Focus Universal Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results include Focus Universal and its wholly owned subsidiaries Perfecular and AVX. The company develops IoT and universal smart-instrumentation technologies, while current sales primarily comprise agricultural sensors and measurement equipment, filters and related products, and AVX integration services.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $363,463 | $310,609 |
| Gross profit (loss) | $71,200 | $(27,463) |
| Gross margin | 19.6% | (8.8%) |
| Operating expenses | $790,393 | $942,818 |
| Operating loss | $(719,193) | $(970,281) |
| Net loss | $(682,516) | $(922,306) |
| Basic and diluted loss per share | $(0.02) | $(0.02) |
| Cash used in operating activities | $(438,775) | $(649,587) |
Revenue increased 17.0%, which management attributed to sales to a new Perfecular customer. Gross profit improved as cost of revenue fell below revenue, compared with a gross loss in Q1 2020. Operating expenses declined 16.2%, including lower professional fees and general and administrative costs. Net loss narrowed by $239,790. The company reported no income-tax expense.
Liquidity, cash flow and debt
At March 31, 2021, cash was $1.91 million, current assets $2.32 million, current liabilities $762,504 and working capital $1.56 million. At December 31, 2020, cash was $583,325 and working capital was $480,071. Cash increased $1.32 million during the quarter, primarily because financing inflows more than offset operating cash use; there were no investing cash flows.
Total reported loans were $2.16 million, including $664,157 of SBA loans and a $1.50 million secured East West Bank loan. The bank loan bears a variable rate of 0.25% above the Wall Street Journal prime rate and requires monthly payments through 2026. Total liabilities were $2.61 million, including lease liabilities. Financing cash inflows included $267,297 of SBA loan proceeds and $1.50 million from the bank loan.
Outlook, risks and notable items
- Funding and going concern: The company reported a quarterly net loss and negative operating cash flow. Management said substantial doubt about continuing as a going concern had been alleviated, but its outlook depends on continued financing, debt repayment and reaching profitable operations. It cited a $1.50 million related-party loan commitment from an entity owned by a director and a planned $10 million underwritten public offering in 2021; the filing does not establish that either was fully funded or completed. Management projected a $1.97 million annual cash burn and said the planned offering would support projected year-end cash of $11 million.
- Product plans: Management expected testing of 4 Mbps ultra-narrowband power-line communication circuit boards to finish in Q2 2021, with PLC products and a portable universal smart device targeted for launch in Q4 2021. It forecast positive cash flow beginning in Q2 2022. These are forward-looking targets, and new products would require manufacturing and marketing cash.
- Concentration: One customer accounted for 80% of Q1 revenue and 48% of accounts receivable at March 31. One vendor represented 84% of purchases and 96% of accounts payable. These concentrations create customer-retention, collection and supply risks.
- Related-party matters: Revenue from a company owned by the CEO’s wife was $10,191. The filing also describes a $1.50 million related-party loan commitment at 10% interest initially and 12% thereafter under specified terms; the lender is owned by a director.
- Acquisition proposal: Management terminated a letter of intent to purchase a target company on March 29, 2021, and the $100,000 escrow deposit was returned.
- Controls and legal matters: Management identified a material weakness in internal control over financial reporting, citing inadequate staffing and technical expertise and reliance on outside consultants for financial-statement adjustments. It separately concluded disclosure controls were effective. The company reported no new material legal proceedings and no off-balance-sheet arrangements.
Investor verification priorities
- Confirm whether the $1.50 million related-party loan commitment was funded and whether the proposed $10 million offering occurred; assess liquidity without those assumed sources.
- Track actual commercialization, testing and launch progress for PLC and the universal smart device against management’s stated milestones.
- Assess dependence on the major customer and vendor, including customer receivable collections and alternative supply availability.
- Review the material weakness remediation and monitor the company’s financing needs, operating cash burn and debt-service capacity.
- Reconcile apparent filing inconsistencies: the stock-option compensation amounts differ between the equity/cash-flow statements and Note 11; the option grant and exercise-price disclosures also differ; and MD&A cites operating cash use of $438,755 in one passage versus $438,775 in the cash-flow statement.