FOCUS UNIVERSAL INC. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; financial statements are unaudited. Focus Universal develops universal smart-instrument and IoT technologies, sells sensor and filtration products, and provides IoT installation services through AVX.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $634,777 | $544,003 | $1,259,920 | $1,289,160 |
| Gross profit | $113,686 | $159,632 | $237,983 | $253,560 |
| Gross margin | 17.9% | 29.3% | 18.9% | 19.7% |
| Operating expenses | $871,240 | $635,310 | $2,378,265 | $2,359,422 |
| Operating loss | ($757,554) | ($475,678) | ($2,140,282) | ($2,105,862) |
| Net loss | ($1,337,754) | ($438,360) | ($2,500,415) | ($1,988,333) |
| Basic and diluted loss per share | ($0.03) | ($0.01) | ($0.06) | ($0.05) |
- At September 30, cash was $9.54 million, versus $583,325 at December 31, 2020. Working capital was $9.38 million, compared with $480,071 at year-end 2020. Total assets were $14.44 million and total liabilities $718,170.
- Nine-month operating cash outflow was $1.50 million, compared with $1.73 million in 2020; investing outflow was $6,875. Financing provided $10.46 million, primarily from $10.33 million of net IPO proceeds. Cash increased by $8.95 million.
- Debt at quarter-end consisted of $267,297 in SBA loans ($178,639 current; $88,658 long-term). The $1.5 million bank loan was repaid in September. Certain COVID-19 SBA loans were forgiven; another $108,750 AVX PPP loan was forgiven after quarter-end, on October 22, 2021.
Changes and notable items
- Q3 revenue rose 16.7% year over year, which management attributed to a delayed Perfecular shipment arriving during the quarter. Nine-month revenue fell 2.3%, with management citing unavailable shipping containers that delayed shipments. Nine-month gross profit declined 6.1%; Q3 gross margin contracted substantially.
- Q3 operating expenses increased $235,930 year over year, including higher professional fees and selling costs. Nine-month operating expenses were broadly stable, up $18,843. Professional fees included IPO-related costs.
- The nine-month net loss widened by $512,082. It included a $1.285 million noncash loss from remeasurement of a warrant liability, partly offset by a $550,406 gain on settlement of a derivative liability and $260,450 in debt-extinguishment gains. These items materially affect comparability.
- The September IPO sold 2.3 million shares at $5.00 per share, raising approximately $10.3 million net. Shares outstanding increased from 40,959,741 at year-end to 43,259,741 at September 30; an additional 121,149 shares from a cashless warrant exercise were recorded as shares to be issued.
Outlook, risks and controls
- Management said IPO proceeds provided adequate reserves to continue operations through 2021 and 2022 and that prior substantial doubt about going concern had been alleviated. The company nevertheless reported a $2.50 million nine-month net loss and $1.50 million operating cash outflow.
- Management expected ultra-narrowband power-line-communication products and a portable universal smart device to launch in Q4 2021, and projected positive cash flow beginning in Q2 2022. These are forward-looking expectations, not reported results; new products were expected to require manufacturing and marketing cash.
- Execution risks include product testing, commercialization and customer adoption; pandemic-related shipping delays; and reliance on concentrated counterparties. One customer represented 81% of nine-month revenue and 39% of receivables; one vendor represented 83% of purchases and 100% of accounts payable.
- The filing reports no material legal proceedings or recorded litigation contingencies and no off-balance-sheet arrangements. It notes that cash deposits may exceed FDIC insurance limits.
- Management concluded disclosure controls were effective, but separately reported 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.
Important facts for investors to verify
- Whether the planned Q4 2021 product launches occurred and whether the products gained commercial traction or generated the projected cash flow.
- Whether the high customer and vendor concentrations persist, and whether delayed shipments or supply constraints continue to affect revenue and gross margin.
- How IPO cash is being deployed relative to operating losses and the stated 2021–2022 runway expectations.
- Progress in remediating the material weakness in financial-reporting controls and the accuracy of future filings.
- The filing’s narrative contains an apparent inconsistency in the stated direction of the professional-fee comparison; the financial statements show nine-month 2021 fees of $1,121,774 versus $1,071,369 in 2020.