Item 7. Management’s Discussion and Analysis
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 us, or
on our behalf, whether 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 us, or on 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 the five proprietary platform technologies
described in the Business Section, starting on page 1. These are: (1) device on a chip;
(2) universal smart instrumentation platform (“USIP”); (3) 5G ultra-narrowband technology; (4) ultra-narrowband power line
communication (“PLC”) technology; and (5) our financial reporting software.
Our main sources of revenue are derived from our
sales of sensor devices and our wholesaling 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, which resells our products directly to consumers through its established retail distribution channels
and, in some cases, places its own branding on our products. Hydrofarm was not our primary source of revenue for the years ended December
31, 2024 and 2023.
In an effort to continually develop our product
lines, we plan to phase out the traditional, lower-margin products, such as the first-generation digital light meter, 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, taking advantage of our existing relationships
in both sectors.
We are building a U.S.-based sales team to market
our Smart AVX-branded product lines. The team has already begun marketing our current large format multimedia touch screens, surveillance
camera system (cameras and network video recorders (NVRs)), indoor and outdoor LED screens, and Focus Universal-branded voice over internet
protocol (VOIP) phone service systems for use in commercial and corporate settings.
Our products on the home automation front are
beginning the production cycle. Of note, smart wall touch light switches, digital control smart wall touch light switches, smart timers,
and smart controllers are ready for production. Sourcing of electronic parts for these products is completed, the cost analysis of these
products is completed, and most of the tooling for production has been completed.
Currently, our Shenzhen subsidiary 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 U.S. management team. The designs of our TDS
sensor, carbon dioxide sensor, new quantum PAR sensor and total dissolved oxygen sensors are also completed. Our testing against the state-of-the-art
sensors on the market suggests to us that the new sensors are at least as good as the best quality sensors on the market. However, we
believe that our sensors are much more cost effective.
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Our software machine auto design team has also
made significant progress during 2024. Having the mathematical and graphical environments created, our team is focused on developing the
3D-user interface machine auto design. Our public reporting automation software is completed and currently undergoing extensive testing.
We have developed a Microsoft®-based add-on software that aims to streamline and automate the financial reporting preparation process.
We believe the software will significantly simplify the Form 10-Q and Form 10-K preparation processes and make creating, editing and managing
documents both simple and accurate. We are planning to commercialize this software in the first quarter of 2025. A cloud-based version
of this software is currently under the development.
We have completed an initial production run of
prototype Ubiquitor devices and intend to proceed into full-scale production during 2025. During 2024, we presented the Ubiquitor several
trade shows including CES 2023 and 2024. 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 Ubiquitor was first showcased at the
Consumer Technology Association’s CES 2024 trade show, which attracted significant interest from potential customers.
We have designed a full line of products for the
gardening industry by integrating the Ubiquitor device into a gardening system. The system includes 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 will offer the same features as a combination
of dozens or even hundreds of different standalone instruments in the gardening industry.
We continue to build upon our existing research
and development with the intention of inventing an ultra-narrowband PLC technology that attempts to tackle: 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
late 2025 or early 2026 pending further development work from the engineering department.
Two of our products are ready for commercialization.
These are our financial reporting software and universal smart technology for smart meters and automation. We are currently looking for
distribution partners for both products.
While currently, we do not believe that inflation
will play a large role and have a large effect on our current business, as our business grows, inflation may play a larger role as our
need to procure supplies increases and our borrowing requirements increase as well. As we begin to diversify away from a single sector
and a single large customer, we also believe that our exposure to market volatility in that sector will be diminished significantly. We
believe this should have a stabilizing effect on revenues. However, as our new products begin to reach maturity and completion, we do
believe our exposure to our supply chain risk will increase with our need for consistently procuring inputs and raw materials. We believe
supply chain disruption is the largest risk factor for our cash flow as production increases. For a greater description of our technologies,
our business segments and the products we are currently selling, see “Part I – Item 1. Business ” above.
