Focus Universal Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited consolidated results include Focus Universal and wholly owned subsidiaries Perfecular and AVX. The company sells sensors, filters and meters, provides IoT installation services through AVX, and is developing its Ubiquitor universal smart instrumentation platform. Management’s stated strategic focus is developing and commercializing that platform.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $434,548 | $518,519 | $745,157 | $672,402 |
| Gross profit (margin) | $121,391 (27.9%) | $141,779 (27.3%) | $93,928 (12.6%) | $163,931 (24.4%) |
| Operating expenses | $781,294 | $563,941 | $1,724,112 | $1,121,997 |
| Net loss | $(627,667) | $(419,839) | $(1,549,973) | $(955,018) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.04) | $(0.02) |
- Cash and liquidity: Cash was $1.365 million at June 30, down from $2.193 million at December 31, 2019. Working capital was $1.377 million, versus $2.007 million at year-end.
- Cash flow: First-half operating cash outflow was $1.183 million, compared with $451,000 in 2019. Investing cash flow was zero, versus $566,000 used in 2019. Financing provided $356,000, including $405,860 of SBA loans and repayment of a $50,000 related-party note.
- Debt and leases: SBA loan balance was $405,860, of which $104,469 was current and $301,391 noncurrent. Operating lease liabilities totaled $118,086. The loans include two-year PPP loans and 30-year Economic Injury Disaster Loans, with differing rates and payment deferrals.
- Balance sheet: Total assets were $6.430 million and total liabilities $748,466 at June 30. Accumulated deficit was $8.729 million. Common shares outstanding were 40,959,741.
Changes and notable items
- Q2 revenue fell $83,971 (about 16%) year over year; management attributed the decline to a lack of customer orders from Perfecular. First-half revenue rose $72,755 (about 11%), which management attributed to AVX, but gross profit fell as cost of revenue increased.
- First-half operating expenses rose $602,115. Professional fees increased $267,183, primarily for legal, accounting, consulting, audit, SEC filing, potential Nasdaq-listing preparation and board stock options; general and administrative expense rose $326,196, including higher salaries, insurance and depreciation.
- First-half net loss included $518,700 of noncash stock-option compensation. Other income was $80,257 for the half-year, compared with $1,980 in 2019; the filing identifies a $10,000 EIDL advance recorded as other income but does not clearly explain the full composition of the reported other income.
- The company received $405,860 in SBA loans related to COVID-19. The $10,000 EIDL advance was described as nonrepayable.
- The filing revised certain 2019 comparative results for errors relating to AVX revenue timing and expense classifications. Management said the errors were not material to the prior-period statements; revised comparisons are used in this summary.
Outlook, risks and contingencies
- Going concern: The filing says recurring losses, operating cash burn and the accumulated deficit raise doubt about the company’s ability to continue as a going concern. Continued shareholder support, debt repayment capacity, additional equity financing and achieving profitability are cited as dependencies; there is no assurance adequate financing will be obtained.
- Development and commercialization: Management is directing substantial resources to bring Ubiquitor and its application to production and distribution, and anticipates needing additional sales and marketing employees. The filing provides no quantified financial guidance or forecast.
- Technology risk: PLC performance claims are based on preliminary internal testing. The company described an intended 2020 chip launch and favorable international search report for a patent application, but commercialization, patent issuance and market acceptance remain uncertain.
- Legal matter: A former AVX employee filed a California lawsuit alleging wrongful termination, retaliation and labor-law violations, seeking unspecified damages and attorneys’ fees. The company intends to defend the case; the filing does not quantify a potential loss.
- Controls: Management reported disclosure controls as effective, but separately 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.
- The company reported no off-balance-sheet arrangements. It reported no subsequent events requiring recognition or disclosure.
Key facts investors should verify
- Cash burn, available financing and management’s basis for its going-concern assessment.
- Revenue trends and gross-margin performance, particularly the impact of Perfecular order levels and AVX operations.
- The nature and sustainability of the $80,257 first-half other income and the accounting and repayment or forgiveness status of SBA loans.
- Potential costs and developments in the former employee lawsuit.
- Progress toward Ubiquitor and PLC commercialization, including independent validation of technical claims and patent status.
- Remediation of the material weakness in financial reporting controls and the accuracy of revised 2019 comparative figures.