FOCUS UNIVERSAL INC. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results include Focus Universal and subsidiaries Perfecular and AVX. The company develops universal smart instruments and IoT technologies and also sells sensors, filters, and related products and provides IoT installation services. Common stock traded OTCQB under FCUV; 40,959,741 shares were outstanding at June 30.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $261,680 in 2021; $434,548 in 2020 | $625,143 in 2021; $745,157 in 2020 |
| Gross profit | $53,097; $121,391 | $124,297; $93,928 |
| Gross margin | 20.3%; 27.9% | 19.9%; 12.6% |
| Operating expenses | $716,632; $781,294 | $1,507,025; $1,724,112 |
| Net loss | $(480,145); $(627,667) | $(1,162,661); $(1,549,973) |
| Basic and diluted loss per share | $(0.01); $(0.02) | $(0.03); $(0.04) |
Revenue fell about 40% for the quarter and 16% for the half year. Management attributed the decline to unavailable shipping containers that delayed Perfecular product shipments. Six-month gross profit improved despite lower revenue, while quarterly gross profit declined. Lower operating expenses and higher other income contributed to the narrower net losses. Six-month other income was $242,823; it included $151,500 of PPP loan forgiveness and $1,490 of related interest. The filing does not clearly explain the full composition of other income.
Cash, liquidity, and debt
- Cash was $1,381,435 at June 30, up from $583,325 at December 31, 2020. Working capital was $1,163,122, versus $480,071 at year-end.
- Six-month operating cash use was $964,297, compared with $1,183,486 in 2020. Financing provided $1,762,407, principally from a $1.5 million East West Bank loan and SBA loans; no investing cash flows were reported. Ending cash increased $798,110.
- Total reported loans were $2,007,767, including $271,085 current and $1,736,682 long-term. The bank loan bears a variable rate of 0.25% above prime and has final payment due in 2026. Reported lease liabilities totaled $69,443.
- The company disclosed a $1.5 million related-party loan commitment, owned by a director, but the filing does not establish that this commitment had been funded by June 30. Stated terms include 10% interest initially and 12% thereafter under specified timing conditions.
Outlook, risks, and notable items
- Management planned a $10 million underwritten public offering in 2021 and projected year-end cash of $11 million assuming the offering. This was a plan, not a reported completed financing. Management also projected positive cash flow beginning in Q2 2022, contingent on product launches and sales.
- Management said testing of 4 Mbps ultra-narrowband power-line communication boards was completed in Q2 2021 and targeted launch of those products and a portable universal smart device in Q4 2021. Product manufacturing and promotion would initially require cash.
- The company reported a six-month net loss and operating cash burn and depends on financing, debt repayment capacity, and eventual profitability. Management stated financing plans alleviated prior substantial doubt about going concern; execution of the related-party commitment and planned offering remains important.
- Customer and supplier concentration is significant: one customer represented 78% of six-month revenue (42% in 2020), and one vendor represented 77% of purchases (47% in 2020). Management also cited pandemic-related shipment-container shortages and earlier project and R&D delays.
- AVX’s $107,460 PPP loan and $1,267 interest were forgiven on July 8, 2021, after quarter-end. A separate $151,500 PPP loan was forgiven in April and recognized in the first half.
- No litigation loss contingencies were recorded, and the company reported no material legal proceedings. Management identified a material weakness in internal controls over financial reporting, citing inadequate staffing and technical expertise and reliance on outside consultants, despite concluding disclosure controls were effective.
Important facts for investors to verify
- Whether the planned $10 million offering and the $1.5 million related-party loan commitment were completed or funded, and the resulting cash runway and financing costs.
- Whether Q4 2021 product launches and the projected Q2 2022 positive cash flow were achieved; these are forward-looking statements, not guarantees.
- The cause and persistence of shipping delays, customer and vendor concentration, and the effect on sales and margins.
- The composition and recurrence of other income, including loan-forgiveness gains, and the company’s ability to reduce recurring operating losses.
- Remediation of the material weakness in financial reporting controls and any later disclosure of control improvements.