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Results of Operations
For the year ended December 31, 2024 compared to the year ended
December 31, 2023
Revenue, cost of revenue and gross profit
For the year ended December 31, 2024
For the year ended December 31, 2023
Increase
(Decrease)
$
Revenue
$ 398,137
$ 440,543
$ (42,406 )
Cost of revenue
387,936
380,884
7,052
Gross Profit
$ 10,201
$ 59,659
$ (49,458 )
A summary of our revenue by product type for the
fiscal years ended December 31, 2024 and 2023 is as follows:
December 31, 2024
December 31, 2023
IoT Products
$ 398,137
$ 384,168
IoT Project Construction and Installation Services
–
56,375
Total
$ 398,137
$ 440,543
Our consolidated gross revenue for the years ended
December 31, 2024, and 2023 was $398,137 and $440,543, respectively. Revenue for the year ended December 31, 2024, decreased $42,406 due
to a sales decrease from construction contracts. Cost of revenue for the year ended December 31, 2024, was $387,936, compared to $380,884
for the year ended December 31, 2023. The overall increase in the cost of revenue was due to inventory reserve for the base LED panel
products sold in the current year. This, combined with a decrease in gross profit, brought the total to $10,201 for the year ended December
31, 2024, compared to $59,659 for the year ended December 31, 2023.
Operating Expenses
The major components of our operating expenses
for the years ended December 31, 2024 and 2023 are outlined in the table below:
For the year ended December 31, 2024
For the year ended December 31, 2023
Increase
(Decrease)
$
Selling expense
$ 100,189
$ 118,762
$ (18,573 )
Compensation – officers and directors
951,845
1,082,775
(130,930 )
Research and development
1,381,937
1,324,438
57,499
Professional fees
1,660,590
767,606
892,984
General and administrative
2,115,891
1,717,864
398,027
Total operating expenses
$ 6,210,452
$ 5,011,445
$ 1,199,007
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Selling expense for the year ended December 31,
2024 was $100,189, compared to $118,762 for the year ended December 31, 2023. Selling expense incurred was mainly from third party advertising
fees. The decrease of selling expense was due to a decrease in advertising fees and trade show expenses.
Compensation – officers and directors were
$951,845 and $1,082,775 for the years ended December 31, 2024 and 2023, respectively. The decrease was attributed to a decline in stock
prices during the current year.
Research and development costs were $1,381,937
and $1,324,438 for the years ended December 31, 2024 and 2023, respectively. The increase was due to an increase in total number of research
and development employee headcount in the Ontario, California headquarters and the Shenzhen, China subsidiary.
Professional fees were $1,660,590 during the year
ended December 31, 2024 compared to $767,606 during the year ended December 31, 2023. The increase in these professional fees compared
to the prior period was due to an increase in legal fees for employment litigation defense.
General and administrative expenses for the year
ended December 31, 2024 was $2,115,891, compared to $1,717,864 for the year ended December 31, 2023. The increase of general and administrative
expenses was primarily due to an increase in the number of office employees and rent expenses in 2024.
Other Income
Other income of $3,278,375 incurred during the
year ended December 31, 2024, primarily consisted of gain on sale of property of $3,181,706, interest income of $40,852, interest expense
– related party of $89,098, unrealized loss on marketable equity securities of $12,075, rental income of $96,541 and other income
of $60,449. Other income of $241,551 incurred during the year ended December 31, 2023, primarily consisted of interest income of $38,339,
interest expense – related party of $38,333, unrealized gain on marketable equity securities of $8,033, realized loss on marketable
equity securities of $2,002, rental income of $160,910 and other income of $74,604.
Loss from discontinued operations, net of tax
Loss from discontinued operations, net of tax
was $278,263 during the year ended December 31,2024, compared to $7,907 during the year ended December 31,2023. The decrease was due to
the discontinued operations of AT Tech Systems LLC in August 2024.
Net Losses
During the years ended December 31, 2024, and
2023, we incurred net losses of $3,200,138 and $4,718,142 respectively, due to the factors discussed above.
