Focus Universal Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. The company develops universal smart instrumentation and sells sensors, meters and filters; it also operates AVX, an IoT installation and integration business. Its Ubiquitor platform remains under development. Figures are in U.S. dollars.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $544,003 | $439,288 | $1,289,160 | $1,111,690 |
| Gross profit (loss) | $159,632 | $(120,187) | $253,560 | $43,744 |
| Gross margin | 29.3% | (27.4%) | 19.7% | 3.9% |
| Operating expenses | $635,310 | $839,307 | $2,359,422 | $1,961,304 |
| Operating loss | $(475,678) | $(959,494) | $(2,105,862) | $(1,917,560) |
| Net loss | $(438,360) | $(950,099) | $(1,988,333) | $(1,905,117) |
| Basic and diluted loss per share | $(0.01) | $(0.02) | $(0.05) | $(0.05) |
Q3 revenue rose about 24% year over year, which management attributed mainly to increased AVX contracts. Nine-month revenue rose about 16%, attributed to AVX; gross profit improved substantially, but operating expenses increased and the nine-month net loss widened modestly. Q3 operating expenses fell, particularly professional fees, which management linked to a temporary hold on the Nasdaq application review and delayed fundraising. Nine-month professional fees and general and administrative expenses increased.
Cash flow and liquidity: Nine-month operating cash use was $1,725,512, compared with $1,126,531 in 2019; investing cash use was $1,314, and financing provided $355,860, including SBA loans net of a note repayment. Cash declined to $821,904 from $2,192,870 at year-end 2019. Working capital was $1,027,862, down from $2,007,113. Current assets were $1,397,624 and current liabilities $369,762.
Debt and balance sheet: At September 30, the company reported $405,860 of SBA loans ($150,006 current; $255,854 long-term) and $106,596 of operating lease liabilities. Total liabilities were $693,578; stockholders’ equity was $5,341,392. Total assets were $6,034,970. Common shares outstanding were 40,959,741, unchanged from December 2019.
Outlook, risks and notable items
- Going concern: Management states that recurring losses, operating cash outflows and a $9,167,334 accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern. Continued shareholder support, debt repayment, additional equity financing and achievement of profitability are cited as dependencies; adequate financing is not assured.
- Product and funding risk: The Ubiquitor had completed an initial prototype production run, but the company had not begun full-scale production or distribution. The filing provides no quantified financial guidance or firm commercialization timetable.
- Proposed acquisition: An August 2020 binding letter of intent contemplated acquiring all of Communication Wiring Specialists for $5 million, with the target to be capitalized with $1 million. A refundable $100,000 deposit was held in escrow; the letter could terminate if closing had not occurred by November 30, 2020. The filing does not establish that the transaction closed.
- COVID-19 loans: The company received $268,060 in PPP loans at 0.98% and 1%, and $137,900 in EIDL loans at 3.75%, in addition to a $10,000 EIDL advance recorded as other income. PPP forgiveness was uncertain; the company said it would continue to assess eligibility and could be required to return funds if eligibility changed. EIDL loans are secured by broad categories of borrower assets.
- Other unusual items: The company recognized $119,453 of other income for the nine months, including the $10,000 EIDL advance; the filing does not clearly explain the full composition of other income. Stock-option compensation was $605,150 for the nine months, versus $172,900 in 2019. A warehouse sublease signed October 19, 2020 is expected to provide $2,400 monthly beginning December 1 for eight months, with an option to extend.
- Financial reporting: The company revised 2019 comparative results for errors involving prematurely recognized AVX revenue and expense reclassifications, which management concluded were not material. Management reported 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.
- Concentration and related parties: One customer represented 24% of accounts receivable at September 30. Revenue from a company owned by the CEO’s wife was $21,267 for the nine months, with $22,410 receivable at period-end. No new material legal proceedings were reported.
Important facts for investors to verify
- Whether the proposed CWS acquisition closed, and how its $5 million price and planned $1 million capitalization were to be financed.
- Current cash runway, access to additional financing, and progress toward resolving the going-concern uncertainty.
- PPP loan forgiveness or repayment status, continued eligibility, and EIDL loan terms and collateral obligations.
- Ubiquitor production, commercialization, customer demand and related revenue milestones; no formal guidance is provided.
- Remediation of the material weakness in financial reporting controls.
- Clarification of filing inconsistencies: the cash-flow discussion cites a nine-month net loss of $1,998,333, while the financial statements report $1,988,333; the segment table reports total other income of $117,729, while the consolidated statement reports $117,529. The filing text does not clearly reconcile these differences.