FOCUS UNIVERSAL INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward-looking statements. Narrative Description of the Business Focus Universal Inc. (the “Company,” “we,” “us,” or “our”) is a Nevada corporation. We have developed four fundamental disruptive proprietary technologies that solve the most fundamental problems plaguing the internet of things (“IoT”) industry through: (1) increasing overall chip integration by shifting it to the device level; (2) creating a faster 5G cellular technology by using ultra-narrowband technology; (3) leveraging ultra-narrowband power line communication (“PLC”) technology; and (4) User Interface Machine auto generation technology. We also manufacture and sell sensor devices and are a wholesaler of various air filters and digital, analog, and quantum light meter systems. For the years ended December 31, 2020 and 2019, we generated significant amount of our revenue from sales of a broad selection of agricultural sensors and measurement equipment which is currently our primary revenue generating business segment. Our Current Products Include: We are a wholesaler of various digital, analog, and quantum light meters and filtration products, including fan speed adjusters, carbon filters and HEPA filtration systems. We source these products from manufacturers in China and then sell them to a major U.S. distributor, Hydrofarm, who resells our products directly to consumers through retail distribution channels and in some cases, places its own branding on our products. Strategy behind the AVX Acquisition On March 15, 2019, the Company completed a transaction with Patrick Calderone to purchase 100% of the outstanding stock of AVX, an IoT installation and management company based in southern California. Through our acquisition of AVX, and implementation of our devices into AVX’s installation business, we are planning to offer ordinary families an entire smart home product line at a fraction of the current market price. We have finished the design of smart lighting control, air conditioner, sprinkler, garden light control, garage door control and heating control. We are developing a swimming pool control device, smoke detector and carbon monoxide monitor. We believe these product lines could be completed by the end of 2021. Ubiquitor Wireless Universal Sensor Device Our USIP technology is an advanced software and hardware integrated instrumentation platform that uses a large-scale modular design approach. The large-scale modular design approach subdivides instruments into a foundation component (a USIP) and architecture-specific components (sensor nodes), which together replaces the functions of traditional instruments at a fraction of their cost. 4 The USIP, which is compatible with a significant percentage of the instruments currently manufactured, consists of universal and reusable hardware and software. The universal hardware in the USIP is (i) a smartphone, computer, or any mobile device capable of running our software that includes a display and either hardware controls or software control surfaces, and (ii) our Ubiquitor, which is designed to be the universal data logger that acts as a bridge between the computer or mobile device and the sensor nodes. We call our flagship USIP device the “Ubiquitor” due to its ability to measure and test a variety of electrical and physical phenomena such as voltage, current, temperature, pressure, sound, light, and humidity—both wired and wirelessly. We have created and assembled prototype models of the Ubiquitor in limited quantities and plan to expand our assembly in the second half of 2021. Recently, the Company has devoted a substantial number of resources to research and development to bring the Ubiquitor and its App to full production and distribution. We anticipate that the sales and marketing involved with bringing the Ubiquitor to market will require us to hire a number of new employees in order to gain traction in the market. We intend to introduce the Ubiquitor in smart home installations to reduce costs and increase functionality, as well as implement the Ubiquitor device in greenhouses and other agricultural warehouses that require regulation of light, humidity, moisture, and other measurable scientific units required to create optimal growing conditions. We also offer an array of traditional handheld measurement and control meters through our wholesale distribution platform. Filter and Handheld Meter Wholesaler We are a wholesaler of various filtration products and digital meters. We source our products from manufacturers in China and then sell to a major U.S. distributor who resells our products directly to consumers through retail distribution channels. Specifically, we sell the following products: Fan Speed Adjuster device . We provide a fan speed adjuster device to retailers and distributors. Designed specifically for centrifugal fans with brushless motors, our adjuster device helps ensure longer life by preventing damage to fan motors by adjusting the speed of centrifugal fans without causing the motor to hum. These devices are rated for 350 watts