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Liquidity and Capital Resources
Working Capital
December 31,
2024
December 31,
2023
Current Assets
$ 3,846,363
$ 1,028,278
Current Liabilities
(876,975 )
(1,657,646 )
Working Capital
$ 2,969,388
$ (629,368 )
Cash Flows
The table below, for the periods indicated, provides
selected cash flow information:
For the year ended December 31, 2024
For the year ended December 31, 2023
Net cash used in operating activities
$ (4,656,754 )
$ (3,528,762 )
Net cash provided by investing activities
7,127,121
54,146
Net cash provided by (used in) financing activities
706,094
(434,048 )
Effect of exchange rate
(15,397 )
(6,508 )
Net change in cash
$ 3,161,064
$ (3,915,172 )
Cash Flows from Operating Activities
Our net cash outflows from operating activities
of $4,656,754 for the year ended December 31, 2024, was primarily the result of our net loss of $3,200,138 and changes in our operating
assets and liabilities offset by the add-back of non-cash expenses, and operating activities from discontinued operations.
Our net cash outflows from operating activities
of $3,528,762 for the year ended December 31, 2023, was primarily the result of our net loss of $4,718,142 and changes in our operating
assets and liabilities offset by the add-back of non-cash expenses, and operating activities from discontinued operations.
We expect that cash flows from operating activities
may fluctuate in future periods because 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 year ended December 31, 2024, we had cash
inflow from investing activities of $7,127,121. That was primarily the result from the purchase of property and equipment of $18,687,
and proceeds from sales of property of $7,145,808. For the year ended December 31, 2023, we had cash inflow from investing activities
of $54,146. That was primarily the result from the purchase of property and equipment of $20,620, purchase of marketable securities of
$43,644 and proceeds from sales of marketable securities of $118,410.
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Cash Flows from Financing Activities
For the year ended December 31, 2024, cash inflows
from financing activities of $706,094. That was primarily the result proceeds from third party loan of $350,000, proceeds from related
party loan of $1,101,000, repayment on related party loan of $2,101,000, repayment on third party loan of $350,000, stock issued for placement
agent 1,086,000, stock issued for private placement of $1,290,000 and purchases of treasury stock of $669,906. For the year ended December
31, 2023, cash outflows from financing activities of $434,048. That was primarily the result from related party loan of $1,000,000, and
purchases of treasury stock of $1,434,048.
Going Concern
The Company has assessed its ability to continue
as a going concern for a period of one year from the date of the issuance of these consolidated financial statements. The Company has
a net loss of $3,200,138 and $4,718,142 for the years ended December 31, 2024 and 2023, respectively. In addition, the Company had an
accumulated deficit of $25,782,308 and $22,582,170 as of December 31, 2024 and 2023, respectively, and negative cash flow from operating
activities of $4,656,754 and $3,528,762 for the years ended December 31, 2024 and 2023, respectively. Substantial doubt about the Company’s
ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable
that the Company will be unable to meet its obligations as they become due within one year from the financial statement issuance date.
The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of
the Company as a going concern. The Company currently suffered recurring losses from operations, generated negative cash flow from operating
activities, has an accumulated deficit and has not completed its efforts to establish a stabilized source of revenues sufficient to cover
operating costs over an extended period of time. These conditions raise substantial doubt as to its ability to continue as a going concern.
These consolidated financial statements do not include adjustments relating to the recoverability and classification of reported asset
amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
At December 31, 2024, the Company had cash and
cash equivalents, and short-term investments, in the amount of $3,613,978. The ability to continue as a going concern is dependent on
the Company attaining and maintaining profitable operations in the future and raising additional capital to meet its obligations and repay
its liabilities arising from normal business operations when they come due. Since inception, the Company has funded its operations primarily
through equity and debt financings, and it expects to continue to rely on these sources of capital in the future. No assurance can be
given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even
if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing,
or cause substantial dilution for our stockholders, in case of equity financing, or grant unfavorable terms in future licensing agreements.
Off-Balance Sheet Arrangements
As of December 31, 2024, 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.
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