/s/ Brett A. Moyer
--------------------
Brett A. Moyer
Chief Executive Officer and President
(Principal Executive Officer)
By:/s/ Gary L. Williams
------------------------
Gary L. Williams
Vice President of Finance,
Chief Financial Officer
(Principal Accounting Officer)
29