max, have 120VAC voltage capacity and feature an internal, electronic auto-resetting circuit breaker. Carbon filter devices . We also sell two types of carbon filter devices to distributors. These Carbon filter devices are professional grade filters specifically designed and used to filter air in greenhouses that might be polluted by fermenting organics. One of these filters can be attached to a centrifugal fan to scrub the air in a constant circle or can be attached to an exhaust line as a single pass filter, which moves air out of the growing area and filters unwanted odors and removes pollens, dust, and other debris in the air. The other filter is designed to be used with fans from 0-6000 C.F.M. HEPA filtration device . We provide an organic air high efficiency particulate arrestance (“HEPA”) filtration device at wholesale prices to distributors and retailers. Manufactured, tested, certified, and labeled in accordance with current HEPA filter standards, this device is targeted towards greenhouses and grow rooms and designed to keep insects, bacteria, and mold out of grow rooms. We sell these devices in various sizes. Digital light meter . We provide a handheld digital light meter that is used to measure luminance in FC units, or foot-candles. The meter we sell is designed to be full cosine corrected for the angular incidence of light (meaning if you are not holding the sensor perpendicular to the light source, the sensor will still read the light correctly). The meter has a built-in low battery indicator and is designed to accurately measure to 40,000 FC. Quantum par meter . We provide a handheld quantum par meter used to measure photosynthetically active radiation (“PAR”). This fully portable handheld PAR meter is designed to measure PAR flux in wavelengths ranging from 400 to 700 nm. It is designed to measure up to 10,000 umol. 5 Research and Development Efforts of Power Line Communication Power Line Communication (“PLC”) is a communication technology that enables sending data over existing power cables. One advantage is that PLC does not require substantial new investment for its communications infrastructure, it utilizes existing power lines. These power lines form a distribution network that already penetrates in to every residential, commercial and industrial premises. Ideally, the power lines could be used to carry voice, data and video traffic. Given that the power grid is an established ubiquitous network, connectivity via PLC is potentially the most cost-effective, scalable interconnectivity approach for the internet of things. We believe PLC can be an integral part of our communication infrastructure for the IoT, which enables reliable, real-time measurements, monitoring and control. A large variety of appliances may be interconnected by transmitting data through the same wires that provide electrical energy. Wireless networks allow multiple users to access large amounts of information without the hassle of running wires to and from each IoT device. However, wireless networks are far from perfect; and there are a number of disadvantages that an individual or organization may face when using a wireless network. Thus, we hope that our proprietary power line communication technology could potentially offer a promising alternative to wireless networks. Since every room in residential and commercial structures already include multiple power outlets, the power line infrastructure represents an excellent network to share data among intelligent devices, specifically in the smart home installations that we are currently performing. Using PLC would mean that costly ethernet cable networks to carry network information could be eliminated, as the same signals may be carried on the existing power lines. We plan to leverage the communications technology of PLC to enhance the Ubiquitor and make the Ubiquitor a central component of the smart home and gardening systems we are currently developing. The goal would be that our Ubiquitor would be used to send or receive control signals from a smart device, and control hundreds of devices in near real time. We intend to apply the same concept to commercial and industrial applications. Intellectual Property Protection On November 4, 2016, we filed a U.S. patent application number 15/344,041 with the USPTO. On March 5, 2018, we issued a press release announcing that the USPTO published an Issue Notification for U.S. Patent Application No. 9924295 entitled “Universal Smart Device,” which covers a patent application regarding the Company’s Universal Smart Device. The patent was issued on March 20, 2018. Pursuant to recent research and development efforts, we recently received an issue notification from the USPTO for an application filed on June 2, 2017 that is a process for improving a spectral response curve of a photo sensor. The small and cost-effective multicolor sensor and its related software protected by the potential patent we believe could achieve a spectral response that approximates an ideal photo response to take optical measurement. The patent was issued on February 26, 2019. In addition, we