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 June 30, 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 Incorporation or Organization) |
(I.R.S. Employer 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. x Yes 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 on August 11, 2004, there were 53.2 million shares of Focus Enhancement’s common stock issued and outstanding.
INDEX
| Page Number | ||||
| PART I - FINANCIAL INFORMATION |
||||
| Item 1. | Financial Statements: | |||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 | ||
| Item 4. | Controls and Procedures | 29 | ||
| PART II - OTHER INFORMATION |
||||
| Item 1. | Legal proceedings | 30 | ||
| Item 2. | Changes in securities | 30 | ||
| Item 3. | Defaults upon senior securities | 30 | ||
| Item 4. | Submission of matters to a vote of security holders | 30 | ||
| Item 5. | Other information | 30 | ||
| Item 6. | Exhibits and reports on Form 8-K | 31 | ||
| 32 | ||||
| CERTIFICATIONS |
||||
2
PART I - FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations
(In thousands, except per-share amounts)
(Unaudited)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30, 2003 |
|||||||||||||
| Net revenue |
$ | 5,024 | $ | 4,301 | $ | 9,118 | $ | 8,391 | ||||||||
| Cost of revenue |
3,223 | 2,440 | 5,985 | 4,843 | ||||||||||||
| Gross margin |
1,801 | 1,861 | 3,133 | 3,548 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Sales, marketing and support |
1,273 | 1,089 | 2,327 | 2,087 | ||||||||||||
| General and administrative |
908 | 436 | 1,465 | 813 | ||||||||||||
| Research and development |
1,666 | 1,047 | 2,772 | 2,104 | ||||||||||||
| Amortization of intangible assets |
243 | 132 | 407 | 304 | ||||||||||||
| In-process research and development |
300 | — | 300 | — | ||||||||||||
| Restructuring recovery |
— | (29 | ) | — | (29 | ) | ||||||||||
| 4,390 | 2,675 | 7,271 | 5,279 | |||||||||||||
| Loss from operations |
(2,589 | ) | (814 | ) | (4,138 | ) | (1,731 | ) | ||||||||
| Interest expense, net |
(14 | ) | (51 | ) | (60 | ) | (102 | ) | ||||||||
| Other net income |
14 | 95 | 20 | 95 | ||||||||||||
| Loss before income tax expense |
(2,589 | ) | (770 | ) | (4,178 | ) | (1,738 | ) | ||||||||
| Income tax expense |
1 | — | 1 | 2 | ||||||||||||
| Net loss |
$ | (2,590 | ) | $ | (770 | ) | $ | (4,179 | ) | $ | (1,740 | ) | ||||
| Net loss per share |
||||||||||||||||
| Basic and diluted |
$ | (0.05 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.05 | ) | ||||
| Weighted average common and common equivalent shares |
||||||||||||||||
| Basic and diluted |
50,027 | 37,184 | 46,466 | 37,146 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Condensed Consolidated Balance Sheets
(In thousands, except per-share amounts)
(Unaudited)
| June 30, 2004 |
December 31, 2003 |
|||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 6,000 | $ | 3,731 | ||||
| Accounts receivable, net of allowances of $426 and $384 |
3,053 | 2,385 | ||||||
| Inventories |
3,056 | 3,493 | ||||||
| Receivable from Visual Circuits Corporation Liquidating Trust |
400 | — | ||||||
| Prepaid expenses and other current assets |
386 | 368 | ||||||
| Total current assets |
12,895 | 9,977 | ||||||
| Long-term assets: |
||||||||
| Property and equipment, net |
468 | 146 | ||||||
| Other assets |
52 | 151 | ||||||
| Intangible assets, net |
2,180 | 635 | ||||||
| Goodwill |
12,788 | 5,191 | ||||||
| Total long-term assets |
15,488 | 6,123 | ||||||
| $ | 28,383 | $ | 16,100 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 2,566 | $ | 2,292 | ||||
| Accrued liabilities |
2,199 | 1,989 | ||||||
| Current portion of long-term debt |
31 | — | ||||||
| Borrowings under line-of-credit |
306 | — | ||||||
| Loan payable |
251 | — | ||||||
| Total current liabilities |
5,353 | 4,281 | ||||||
| Long-term liabilities: |
||||||||
| Convertible promissory notes payable to shareholder |
— | 3,867 | ||||||
| Long-term debt, net of current portion |
191 | — | ||||||
| Total long-term liabilities |
191 | 3,867 | ||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.01 par value; authorized 3,000,000 shares; 3,161 and 1,904 shares issued at June 30, 2004 and December 31, 2003, respectively (aggregate liquidation preference $3,917) |
— | — | ||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized, 53,691,698 and 42,800,240 shares issued at June 30, 2004 and December 31, 2003, respectively |
537 | 428 | ||||||
| Additional paid-in capital |
90,195 | 71,295 | ||||||
| Accumulated deficit |
(67,200 | ) | (63,021 | ) | ||||
| Cumulative foreign currency translation adjustments |
57 | — | ||||||
| Treasury stock at cost, 497,055 shares at June 30, 2004 and December 31, 2003, respectively |
(750 | ) | (750 | ) | ||||
| Total stockholders’ equity |
22,839 | 7,952 | ||||||
| $ | 28,383 | $ | 16,100 | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, 2004 |
June 30, 2003 |
June 30, 2004 |
June 30, 2003 |
|||||||||||||
| Net loss |
$ | (2,590 | ) | $ | (770 | ) | $ | (4,179 | ) | $ | (1,740 | ) | ||||
| Foreign currency translation adjustments, net |
58 | — | 57 | — | ||||||||||||
| Comprehensive loss |
$ | (2,532 | ) | $ | (770 | ) | $ | (4,122 | ) | $ | (1,740 | ) | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Six Months Ended, |
||||||||
| June 30, 2004 |
June 30, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (4,179 | ) | $ | (1,740 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
457 | 405 | ||||||
| Stock-based compensation |
32 | — | ||||||
| Changes in assets and liabilities: |
||||||||
| Decrease (increase) in accounts receivable |
272 | (625 | ) | |||||
| Decrease (increase) in inventories |
1,016 | (70 | ) | |||||
| Decrease (increase) in prepaid expenses and other assets |
154 | (94 | ) | |||||
| Increase (decrease) in accounts payable |
(429 | ) | 593 | |||||
| Increase in accrued liabilities |
343 | 296 | ||||||
| Net cash used in operating activities |
(2,334 | ) | (1,235 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Acquisition of COMO Computer and Motion GmbH net of cash acquired |
(5 | ) | — | |||||
| Acquisition of Visual Circuits Corporation |
(440 | ) | — | |||||
| Purchases of property and equipment |
(206 | ) | (51 | ) | ||||
| Net cash used in investing activities |
(651 | ) | (51 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Payments of short-term debt |
(149 | ) | — | |||||
| Payments under capital lease obligations |
— | (24 | ) | |||||
| Proceeds from exercise of common stock options and warrants |
155 | 162 | ||||||
| Net proceeds from private offerings of common stock |
5,191 | — | ||||||
| Net cash provided by financing activities |
5,197 | 138 | ||||||
| Effect of exchange rate changes on cash |
57 | — | ||||||