FOCUS UNIVERSAL INC. 10-K

Item 7. 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 our behalf. We disclaim any obligation to update forward-looking statements. Focus Universal Inc., a Nevada corporation (the “Company,” “we,” “us,” or “our”), has developed five proprietary platform technologies that we believe solve the most fundamental problems plaguing the internet of things (“IoT”) industry by: (1) increasing the overall degree of chip integration capabilities by shifting integration from the component level directly 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; (4) developing a natural integrated programming language (“NIPL”) applied to software development, which generates a user interface through machine auto generation technology, and (5) developing a universal smart instrumentation platform (“USIP”). 45 In addition to the abovementioned technologies that we have developed, we provide sensor devices and 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. For the years ended December 31, 2021 and 2020, we generated a significant amount of our revenue from sales of a broad selection of agricultural sensors and measurement equipment, which is currently our primary business. For a greater description of our technologies, our business segments and the products we are currently selling, see “Part I – Item 1. Business” above. 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. The USIP has an open architecture, incorporating a variety of individual instrument functions, sensors, and probes from different industries and vendors. The platform features the ability to connect potentially thousands of different sensors or probes, addressing major limitations present in traditional instrumentation systems. We believe the platform represents a technological advancement in the IoT marketplace by integrating large numbers of technologies, including cloud technology, wired and wireless communication technology, software programming, instrumentation technology, artificial intelligence, PLC, and sensor networking into a single platform. The result of such integration is a smaller, cheaper and faster circuit system design than those currently offered in the instrumentation market. 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 2022. Our prototype Ubiquitor is compatible with standard desktop computers running either Windows OS or MacOS and Android- or iOS-based mobile devices and acts as a conduit that communicates with a group of sensors or probes manufactured by different vendors in a manner that requires the user to have little or no knowledge of their unique specifications. The data readout is displayed on the computer or mobile device display in application software we have created for use with a Windows PC and are creating for use with a Mac. We are designing the application software (the “App”) to have a graphical representation of control and indicator elements common in traditional tangible instruments, such as knobs, buttons, dials, and graphs, etc. Utilizing the Ubiquitor and the App, users and instrument manufacturers will be free to add, remove, or change a sensor module for their special industrial or educational application without creating their own application software and designing their own hardware. Our developers are designing and implementing a soft control touch screen interface that supports real-time data monitoring and facilitates instrument control and operation. The Company continues to devote a substantial number of resources to research and development despite a slight decrease to the overall number year over year 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. Our universal smart development protocol focuses not only on the design of the hardware and software modules but also on the design of the overall universal smart instruments system, guided by the principles of structure, universality and modularity. 46 Our Ubiquitor device is a fully modular system with a universal sensor node and gateway system that uses a computer or mobile device as the output display module responsible for displaying the readings of various sensor nodes. We have completed an initial production run of prototype Ubiquitor devices and intend to proceed into full-scale production. The Ubiquitor’s sensor analytics system integrates event-monitoring, storage and analytics software in a cohesive package that provides a holistic view of the sensor data it is reading. The physical hardware consists of: 1. The sensor nodes, which come in hundreds of different varieties of sensor instruments in the form of a USB stick, with both male and female ports; and 2. The Ubiquitor as the main hardware gateway, which is a small cell phone-sized device with integrated circuits. We believe the Ubiquitor device can connect up to thousands of potential sensor nodes, and integrate data using embedded software to display the data and all analytics onto a digital screen (desktop, smartphone or mobile device displays) using a Wi-Fi connection. As disclosed in our patent application, we have already tested up to 256 sensor instrument readouts. Most types of nodes and probes can connect to the hardware. If the sensor size is bigger than the standard probe size, it is possible to simply use a USB cable to connect the probe and the hub. All data and analytics are displayed on a single screen, with tools that record and keep track of all measurements, and sort and display analytic information in easy-to-read charts. The Ubiquitor is a general platform that collects data in real time, and is intended to be adapted to many industrial uses. By using the universal hardware or USIP, we believe we could achieve the following efficiencies in instrumentation systems: 1. Cut production costs. Smartphone technology is widely used on the small sensor device market. By utilizing smartphone technology, the Ubiquitor will add superior functionality and performance, while cutting manufacturing and production costs. 