FOCUS UNIVERSAL INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in, Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Forward-Looking Statements This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management beliefs, and certain assumptions made by our management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth herein and in other reports and documents that we file from time to time with the Securities and Exchange Commission, particularly the Report on Form 10-K, Form 10-Q and any Current Reports on Form 8-K. Narrative Description of the Business Focus Universal Inc. (the “Company,” “we,” “us,” or “our”) is a Nevada corporation. We believe we have developed five proprietary technologies utilizing our patent portfolio which we believe solve the most fundamental problems plaguing the internet of things (“IoT”) industry through: (1) increasing overall chip integration by shifting integration from the component level 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) proprietary User Interface Machine auto generation technology; and (5) incorporating all our core technologies into a single chip. Our Universal Smart Technology is designed to overcome instrumentation interoperability and interchangeability. The electronic design starts from a 90% completed common foundation we call our universal smart instrumentation platform (“USIP”), instead of the current method of building each stand-alone instrument from scratch. Our method eliminates redundant hardware and software and results in significant cost savings and production efficiency. We believe we have developed software machine auto generation technology to replace the manual software designs which are currently in use and cannot satisfy the exponential growth of future IoT industry demand. We believe our ultra-narrowband PLC enables our users to send data over existing electrical power cables and immediately establish a ubiquitous data network without substantial new investment for a dedicated wiring infrastructure. We believe our ultra-narrow band technology is capable of overcoming the noise problems communicating through power lines that have hindered our competitors for over a century. We believe our wireless communication technology allows for longer-range coverage, is more energy effective and has much faster data sending speeds than the current 5G technology speeds being used. We also provide sensor devices and are a wholesaler of various air filters and digital, analog, and quantum light meter systems. For the three months ended March 31, 2023 and 2022, we generated significant amount of our revenue from sales of a broad selection of agricultural sensors and measurement equipment which is our primary business. 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 various 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. During the development phase, the company uses generic electronic device casings to house the prototype equipment before the final design and manufacturing process. As an update to our product line development: we plan to phase out the traditional, lower-margin products and are preparing to launch a new line of products that have been in development for several years. These newer technology products will be released in phases, and we intend that increasing amounts of technology will be layered upon these products. Additionally, we plan to continue to increase our efforts in protecting more intellectual property and have continued to develop technologies for long-term growth. We have developed products in both the controlled agriculture industry and home automation industries. We have existing relationships in both sectors. 23 We are building a U.S. sales team. The team has already begun marketing our current AVX branded surveillance camera system (cameras and NVRs) and indoor and outdoor LED screens. In our hydroponics segment, our honeycomb activated carbon filter product has been issued a patent in October 2022, and the production of the products in several different formats has been completed and are ready to ship to the USA for nationwide marketing. Our products on the home automation front are also beginning production. Of note, (1) smart wall touch light switches, (2) digital control smart wall touch light switches, (3) smart timers, and finally (4) smart controllers are ready for production. Currently, our Shenzhen subsidiary unit mainly focuses on product development and commercialization. An important electrode with a “Total Dissolved Solids” (“TDS”) meter design, with applications in all solubility measurements, was completed and approved by our US management team. Furthermore, our devices and sensors with applications within hydroponics, including (1) pH meter, (2) CO2 meter, (3) dissolved oxygen meter, (4) digital light meter, (5) new (and vastly improved) quantum par meter are under intensive testing and we expect to receive new versions into our US headquarters for management approval in November 2022. In summary, our entire smart home and hydroponic IoT line are expected to be completed by the end of 2022. Beyond IoT products, as an NIPL (our software platform for interoperability within IoT) derivative product, a complementary office automation software was developed, and we believe the remaining major technical difficulties have been overcome. This specific software was designated to assist in completing financial reports faster, more accurately, and allow ease of update, eliminating the need for increased staffing especially in time sensitive projects. It is designed to save CPAs, auditors, accounting, and/or legal significant of time in preparation of SEC financial reports and other internal financial reporting. Eighty percent (80%) of this software development has been completed and we hope to launch beta versions by the end of 2022. While we will continue to sell the following products through Hydrofarm. We expect to have upgraded versions of certain of these products to re-introduce new versions after the older version are discontinued: Specifically, we sell the following products through Hydrofarm: Fan speed adjuster device . 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 sell two types of carbon filter devices. 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 a high-efficiency particulate arrestance (“HEPA”) filtration device at wholesale prices to our client Hydrofarm. 