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FOCUS UNIVERSAL INC. - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly period ended September 30, 2020

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-55247

 

FOCUS UNIVERSAL INC.

(Exact Name of Small Business Issuer as specified in its charter)

 

Nevada 46-3355876
(State or other jurisdiction (IRS Employer File Number)
of incorporation)  

 

20511 E. Locust St., Ontario, CA 91761
(Address of principal executive offices) (zip code)

 

(626) 272-3883

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
N/A N/A N/A

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files. Yes o  No  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer  o Smaller reporting company  x
Emerging growth company x  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o    No x

 

As of November 12, 2020, registrant had 40,959,741 shares outstanding of the registrant's common stock at a par value of $0.001 per share.

 

 

 

   

 

 

FORM 10-Q

 

FOCUS UNIVERSAL INC.

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION 3
   
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
   
Item 4. Controls and Procedures 12
   
PART II OTHER INFORMATION 13
   
Item 1. Legal Proceedings 13
   
Item 1A. Risk Factors 13
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
   
Item 3. Defaults Upon Senior Securities 13
   
Item 4. Mine Safety Disclosures 13
   
Item 5. Other Information 13
   
Item 6. Exhibits 14
   
Signatures 15

 

 

 

 

 

 

 

 

 2 

 

 

PART I.  FINANCIAL INFORMATION

 

References in this document to "us," "we," or "Company" refer to FOCUS UNIVERSAL INC.

 

ITEM 1.  FINANCIAL STATEMENTS

 

FOCUS UNIVERSAL INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Index to the Financial Statements

 

Contents Page
   
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 F-1
   
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) F-2
   
Condensed Consolidated Statement of Changes in Stockholder’s Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) F-3
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited) F-5
   
Notes to the Condensed Consolidated Financial Statements (unaudited) F-6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3 

 

 

FOCUS UNIVERSAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2020   2019 
   (unaudited)     
ASSETS
Current Assets:          
Cash  $821,904   $2,192,870 
Accounts receivable, net   309,452    137,338 
Accounts receivable - related party   22,410     
Inventories, net   65,998    62,933 
Other receivables   200     
Prepaid expenses   77,660    46,971 
Deposit - current portion   100,000     
Total Current Assets   1,397,624    2,440,112 
           
Property and equipment, net   4,533,068    4,653,438 
Operating lease right-of-use asset   97,648    128,399 
Deposits   6,630    6,630 
           
Total Assets  $6,034,970   $7,228,579 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities:          
Accounts payable and accrued liabilities  $156,732   $192,488 
Other current liabilities   6,236    16,820 
Interest payable - related party       1,750 
Customer deposit   5,819    127,671 
Loan, current portion   150,006     
Lease liability, current portion   50,969    44,270 
Promissory note short term - related party       50,000 
Total Current Liabilities   369,762    432,999 
           
Non-Current Liabilities:          
Lease liability, less current portion   55,627    94,670 
Loan, less current portion   255,854     
Other liability   12,335    12,335 
Total Non-Current Liabilities   323,816    107,005 
           
Total Liabilities   693,578    540,004 
           
Contingencies (note 16)        
           
Stockholders' Equity:          
Common stock, par value $0.001 per share, 75,000,000 shares authorized; 40,959,741 shares issued and outstanding as of September 30, 2020 and December 31,2019, respectively   40,959    40,959 
Additional paid-in capital   14,381,058    13,775,908 
Shares to be issued, common shares   86,709    50,709 
Accumulated deficit   (9,167,334)   (7,179,001)
Total Stockholders' Equity   5,341,392    6,688,575 
           
Total Liabilities and Stockholders' Equity  $6,034,970   $7,228,579 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

 F-1 

 

 

FOCUS UNIVERSAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three months ended September 30,   Nine months ended September 30, 
   2020   2019   2020   2019 
Revenue  $544,003   $431,988   $1,267,893   $1,101,390 
Revenue - related party       7,300    21,267    10,300 
Total Revenue   544,003    439,288    1,289,160    1,111,690 
Cost of Revenue   384,371    559,475    1,035,600    1,067,946 
                     
Gross Profit (Loss)   159,632    (120,187)   253,560    43,744 
                     
Operating Expenses:                    
Selling expense   677    12,267    17,696    24,023 
Compensation - officers   34,000    40,000    102,000    110,000 
Research and development   62,039    66,289    194,232    193,009 
Professional fees   243,799    397,950    1,071,369    958,337 
General and administrative   294,795    322,801    974,125    675,935 
Total Operating Expenses   635,310    839,307    2,359,422    1,961,304 
                     
Loss from Operations   (475,678)   (959,494)   (2,105,862)   (1,917,560)
                     
Other Income (Expense):                    
Interest income (expense), net   (1,878)   (248)   (1,843)   820 
Interest (expense) - related party           (81)    
Other income   39,196    9,643    119,453    11,623 
Total other income (expense)   37,318    9,395    117,529    12,443 
                     
Loss before income taxes   (438,360)   (950,099)   (1,988,333)   (1,905,117)
Income tax expense                 
Net Loss  $(438,360)  $(950,099)  $(1,988,333)  $(1,905,117)
                     
Weighted Average Number of Common Shares Outstanding: Basic and Diluted   40,959,741    40,959,741    40,959,741    40,945,807 
                     
Net Loss per common share: Basic and Diluted  $(0.01)  $(0.02)  $(0.05)  $(0.05)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

 

 F-2 

 

 