2. Reduce the effort required to develop a new sensor product. With the Ubiquitor, we believe that there will be no need for device manufacturers to research and develop new monitoring and operating components because they will just need to develop new sensor nodes or probes that may be integrated into our software technology. 3. Reduce clutter. It is anticipated that the Ubiquitor could also dispense with some of the hassle of connecting cables, since the Ubiquitor allows wired and wireless transmission of sensor data and may allow wireless access to networks, such as a PLC network. 47 Also, we plan to design a full line of products for the gardening industry by integrating the Ubiquitor device into a gardening system. The system would include the Ubiquitor connected to a light control node, temperature sensor, humidity sensor, digital light sensor, quantum PAR sensor, pH sensor, total dissolved solids (“TDS”) sensor and carbon dioxide sensor. We believe the combination of the Ubiquitor with these sensors would offer the same features as a combination of dozens or even hundreds of different standalone instruments in the gardening industry. The Ubiquitor-powered gardening system would be used to replace these standalone devices and could offer another case study of the effectiveness of the application of universal smart technology to such systems. The development of universal smart instruments and the IoT have a considerable amount of overlap, with the only difference being the number of sensor nodes involved. We plan to take advantage of this overlap and unify universal smart instruments and the IoT into a single system, building the IoT infrastructure for both residential and commercial uses and charging monthly subscription fees. End users will be able to plug any peripheral devices into the power outlet and enjoy the IoT connectivity throughout their home or business. 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 of this technology is that PLC does not require substantial new investment for its communications infrastructure. Rather, PLC utilizes existing power lines, thereby forming a distribution network that penetrates most residential, commercial and industrial premises. Accordingly, connectivity via PLC is a cost-effective and scalable interconnectivity approach for the IoT. 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. We are currently developing a wired alternative to wireless networks that utilizes installed power lines to transmit information. Our PLC technology uses an ultra-narrowband spectrum channel of less than 1 KHz to establish a long-distance link between transmitter and receiver. Thus, we believe that our proprietary ultra-narrowband PLC technology will offer a promising alternative to wireless networks and provide the backbone communication infrastructure for IoT devices. The primary design goal of the power line network is electric power distribution, not data transmission. The harsh electrical noise present on power lines and variations in equipment and standards make data transmission over the power grid difficult. These technological challenges have impeded, or even halted, progression of PLC technology. We continue to build upon our existing research and development with the intention of inventing an ultra-narrowband PLC technology that attempts to tackle two challenges: 1) overcoming interference caused by electronic noise on the power line system; and 2) bandwidth. Preliminary internal testing suggests that we have achieved significant noise rejection and interference suppression. In our preliminary internal testing, we have been able to increase bandwidth to 4 megabits per second with the potential for more, while simultaneously effectively dealing with electrical noise and interference. Such data transfer rates were delivered at a bandwidth of less than 1000 Hz, thereby achieving a bandwidth efficiency (measured as bits per second per Hz) greater than 4000. Based on the promising results of our internal testing, we have begun designing a proprietary PLC microchip and have set an intended launch date for 2022. 48 We believe that because residential and commercial structures already include multiple power outlets, the power line infrastructure represents an excellent network to share data among intelligent devices, particularly in the smart home installations that we are currently performing through AVX. 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. On December 23, 2021, Focus Universal (Shenzhen) Technology Co. LTD was founded as a mainland China office for manufacturing procurement expertise and support research and development activities. Focus Universal (Shenzhen) Technology Co. LTD is designed to function as a branch office accessing high level ability to source products and build relationships with manufacturers in the region and as a lower cost form of support research and development as engineers are more plentiful in the region. In the future, this office could also handle other online marketing and marketing production activities, provided a cost and quality benefit exists at the time. 