FOCUS UNIVERSAL INC. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 15, 2020. Focus develops universal smart instrumentation and sells sensors and measurement products; its consolidated business also includes Perfecular and AVX, an IoT installation and integration company.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $310,609 | $153,883 (revised) |
| Gross profit (loss) | $(27,463); margin (8.8%) | $22,152; margin 14.4% |
| Operating expenses | $942,818 | $558,056 |
| Operating loss | $(970,281) | $(535,904) |
| Net loss | $(922,306); $(0.02) per share | $(535,179); $(0.01) per share |
| Cash used in operating activities | $(649,587) | $(369,117) |
- Revenue increased about 102% year over year, primarily because AVX contributed $170,230 in Q1 2020; the comparable 2019 period included AVX only after its March 15 acquisition. Related-party revenue was $14,672 versus $3,000.
- Gross results deteriorated to a loss. Management attributed AVX’s project losses to material and labor costs exceeding original estimates.
- Operating expenses rose about 69%, including higher professional fees ($433,539, up $83,140) and general and administrative costs ($389,813, up $279,160). The company recorded $259,350 of noncash stock-option compensation.
- Other income was $46,781, with no clear explanation of its source in the filing text. It partially offset operating losses.
- Cash was $1,493,283 at quarter-end, down $699,587 from year-end. Working capital was $1,394,232, versus $2,007,113 at December 31, 2019.
- Total liabilities were $566,672, including $128,707 of lease liabilities on the balance sheet. The $50,000 related-party promissory note was repaid in January 2020; no balance remained at March 31. No new investing cash flows were reported.
- Stockholders’ equity was $6,037,619; 40,959,741 common shares were outstanding at March 31.
Material changes, outlook and risks
- The company revised Q1 2019 results after identifying premature revenue recognition following the AVX acquisition and expense classification errors. Revised 2019 revenue was $153,883, compared with $242,738 previously reported; revised net loss was $535,179, compared with $447,283. The company said the errors were not material to the affected periods and reported no balance-sheet impact.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the Q1 net loss, operating cash outflow, $8,101,307 accumulated deficit, and dependence on shareholder support, financing, and achieving profitability. It gave no quantified financial guidance.
- The company is developing the Ubiquitor universal sensor platform and said it had completed an initial prototype production run, but had not begun development of a second generation. It described commercialization and financing as uncertain. The filing provides no specific assessment of COVID-19’s effects.
- AVX projects exceeded quoted labor and material costs. Other risks include customer collection and inventory estimates, competition, and reliance on successful product development.
- After quarter-end, a former AVX executive filed a California lawsuit alleging wrongful termination, retaliation, and other employment-law claims; damages were unspecified. The company said it would defend the action and could not predict the outcome.
- Management called disclosure controls effective, but separately concluded financial-reporting controls had a material weakness due mainly to inadequate staffing and technical expertise and reliance on outside consultants. No quarterly changes to internal controls were reported.
- The filing says AVX-related intangible assets and goodwill were fully impaired in 2019, with charges of $47,975 and $458,490, respectively.
Investor verification points
- Assess cash burn, available financing, and the company’s going-concern warning against its commercialization plans.
- Determine whether AVX can price and execute projects profitably after the reported cost overruns.
- Clarify the composition and recurrence of the $46,781 of Q1 other income.
- Reconcile the lease-liability disclosures: the balance sheet and lease summary report $128,707, while the maturity table states a net lease obligation of $138,940.
- Review the stock-option disclosures: the filing reports 140,000 options vested and 70,000 unvested, but elsewhere states 210,000 were exercisable at quarter-end.
- Monitor the employment lawsuit, related-party receivable and revenue, and remediation of the material weakness in financial reporting controls.