Focus Universal Inc. (Nasdaq: FCUV) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. The company develops IoT instrumentation and communication technologies and also sells agricultural sensors and filters and provides home-automation installation services.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $60,654 | $634,777 | $282,463 | $1,259,920 |
| Gross profit (margin) | $18,213 (30.0%) | $113,443 (17.9%) | $39,459 (14.0%) | $237,254 (18.8%) |
| Operating expenses | $992,179 | $870,997 | $4,142,634 | $2,377,536 |
| Operating loss | $(973,966) | $(757,554) | $(4,103,175) | $(2,140,282) |
| Net loss | $(942,020) | $(1,337,754) | $(3,872,247) | $(2,500,415) |
| Basic and diluted loss per share | $(0.02) | $(0.03) | $(0.09) | $(0.06) |
For the nine months, operating cash outflow was $2.44 million, versus $1.50 million in 2021. Investing activities used $177,738; financing activities provided no cash, compared with $10.46 million in 2021, primarily from the IPO. Cash fell to $6.06 million from $8.68 million at year-end 2021.
At September 30, current assets were $6.59 million and current liabilities $2.28 million, producing working capital of $4.31 million, down from $8.64 million at December 31, 2021. Total assets were $11.06 million and total liabilities $2.48 million. The company reported no loan debt after forgiveness of its $158,547 SBA loan; lease liabilities totaled $293,103, including current and non-current portions.
Changes and management explanation
- Revenue declined 90% in Q3 and 78% for the nine-month period. Management attributed the fall to lower sales to major customer Hydrofarm, limited AVX service work and large projects amid competition, and a shift away from traditional hydroponic products toward newer technology products.
- Nine-month gross profit fell to $39,459 as lower revenue more than offset reduced cost of revenue. Operating expenses rose $1.77 million, led by higher R&D, general and administrative costs, selling expense, and stock-based compensation.
- Q3 net loss was smaller than in 2021, when results included substantial non-cash warrant-liability and derivative items. The nine-month net loss increased year over year as revenue fell and operating expenses increased.
Outlook, risks and unusual items
- Management said available cash was adequate to fund operations through 2022 without another capital raise, using a projected annual cash-burn estimate of $3.15 million. It also stated that long-term viability depends on shareholder support, financing as needed, debt repayment capacity, and achieving profitable operations. No formal revenue or earnings guidance was provided.
- Management described plans to phase out lower-margin products, expand higher-technology products, and continue developing the Ubiquitor platform, ultra-narrowband power-line communication, and smart-home and hydroponic IoT products. It expected smart-home and hydroponic IoT products to be completed by year-end 2022, Ubiquitor assembly to expand in 2023, and a beta of office-automation software potentially by year-end 2022. These are forward-looking expectations, not reported results.
- The company repurchased 400,000 shares for $2.0 million under an August 2022 agreement. The shares transferred after quarter-end; $1.0 million was paid October 6, 2022, with the remaining $1.0 million due by February 6, 2023. The full $2.0 million was recorded as treasury stock payable at September 30.
- Cash exceeding FDIC insurance limits was approximately $5.03 million. Three customers represented 43% of nine-month revenue; a single vendor represented 24% of purchases. Related-party revenue was $39,788 for the nine months, including revenue from a company owned by the CEO’s wife and services provided to a director.
- The filing states disclosure controls were effective, but separately identifies a material weakness in internal control over financial reporting, principally due to inadequate staffing and technical expertise and reliance on outside consultants for financial-statement adjustments.
- No litigation loss contingencies were recorded, and management reported no new material legal proceedings. A patent was issued November 1, 2022, after quarter-end.
Key facts for investors to verify
- Whether revenue and customer demand recover as the company transitions from legacy products to new technology products.
- Actual cash burn, liquidity runway, and settlement of the remaining $1.0 million share-repurchase payment.
- Progress toward product-development and commercialization milestones, including Ubiquitor and PLC claims and timelines.
- Plans and remediation progress for the material weakness in internal financial controls.
- Exposure to customer and vendor concentration, related-party transactions, and uninsured cash balances.