have been notified that the USPTO published a notice of allowance for a patent application we filed on March 12, 2018 as application No. 15/925,400. The patent title is a “Universal Smart Device” which is a universal smart instrument that unifies heterogeneous measurement probes into a single device that can analyze, publish, and share the data analyzed. The issue fee was paid on March 14, 2019. On November 29, 2019, the Company filed an international utility patent application filed through the patent cooperation treaty as application PCT/US2019/63880. On in late April 2020, the Company was notified that it received a favorable international search report from the International Searching Authority regarding this patent application, which patents the Company’s powerline communication technology. The World International Property Organization report cited only three category “A” documents indicating that the Company’s application met both the novelty and non-obviousness patentability requirements. Consequently, the Company is optimistic that the patent covering the claims for its PLC technology will be issued in due course and will allow the Company to implement strong protections on the PLC technology worldwide. 6 Impact of the Covid-19 pandemic on our operations During 2020, our subsidiary AVX was negatively impacted by COVID-19 pandemic. AVX encountered delays in certain projects due to the pandemic’s restriction and access control at job sites as well as halts in projects due to confirmed cases at the clients’ sites. We also had employees contract the virus. We were also negatively impacted due to delay in research and development work due to confirmed COVID-19 cases in the office. In 2021, we had delays in receiving inventory for Perfecular to fulfill our sales order due to shortage of shipment containers caused by the pandemic, which resulted in delays in completing our sales cycles. Results of Operations For the three months ended September 30, 2021 compared to the three months ended September 30, 2020 Revenue, cost of revenue and gross profit Our consolidated gross revenue for the three months ended September 30, 2021 and 2020 was $634,777 and $544,003, respectively, which included revenue from related parties of $0 and $0, respectively. Cost of revenue for the three months ended September 30, 2021 and 2020 were $521,091 and $384,371, respectively. Revenue for the three months ended September 30, 2021 increased $90,774 due to Perfecular, Inc. prior quarter’s order was arrived in this quarter due to shipping container was not available before, resulting in gross profit of $113,686 and $159,632 for the three months ended September 30, 2021 and 2020, respectively. Operating Costs and Expenses The major components of our operating expenses for the three months ended September 30, 2021 and 2020 are outlined in the table below: For the three months ended September 30, 2021 For the three months ended September 30, 2020 Increase (Decrease) $ Selling expense $ 14,776 $ 677 $ 14,099 Officer compensation 34,600 34,000 600 Research and development 55,525 62,039 (6,514 ) Professional fees 450,624 243,799 206,825 General and administrative 315,715 294,795 20,920 Total operating expenses $ 871,240 $ 635,310 $ 235,930 Selling expense for the three months ended September 30, 2021 was $14,776, compared to $677 for the three months ended September 30, 2020. Selling expense incurred was mainly from third party advertising fees. The increase of selling expense was due to an increase in advertising fees. Officer compensation was $34,600 and $34,000 for the three months ended September 30, 2021 and 2020, respectively. Research and development costs were $55,525 and $62,039 for the three months ended September 30, 2021 and 2020, respectively. The decrease in 2021 is accounted for by decreased spending on supplies in 2021. The decrease of research and development costs was due to the fact that our newly developed products have completed the development stage and entered the testing phase. Professional fees were $450,624 during the three months ended September 30, 2020 compared to $243,799 during the three months ended September 30, 2021. The increase in professional fees mainly resulted for initial public offering. 7 General and administrative expenses of $315,715 incurred during the three months ended September 30, 2021 primarily consisted of salaries of $82,382, insurance expense of $116,546 and depreciation expense of $41,062. General and administrative expenses of $294,795 incurred during the three months ended September 30, 2020 primarily consisted of salaries of $115,155, insurance expense of $56,168, and depreciation expense of $40,559. The increase was mainly due to increased insurance premiums because of the Company’s uplist to NASDAQ. Salaries decreased due to a decrease in the number of employees. Net Losses During the three months ended September 30, 2021 and 2020, due to the factors discussed above we incurred net losses of $1,337,754 and $438,360 respectively. For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 Revenue, cost of revenue and