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. Subsequent to our internal research and development efforts, we filed with the USPTO on June 2, 2017, a patent application regarding a process for improving the 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 measure optical measurement. The patent was issued on February 26, 2019. On November 29, 2019, the Company filed an international utility patent application filed through the patent cooperation treaty as application PCT/US2019/63880. In 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 PLC 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. On May 19, 2021, we filed thirteen provisional patent applications with the USPTO that we had been researching and developing for years encompassing a broad spectrum of technology areas including sensor technology, wired and wireless communications, power line communications, computer security, software solutions, interconnected technological communications, smart home systems and methods for both home and hydroponic areas, dynamic password cipher, local file security, payment card security, infrared sensor, and a method and apparatus for high data rate transmission. In the fourth quarter of 2021, we hired the law firm of Knobbe Martens, Olson & Bear, LLP to serve as outside intellectual property counsel for the Company. The firm is working on transferring the Company’s provisional patent applications to formal patent applications. Competitors There are several competitors we have identified in the wireless sensor node industry, including traditional instruments or devices manufacturers such as Hanna Instruments and Extech Instruments. Hach developed and launched the SC1000 Multi-parameter Universal Controller, a probe module for connecting up to 32 digital sensors or analyzers. However, their products are not compatible with smart phones yet; and we believe their price point is still prohibitive to consumers. Monnit Corporation offers a range of wireless and remote sensors. Many of Monnit’s products are web-based wireless sensors that usually are not portable because of their power consumption. Also, the sensors’ real-time updates are slow; and we believe security of the web-based sensor data acquisition also may be a concern. In addition to purchasing the device, consumers usually have to pay monthly fees for using web-based services. We are not trying to compete with traditional instruments or device manufacturers because we utilize our Ubiquitor device in conjunction with our smartphone application, which we believe will be a completely different product category. 49 Market Potential We believe that wireless universal smart technology will play a critical role for traditional instrument manufacturers, as it is too expensive and difficult to develop for medium or smaller companies. The cost factor is the first consideration when deciding whether a company wants to develop smart wireless technologies and implement them in their products or use them in their field testing. We also hope to play a role in academic laboratories, particularly with smaller academic laboratories who are sensitive to price. Results of Operations For the year ended December 31, 2021 compared to the year ended December 31, 2020 Revenue Our consolidated gross revenue for the years ended December 31, 2021 and 2020 was $1,434,446 and $1,678,967, respectively, which included revenue from related parties of $29,084 and $26,449, respectively. Revenue for the year ended December 31, 2021 decreased $244,521 due to AVX Design & Integration Inc. being unable to generate more service work or develop a big project during the pandemic. Cost and Operating Expenses The major components of our cost and operating expenses for the years ended December 31, 2021 and 2020 are outlined in the table below: For the year ended December 31, 2021 For the year ended December 31, 2020 Increase (Decrease) $ Cost of revenue, excluding depreciation & amortization 1,136,315 $ 1,395,187 $ (258,872 ) Selling expense 39,821 22,590 17,231 Compensation – officers and directors 661,171 832,250 (171,079 ) Research and development 220,469 256,636 (36,167 ) Professional fees 1,030,159 607,010 423,149 General and administrative 1,363,098 1,269,207 93,891 Total costs and operating expenses $ 4,451,033 $ 4,382,880 $ 68,153 Cost of revenue, excluding depreciation & amortization for the year ended December 31, 2021 was $1,136,315, compared to $1,395,187 for the year ended December 31, 2020. This decrease in cost of revenue was related to the decrease in revenues. Selling expense for the year ended December 31, 2021 was $39,821, compared to $22,590 for the year ended December 31, 2020. Selling expense incurred was mainly from third party advertising fees. The increase of selling expense was due to an increase in advertising fees. Compensation – officers and directors were $661,171 and $832,250 for the years ended December 31, 2021 and 2020, respectively. The decrease was due to decrease in directors’ stock-based compensation - options. Research and development costs were $220,469 and $256,636 for the years ended December 31, 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. Professional fees were $1,030,159 during the year ended December 31, 2021 compared to $607,010 during the year ended December 31, 2020. The increase in professional fees mainly resulted from the uplist in 2021 compared to the prior period. General and administrative expenses of $1,363,098 incurred during the year ended December 31, 2021 primarily consisted of salaries of $487,073, insurance expense of $359,372 and depreciation expense of $162,160. General and administrative expenses of $1,269,207 incurred during the year ended December 31, 2020 primarily consisted of salaries of $491,638, insurance expense of $210,949 and depreciation expense of $162,242. The increase was mainly due to increased insurance premiums because of the Company’s uplist to NASDAQ. 