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. 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 µmol. 24 Ubiquitor Wireless Universal Sensor Device We are developing a device we call the Ubiquitor, which replaces the functions of traditional digital measurement and sensing products by integrating many digital sensors and measurement tools into one single digital device. 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. We believe the result of such integration is a smaller, cheaper, and faster circuit system design than those currently offered in the instrumentation market. Our USIP technology that will make the Ubiquitor possible 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. 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 2023. 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 needing to create their own application software and design 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. Recently, we have devoted a substantial number of resources to research and development in both the US and China 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 sales and marketing employees in order to gain traction in the market. We expect to continue this process throughout 2023. 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, temperature, 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. As mentioned, we believe we address the core and fundamental issues facing the IoT marketplace. 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. We intend to design the Ubiquitor’s sensor analytics system to integrate event-monitoring, storage and analytics software in a cohesive package that provides a holistic view of the sensor data it is reading. During the development phase, we use generic electronic device casings to house the prototype equipment before final design and manufacturing process. 25 The physical hardware of the Ubiquitor will consist 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 instrument 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 will be a general platform that collects data in real time, up to 100 Hz per second; and thus, 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, improve the product’s quality, and cut 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 dispense with some of the hassle of connecting cables, since the Ubiquitor allows wireless transmission of sensor data and may allow wireless access to networks, such as a PLC network. We have not yet started research and development of a second generation Ubiquitor device, but once we demonstrate the market for this product, we intend to begin such research and development. Currently our research and development is focused on concepts we can implement in the current first generation Ubiquitor device. 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 already penetrates all residential, commercial and industrial premises. Accordingly, connectivity via PLC is potentially the most cost-effective, 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. Our patented 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. 26 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. 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 2023. 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. This last quarter of 2022, this office has continued to grow to double digit headcount and has also begun to handle other online and simple phone marketing and marketing materials production activities, provided a cost and quality benefit exists at the time. Research and Development Efforts of 5G Cellular Technology Just like our ultra-narrowband technology can be used to reduce noise in powerline communication technology, our internal research suggests that our ultra-narrowband technology can be leveraged to create a type of 5G wireless communication technology that can achieve both low band 5G coverage and an estimated 1 Gbps high band speed. We employ an ultra-narrow spectrum channel (<1KHz) to establish an ultra-long-distance link between the 5G base station and the receiver which reduces noise and interference entering the bandwidth. For a description of the ultra-narrowband technology and the 5G applications, see “Part I - Item 1. Business, Section 2. “Creating a faster 5G cellular technology by using ultra-narrowband technology” in our 10-K Annual Report filed with the SEC on March 31, 2023. Eventually, we hope to establish five divisions to bring our technology together: 1) AVX with new shared distributed smart home products powered by the Ubiquitor; 2) an IT division in software machine design; 3) Universal Smart Instrumentation; 4) PLC; and 5) an IoT division. 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 a spectral response curve of a photo sensor. The small and cost-effective multicolor sensor and its related software protected by the 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. 27 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. 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 further transferring the Company’s provisional patent applications to formal patent applications which should number 13 according if all proceed according to plan. In addition, Knobbe Martens is also working on further filing four previously unfiled patents during the same timeframe and extending an existing patent application into Europe and Australia. In addition, in May 2022, the Company also engaged Chang & Hale, LLP law firm as suggested by our counsel at Knobbe, Martens, Olsen & Bear, LLP to assist with two new patents, however Knobbe Martens still remains our main IP counsel. The company now has 24 total patents and patent applications in various phases with the US Patent and Trademark Office, with three more provisional patents filed this quarter. As a note, Focus Universal’s patent number 11,488,468 was allowed and subsequently issued on November 1, 2022. The patent is titled “Sensor for Detecting the Proximity of an IEEE 802.11 Protocol Connectable Device.” Competitors We have identified several competitors we have identified, specifically in the wireless sensor node industry, including traditional instruments or device 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 may also 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. IoT Installation Industry There