gross profit Our consolidated gross revenue for the nine months ended September 30, 2021 and 2020 was $1,259,920 and $1,289,160, respectively, which included revenue from related parties of $15,141 and $21,267, respectively. Cost of revenue for the nine months ended September 30, 2021 and 2020 were $1,021,937 and $1,035,600, respectively. Revenue for the nine months ended September 30, 2021 decreased $29,240 due to an inability to ship goods sold by Perfecular, Inc. because the required shipping container was not available. In addition to the decrease in revenue, gross profit decreased to $237,983 compared to $253,560 for the nine months ended September 30, 2021 and 2020, respectively. Operating Costs and Expenses The major components of our operating expenses for the nine months ended September 30, 2021 and 2020 are outlined in the table below: For the nine months ended September 30, 2021 For the nine months ended September 30, 2020 Increase (Decrease) $ Selling expense $ 15,734 $ 17,696 $ (1,962 ) Officer compensation 107,700 102,000 5,700 Research and development 165,897 194,232 (28,335 ) Professional fees 1,121,774 1,071,369 50,405 General and administrative 967,160 974,125 (6,965 ) Total operating expenses $ 2,378,265 $ 2,359,422 $ 18,843 Selling expense for the nine months ended September 30, 2021 was $15,734, compared to $17,696 for the nine months ended September 30, 2020. Selling expense incurred were mainly third-party advertising fees. The decrease of selling expense was due to a decrease in advertising fees. Officer compensation was $107,700 and $102,000 for the nine months ended September 30, 2021 and 2020, respectively. The increase was due to an adjustment of the Chief Financial Officer’s compensation. Research and development costs were $165,897 and $194,232 for the nine months ended September 30, 2021 and 2020, respectively. The decrease was due to a decrease in the supplies needed for the research and development. The decrease of research and development costs was due to the fact that we completed the development stage and our newly developed products entered the testing phase. 8 Professional fees were $1,121,774 during the nine months ended September 30, 2020 compared to $1,071,369 during the nine months ended September 30, 2021. The increase in professional fees mainly resulted from the IPO in 2021 compared to the prior period. General and administrative expenses of $967,160 incurred during the nine months ended September 30, 2021 primarily consisted of salaries of $344,133, depreciation expense of $121,933, and insurance expense of $251,690. General and administrative expenses of $974,125 incurred during the nine months ended September 30, 2020 primarily consisted of salaries of $377,929, insurance expense of $188,202 and depreciation expense of $121,684. Net Losses During the nine months ended September 30, 2021 and 2020, the company incurred net losses of $2,500,415 and $1,988,333 respectively, due to the factors discussed above. Liquidity and Capital Resources Working Capital September 30, 2021 December 31, 2020 Current Assets $ 10,010,770 $ 1,007,630 Current Liabilities (629,512 ) (527,559 ) Working Capital $ 9,381,258 $ 480,071 Cash Flows The table below, for the periods indicated, provides selected cash flow information: For the nine months ended September 30, 2021 For the nine months ended September 30, 2020 Net cash used in operating activities $ (1,496,812 ) $ (1,725,512 ) Net cash used in investing activities (6,875 ) (1,314 ) Net cash provided by financing activities 10,455,528 355,860 Net change in cash $ 8,951,841 $ (1,370,966 ) Cash Flows from Operating Activities Our net cash outflows from operating activities of $1,496,812 for the nine months ended September 30, 2021, was primarily the result of our net loss of $2,500,415 and changes in our operating assets and liabilities offset by the add-back of non-cash expenses. The change in operating assets and liabilities includes an increase in accounts receivable of $120,503, a decrease in inventory of $20,969, an increase in prepaid expenses of $55,280, a decrease in deposits of $100,000, an increase in accounts payable and accrued liabilities of $172,474, a decrease in accounts payable – related party of $17,471, an increase in other current liabilities of $17,299, a decrease in customer deposits of $57,106, and a decrease in other liabilities of $17,135. Non-cash expense includes add-backs of $7,794 in bad debt expense, $1,689 in inventory reserve reductions, $121,932 in depreciation expense, $258,960 in gain on extinguishment of debt, $1,284,780 in change in fair value of warrant liability, $550,406 in gain on settlement of derivative liability, $2,985 in amortization of right-of-use assets, $36,000 in stock-based compensation, and $320,512 in stock option compensation. 