50 Net Losses During the years ended December 31, 2021 and 2020, we incurred net losses of $3,220,977 and $2,537,113 respectively, due to the factors discussed above, gain on extinguishment of debt of $371,118, loss on change in fair value of warrant liability of $1,284,780, and gain on settlement of derivative liability of $550,406. Liquidity and Capital Resources Working Capital December 31, 2021 December 31, 2020 Current Assets $ 9,214,340 $ 1,007,630 Current Liabilities (571,442 ) (527,559 ) Working Capital $ 8,642,898 $ 480,071 Cash Flows The table below, for the periods indicated, provides selected cash flow information: For the year ended December 31, 2021 For the year ended December 31, 2020 Net cash used in operating activities $ (2,228,405 ) $ (1,955,091 ) Net cash used in investing activities (22,990 ) (1,314 ) Net cash provided by financing activities 10,346,778 346,860 Effect of exchange rate (43 ) - Net change in cash $ 8,095,340 $ (1,609,545 ) Cash Flows from Operating Activities Our net cash outflows from operating activities of $2,228,405 for the year ended December 31, 2021 was primarily the result of our net loss of $3,220,977 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 $28,875, increase in accounts receivable – related party of $15,176, decrease in inventory of $21,229, increase in other receivable of $13,057, increase in prepaid expenses of $210,017, decrease in deposits of $66,767, increase in operating lease right-of-use asset of $333,140, decrease in accounts payable and accrued liabilities of $94,484, decrease in accounts payable – related party of $17,471, increase in other current liabilities of $17,299, decrease in customer deposit of $57,106, increase in lease liabilities of $328,846, and decrease in other liabilities of $17,135. Non-cash expense included add-backs of $42,116 in bad debt expense, $162,160 in depreciation expense, $1,284,780 in change in fair value of warrant liability, $48,000 in stock-based compensation, $429,856 in stock option compensation, reduction in inventory reserve of $1,622, gain on extinguishment of debt of $258,960 and gain on settlement of derivative liability of $550,406. Our net cash outflows from operating activities of $1,955,091 for the year ended December 31, 2020 was primarily the result of our net loss of $2,537,113 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 $75,125, decrease in inventory of $21,289, increase in prepaid expenses of $44,282, increase in deposits of $100,000, increase in accounts payable and accrued liabilities of $8,132, increase in accounts payable – related party of $17,471, decrease in other current liabilities of $12,238, decrease in interest payable – related party of $1,750, decrease in customer deposit of $70,294, and increase in other liabilities of $4,800. Non-cash expense included add-backs of $21,907 in bad debt expense, $162,242 in depreciation expense, $48,000 in stock-based compensation, $605,150 in stock option compensation, reduction in inventory reserve of $852 and a net of $2,428 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. 51 Cash Flows from Investing Activities For the year ended December 31, 2021 we had cash outflow from investing activities of $22,990 from the purchase of property and equipment. For the year ended December 31, 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 year ended December 31, 2021, cash inflows of $10,346,778 were due to proceeds of SBA loans of $267,297, repayment of SBA loans of $246,650, proceeds from bank loan of $1,500,000, repayment of the bank loan of $1,500,000, proceeds from issuance of shares of $10,326,131. For the year ended December 31, 2020 the Company paid off a promissory note, resulting in cash outflows of $50,000 and obtained loans from the SBA in the amount of $396,860. 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 year ended December 31, 2021, the Company had a net loss of $3,220,977 and negative cash flow from operating activities of $2,228,405. The Company raised $10.3 million through an underwritten public offering in September 2021. With the January 1, 2021 beginning cash amount of $583,325 and underwritten public offering of $10.3 million, the Company will have enough cash to cover its projected annual cash burn rate of $1,967,074, which is a decrease from the previous year. This is a result of coming off of a year where the company completed an uplisting transaction causing a greater than normal amount of expenditure, especially within professional service fees. Overall, the Company has adequate cash for the Company to continue operation as a going concern throughout 2022 without any additional capital raise. As a result, the previous factors raising substantial doubt to continue as a going concern have been alleviated for the following year. Off-Balance Sheet Arrangements As of December 31, 2021, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation SK. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. 52