Focus Universal Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 12, 2022. Unaudited consolidated results. Focus develops IoT instrumentation and communications technologies, while current revenue principally comes from agricultural sensors and equipment sales and AVX installation services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $64,642 | $261,680 | $221,809 | $625,143 |
| Gross profit (revenue less reported cost of revenue) | $7,170 | $53,097 | $21,246 | $124,297 |
| Gross margin (approx.) | 11.1% | 20.3% | 9.6% | 19.9% |
| Operating loss | $(1,205,348) | $(663,535) | $(3,129,209) | $(1,382,728) |
| Net loss | $(1,061,297) | $(480,145) | $(2,930,227) | $(1,162,661) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.07) | $(0.03) |
Revenue fell approximately 75% in Q2 and 65% in the six-month period year over year. Management attributed the decline to lower sales to a major Perfecular customer and reduced AVX service/project work amid competition, as the company shifts away from general hydroponic products toward higher-technology offerings. Six-month related-party revenue was $33,820, including $31,542 from a company owned by the CEO’s wife. Three customers represented 54% of six-month revenue.
Operating expenses increased to $1.27 million in Q2 and $3.35 million for the half year. Six-month research and development rose to $729,105 from $110,372, and general and administrative expense rose to $1.72 million from $865,120. Management cited expanded R&D staffing and China activity, equity compensation, rent, insurance and other costs. The half-year net loss also reflects $74,626 of unrealized losses on marketable securities; other income included debt-forgiveness and facility rental income. The SBA loan principal of $158,547 and $1,570 of interest was forgiven in April 2022.
Cash, liquidity and capital
- Cash was $6.66 million at June 30, 2022, down from $8.68 million at December 31, 2021. Total assets were $11.90 million and stockholders’ equity was $11.34 million.
- Working capital was $7.03 million, versus $8.64 million at year-end; current assets were $7.34 million and current liabilities $314,283.
- Operating cash outflow was $1.75 million for the first half, compared with $964,297 a year earlier. Investing cash outflow was $267,537; there was no financing cash flow in the 2022 period. Cash declined by $2.02 million.
- No loan balance remained at June 30 following SBA forgiveness. Lease liabilities totaled approximately $345,390, including current and non-current amounts.
- Approximately $5.72 million of cash was not covered by FDIC insurance. Marketable equity securities were $163,490 at period-end.
Outlook, risks and notable items
- Management projected an annual cash burn rate of $3.15 million and said available cash was adequate to continue operations through 2022 without another capital raise. It stated prior going-concern doubt was alleviated for the following year. The filing provides no formal revenue or earnings guidance.
- The Ubiquitor was at prototype stage; management planned to expand assembly in 2023 and continue product development and commercialization efforts. These plans, and claims about product performance and market potential, are forward-looking and subject to execution and adoption risks.
- Management reported customer concentration, competitive pressure, ongoing losses and reliance on cash resources. It also noted that actual results may differ materially from estimates and projections.
- The filing reports a material weakness in internal control over financial reporting, attributed principally to inadequate staffing and technical expertise and reliance on outside consultants for financial-statement adjustments. Management separately concluded disclosure controls were effective; the distinction merits attention.
- The filing says professional-fee increases were partly related to pending litigation, while its legal-proceedings discussion says there were no new proceedings and Note 13 reports no recorded litigation loss contingencies. No loss range is provided.
- In the first half, the company issued 153,776 shares, including shares for services and the delayed issuance related to a cashless warrant exercise. Stock-based compensation was significant; outstanding options were 420,000 at June 30.
- A new independent director was appointed August 10, 2022. No other material subsequent event was disclosed.
Key facts for investors to verify
- Whether revenue declines and major-customer dependence persist, and whether the product transition produces commercial sales.
- Cash burn versus management’s $3.15 million annual estimate, including whether cash remains sufficient beyond 2022 without additional financing.
- Progress in addressing the material weakness and the effectiveness of financial reporting controls.
- The status and potential financial exposure of the litigation referenced in MD&A, given the filing’s differing disclosures.
- Related-party receivables and sales, customer concentration, uninsured cash exposure, and potential dilution from equity compensation and options.