9 Our net cash outflows from operating activities of $1,725,512 for the nine months ended September 30, 2020 was primarily the result of our net loss of $1,998,333 and changes in our operating assets and liabilities offset by the add-back of non-cash expenses. The change in operating assets and liabilities includes an increase in accounts receivable of $179,041, an increase of accounts receivable – related party of $22,410, a decrease in inventory of $788, an increase in other receivables of $200, an increase in prepaid expenses of $30,689, an increase in deposits of $100,000, a decrease in accounts payable and accrued liabilities of $34,006, decrease in other current liabilities of $12,334, decrease in interest payable – related party of $1,750, and a decrease in customer deposit of $121,852. Non-cash expense included add-backs of $6,927 in bad debt expense, $3,853 in inventory reserve, $121,684 in depreciation expense, $36,000 in stock-based compensation, $605,150 in stock option compensation, and $1,593 in amortization of right-of-use assets. We expect that cash flows from operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our net revenues and operating results, utilization of new revenue streams, collection of accounts receivable, and timing of billings and payments. Cash Flows from Investing Activities For the nine months ended September 30, 2021 we had cash outflow from investing activities of $6,875 from the purchase of property and equipment. For the nine months ended September 30, 2020 we had cash outflow from investing activities of $1,314 from the purchase of property and equipment. Cash Flows from Financing Activities For the nine months ended September 30, 2021, cash inflows of $10,455,528 were due to proceeds of SBA loans of $267,297, repayment of SBA loans of $137,900, proceeds from bank loan of $1,500,000, repayment of the bank loan of $1,500,000, proceeds from IPO, net of $10,326,131. For the nine months ended September 30, 2020 the Company paid off a promissory note, resulting in cash outflows of $355,860 were due to repayment on promissory note of $50,000 and obtained loans from the SBA in the amount of $405,860. Going Concern In the long term, the continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to repay its debt obligations, to obtain necessary equity financing to continue operations, and the attainment of profitable operations. For the period ended September 30, 2021, the Company had a net loss of $2,500,415 and negative cash flow from operating activities of $1,496,812. In February 2021, the Company has obtained a $1,500,000 loan from a financial institution and has a $1,500,000 loan commitment from a private related party. The loan from the financial institution requires monthly payments with the final payment due in 2026. The related party loan will accrue interest at 10% until March 15, 2022, or nine months from the date the loan is funded, whichever is later (the “Initial Interest Accrual Date”). Interest on any unpaid principal after Initial Interest Accrual Date shall accrue at a fixed rate of 12% per annum until paid. The Company reserves the right to prepay this loan agreement (in whole or in part) after 6 months of the first day with no prepayment penalty. The Company may make, in its sole discretion, payments of interest only, or interest and principal, provided that the principal is not paid in full prior to nine months from the date the loan is funded. The Company raised $11.5 million through an underwritten public offering in September 2021. With the January 1, 2021 beginning cash amount of $583,325 and the loan of $1,500,000, the Company will have enough cash to cover its projected annual cash burn rate of $1,967,074. With IPO $11.5 million, the Company will have adequate reserves to continue operations in 2021 and 2022. 10 In 2020 the Company had negative operating cashflow of approximately $1.96 million , mainly resulting from net loss. The Company is currently developing its products and licenses and expects to generate profit once the products and licenses available for the market, which will begin to alleviate the negative cashflow. Currently, the Company is testing 4 Mbps ultra-narrowband power line communication printed circuit boards. The testing is completed in second quarter of 2021. The ultra-narrowband power line communication products will launch in fourth quarter of 2021. A portable universal smart device is also in the final printed circuit board layout stage. The Company is planning to launch this product in fourth quarter of 2021. Initially, new products would require cash to manufacture and promote. The Company expects to begin generating positive cashflow with the launch of above-mentioned products from second quarter of 2022. Overall, with the capital raising in September 2021, the Company will have an adequate cash for the Company to continue operation as a going concern throughout 2021 and 2022. The Company expects the loans and offering will generate cash for 2021’s operation and be able to pay off the loans obtained through the offering with sufficient cashflow for 2021 and 2022. Thus, the previous factors raising substantial doubt to continue as a going concern have been alleviated. Off-Balance Sheet Arrangements As of September 30, 2021, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation SK. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.