are several companies that compete with AVX in smart home installations, including Vivint Smart Home, Crestron and Control4. However, we believe we can distinguish ourselves from our competitors by offering a substantially lower price. An installation by Crestron ranges between $20,000 and $100,000 and by Control4 between $20,000 and $40,000. The cheapest competitor we can identify in this sector is Vivint Smart Home, which costs less than $5,000 to install; however, we understand that the Vivint Smart Home focuses on security systems only and that users have no other smart applications, which our smart home product line would include. Air Filtration Systems and Meter Products Industry The air filtration system and meter products industry is a niche industry. Air purification methods are an effective way to control contaminants and improve indoor air quality and as a result, many national and local governments overseeing indoor air quality and other emissions are enacting stricter workforce health and safety regulations in this area, which drives demand. 28 Market Potential We believe universal wireless smart technology will play a critical role for traditional instrument manufacturers, as currently simply the undertaking of an IoT project is too expensive and difficult to develop for medium or smaller companies and carries 75% failure rate according to Cisco Systems 1 . 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 that are sensitive to price. Regarding the larger IoT industry statistics, overall enterprise IoT spending increased to $201 Billion in 2022, an increase of 21.5%. The outlook for growth in 2023 is 18.5% from this large base of enterprise spending 2 . More specifically, the IoT sensors market is projected to reach $26 Billion by 2026 from $11.1 Billion in 2022 3 . The IoT marketplace size assessments usually include the hardware components and the software components which often contain a Software as a Service (SaaS) model. Additionally, the rising need for reliable high bandwidth communication for IoT devices is expected to rise to $664.75 Billion in 2028, spearheaded by the currently predominant services in the 5G category. We would also expect this market to grow with the addition of new categories of services delivering reliable high bandwidth communication for IoT devices and would cannibalize and expand the existing services where the new services proved to be more effective and efficient. We also expect our recent growth within our IoT Installation Services segment and acquisition of AT Tech Systems to bolster and complement our AVX Design and Integration and all other related installation businesses of these IoT products. The number of new contracts we have signed thus far in a limited amount of time through the segment is 13 with an average value of $13,355 and a total collection value of $485,618 in signed contracts to date, of which we have already collected $233,801. Additionally, thus far, we have an aggregate $1,041,897 in contracts agreed in principle, of which we expect to be signed and deposits paid. This is compared to our highest AVX revenue for calendar year of $817,233 in 2019, $705,877 for 2020, $252,958 for 2021, and $260,871 for 2022 for the entire calendar year. While statistics regarding the IoT installation sectors are difficult to aggregate given that the work is often are pieced off into various contractor service categories, the residential custom installation market ranges from $5.7B to $12.1B 5 , and we would expect the commercial and industrial installation markets to be larger than the residential for IoT devices. Results of Operations For the three months ended March 31, 2023 compared to the three months ended March 31, 2022 Revenue, cost of revenue and gross profit Our consolidated gross revenue for the three months ended March 31, 2023 and 2022 was $236,095 and $157,167 respectively, which included revenue from related parties of $0 and $31,542, respectively. Revenue for the three months ended March 31, 2023 increased $78,928 due to sales increase from new acquisition, AT Tech. This increase of revenue was mainly a result of the increase of IoT Installation Services being bolstered by additional resources such as increased headcount. Cost of revenue for the three months ended March 31, 2023 was $180,744, compared to $143,523 for the three months ended March 31, 2022. While the overall cost of revenue increased, as a percent of revenue, costs went down as a result higher margin contracts for IoT Installation Services being signed. In addition to the increase in revenue, gross profit increase to $55,351 compared to $13,644 three months ended March 31, 2023 and 2022, respectively. ________________________ 1 Cisco Systems, Connected Futures, Executive Business Insights, May 2017, The Journey to IOT Value, Challenges, Breakthroughs, and Best Practices, https://www.slideshare.net/CiscoBusinessInsights/journey-to-iot-value-76163389, https://newsroom.cisco.com/c/r/newsroom/en/us/a/y2017/m05/cisco-survey-reveals-close-to-three-fourths-of-iot-projects-are-failing.html 2 IoT Analytics, Market Insights for the Internet of Things, February 7, 2023, Global IoT market size to grow 19% in 2023—IoT shows resilience despite economic downturn, https://iot-analytics.com/iot-market-size/ 3 Markets and Markets, IoT Sensors Market by Sensor Type, Network Technology, Vertical, Application, and Geography – Global Forecast -2026, https://www.marketsandmarkets.com/Market-Reports/sensors-iot-market-26520972.html 4 Cision PRNewswire, Research and Markets, Global $664.75 Billion 5G Services Markets to 2028: Rising Need for High Bandwidth to Provide Reliable Communication to IoT Devices is Expected to Boost Overall Market Growth, https://www.prnewswire.com/news-releases/global-664-75-billion-5g-services-markets-to-2028-rising-need-for-high-bandwidth-to-provide- reliable-communication-to-iot-devices-is-expected-to-boost-overall-market-growth-301432173.html 5 CEPro. How Big is the Custom Installation Market?, February 5, 2018, https://www.cepro.com/news/how_big_is_custom_installation_market/ 29 Operating Expenses The major components of our cost and operating expenses for the three months ended March 31, 2023 and 2022 are outlined in the table below: For the three months ended March 31, 2023 For the three months ended March 31, 2022 Increase (Decrease) $ Selling expense 11,859 38,339 (26,480 ) Compensation – officers and directors 307,534 325,665 (18,131 ) Research and development 276,481 561,744 (285,263 ) Professional fees 257,399 360,866 (103,467 ) General and administrative 443,052 650,891 (207,839 ) Total operating expenses $ 1,296,325 $ 1,937,505 $ (641,180 ) Selling expenses for the three months ended March 31, 2023 was $11,859, compared to $38,339 for the three months ended March 31, 2022. Selling expense incurred was mainly from third party advertising fees and marketing related fee. The decrease of selling expense was due to a decrease in advertising fees. Compensation – officers and directors were $307,534 and $325,665 for the three months ended March 31, 2023 and 2022, respectively. Research and development costs were $276,481 and $561,744 for the three months ended March 31, 2023 and 2022, respectively. The decrease was due to a decrease in number of research and development employee headcount in the Ontario, California headquarters. Professional fees were $257,399 during the three months ended March 31, 2023, compared to $360,866 during the three months ended March 31, 2022. The decrease in these professional fees compared to the prior period was due to a decrease in professional legal fees. General and administrative expenses of $443,052 incurred during the three months ended March 31, 2023 primarily consisted of insurance expense of $107,473, amortization expense of $28,741, payroll tax of $73,067, administrative salaries of $71,956, depreciation expense of $41,798 and rent of $46,080. General and administrative expenses of $650,891 incurred during the three months ended March 31, 2022 primarily consisted of employee compensation of $193,930, insurance expense of $176,915, administrative salaries of $137,162, rent of $75,597 and depreciation expense of $40,163. Other Income (expense) Other income of $210,431 incurred during the three months ended March 31, 2023 primarily consisted of interest income of $14,436, gain on bargain purchase of $61,747, unrealized gain on marketable equity securities of $32,570, realized loss on marketable equity securities of $14,901, rental income of $39,952 and other expense of $7,073. Other expenses of $54,931 incurred during the three months ended March 31, 2022 primarily consisted of interest expense of $6, rental income of $46,372 and other income of $8,565. Net Losses During the three months ended March 31, 2023 and 2022, we incurred net losses of $1,114,243 and $1,868,930 respectively, due to the factors discussed above. Liquidity and Capital Resources Working Capital March 31, 2023 December 31, 2022 Current Assets $ 2,999,834 $ 4,807,830 Current Liabilities (402,448 ) (1,387,239 ) Working Capital $ 2,597,386 $ 3,420,591 30 Cash Flows The table below, for the periods indicated, provides selected cash flow information: For the three months ended March 31, 2023 For the three months ended March 31, 2022 Net cash used in operating activities $ (838,535 ) $ (902,283 ) Net cash provided by (used in) investing activities 61,824 (31,470 ) Net cash used in financing activities (1,000,000 ) – Effect of exchange rate 3,760 24 Net change in cash $ (1,772,951 ) $ (933,729 ) Cash Flows from Operating Activities Our net cash outflows from operating activities of $838,535 for the three months ended March 31, 2023 was primarily the result of our net loss of $1,114,243 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 a decrease in accounts receivable of $8,832, a decrease in accounts receivable – related party of $34,507, a decrease in inventories of $13,109, an increase in prepaid expense of $80,511, a decrease in deposit of $8,617, an increase in operating lease right-of-use asset of $16,075, a decrease in accounts payable and accrued liabilities of $20,011, an increase in customer deposit of $98,838, and a decrease in lease liabilities of $50,885. Non-cash expense included add-backs of $5,114 in bad debt expense, $42,041 in depreciation expense, $28,741 in amortization of intangible assets, $14,901 in realized loss on marketable securities, $149,404 in stock-based compensation - shares, and $133,403 in stock option compensation, reduces of $32,570 in unrealized gain on marketable equity securities and $61,747 in gain on bargain purchase. Our net cash outflows from operating activities of $902,283 for the three months ended March 31, 2022 was primarily the result of our net loss of $1,868,930 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 $96,258, an increase in accounts receivable – related party of $70,816, an increase in inventories of $5,067, a decrease in other receivable of $13,057, a decrease in prepaid expense of $148,616, an increase in deposit of $35,142, a decrease in operating lease right-of-use asset of $150,623, an increase in accounts payable and accrued liabilities of $38,000, a decrease in other current liabilities of $17,135, a decrease in lease liabilities of $123,951, an increase in other liabilities of $14,736. Non-cash expense included add-backs of $42,080 in bad debt expense, $25,006 in reduction of inventory fair value adjustments, $40,165 in depreciation expense, $656,370 in stock-based compensation - shares, $8,000 in stock-based compensation - services, and $228,375 in stock option compensation. 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, in line with our shifting revenue streams, collection of accounts receivable, and timing of billings and payments. Cash Flows from Investing Activities For the three months ended March 31, 2023, we had cash inflow from investing activities of $61,824. That was primarily the result from the purchase of property and equipment of $9,920, purchase of marketable securities of $17,690, and proceeds from sales of marketable securities of $89,434. For the three months ended March 31, 2022 we had cash outflow from investing activities of $31,470 from the purchase of property and equipment. Cash Flows from Financing Activities For the three months ended March 31, 2023, we had cash outflows of $1,000,000 due to purchase of treasury stock. There were no financing activities for the three months ended March 31, 2022. Off-Balance Sheet Arrangements As of March 31, 2023, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation SK. 31 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.