FOCUS UNIVERSAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

           Additional   Shares to be       Total 
   Common stock   Paid-In   issued   Accumulated   Stockholders' 
Description  Shares   Amount   Capital   Common Shares   Deficit   Equity 
Balance - June 30, 2020   40,959,741   $40,959   $14,294,608   $74,709   $(8,728,974)  $5,681,302 
                               
Stock options issued for services           86,450            86,450 
                               
Common stock to be issued for services               12,000        12,000 
                               
Net loss                   (438,360)   (438,360)
                               
Balance - September 30, 2020   40,959,741   $40,959   $14,381,058   $86,709   $(9,167,334)  $5,341,392 

 

           Additional   Shares to be       Total 
   Common stock   Paid-In   issued   Accumulated   Stockholders' 
Description  Shares   Amount   Capital   Common Shares   Deficit   Equity 
Balance - June 30, 2019   40,959,741   $40,959   $13,343,659   $23,491   $(4,958,476)  $8,449,633 
                               
Stock options issued for services           172,900            172,900 
                               
Common stock to be issued for services               11,964        11,964 
                               
Net loss                   (950,099)   (950,099)
                               
Balance - September 30, 2019   40,959,741   $40,959   $13,516,559   $35,455   $(5,908,575)  $7,684,398 

 

 

 

 

 

 

 

 

 

 

 F-3 

 

 

FOCUS UNIVERSAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(continued)

 

           Additional   Shares to be       Total 
   Common stock   Paid-In   issued   Accumulated   Stockholders' 
Description  Shares   Amount   Capital   Common Shares   Deficit   Equity 
Balance - December 31, 2019   40,959,741   $40,959   $13,775,908   $50,709   $(7,179,001)  $6,688,575 
                               
Stock options issued for services           605,150            605,150 
                               
Common stock to be issued for services               36,000        36,000 
                               
Net loss                   (1,988,333)   (1,988,333)
                               
Balance - September 30, 2020   40,959,741   $40,959   $14,381,058   $86,709   $(9,167,334)  $5,341,392 

 

           Additional   Shares to be       Total 
   Common stock   Paid-In   issued   Accumulated   Stockholders' 
Description  Shares   Amount   Capital   Common Shares   Deficit   Equity 
Balance - December 31, 2018   40,907,010   $40,907   $12,956,486   $72,000   $(4,003,458)  $9,065,935 
                               
Stock options issued for services           172,900            172,900 
                               
Common stock issued for compensation   13,445    13    96,496    (96,509)        
                               
Common stock to be issued for services               59,964        59,964 
                               
Common stock issued for acquisition   39,286    39    290,677            290,716 
                               
Net loss                   (1,905,117)   (1,905,117)
                               
Balance - September 30, 2019   40,959,741   $40,959   $13,516,559   $35,455   $(5,908,575)  $7,684,398 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

 

 F-4 

 

FOCUS UNIVERSAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Nine Months Ended September 30,  
   2020   2019 
Cash flows from operating activities:          
Net Loss  $(1,988,333)  $(1,905,117)
Adjustments to reconcile net loss to net cash from operating activities:          
Bad debt expense   6,927     
Inventories reserve   (3,853)   3,601 
Depreciation expense   121,684    112,107 
Amortization of intangible assets       16,521 
Amortization of right-of-use assets   (1,593)   (296)
Stock-based compensation   36,000    59,964 
Stock option compensation   605,150    172,900 
Changes in operating assets and liabilities:          
Accounts receivable   (179,041)   193,726 
Accounts receivable - related party   (22,410)   39,625 
Inventories   788    (5,210)
Other receivable   (200)   (3,625)
Prepaid expenses   (30,689)   68,914 
Deposit – Current portion   (100,000)    
Deposits       7,210 
Accounts payable and accrued liabilities   (34,006)   161,464 
Accounts payable - related party       (4,921)
Other current liabilities   (12,334)    
Interest payable - related party   (1,750)    
Customer deposit   (121,852)   (36,184)
Other liabilities       (7,210)
Net cash flows used in operating activities   (1,725,512)   (1,126,531)
           
Cash flows from investing activities:          
Cash from acquisition       201,482 
Purchase of property and equipment   (1,314)   (220,793)
Cash paid for acquisition       (550,000)
Net cash flows used in investing activities   (1,314)   (569,311)
           
Cash flows from financing activities:          
Proceeds from SBA loan   405,860     
Payment on promissory note   (50,000)    
Net cash flows provided by financing activities   355,860     
           
Net change in cash   (1,370,966)   (1,695,842)
           
Cash beginning of period   2,192,870    4,455,751 
           
Cash end of period  $821,904   $2,759,909 
           
Supplemental cash flow disclosure:          
Cash paid for income taxes  $   $ 
Cash paid for interest  $1,831   $ 
           
Supplemental disclosures of non-cash investing and financing activities:          
Promissory note issued for acquisition  $   $50,000 
Shares issued for acquisition  $   $290,716 
Shares issued to reduce notes payable  $   $ 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 F-5 

 

 

FOCUS UNIVERSAL INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1 – Organization and Operations

 

Focus Universal Inc. (“Focus”) was incorporated under the laws of the state of Nevada on December 4, 2012 (“Inception”). It is a universal smart instrument developer and manufacturer, headquartered in the Los Angeles, California metropolitan area, specializing in the development and commercialization of novel and proprietary universal smart technologies and instruments. Universal smart technology is an off-the-shelf technology utilizing an innovative hardware integrated platform. The Focus platform provides a unique and universal combined wired and wireless solution for embedded design, industrial control, functionality testing, and parameter measurement instruments and functions. Our smart technology software utilizes a smartphone, computer, or a mobile device as an interface platform and display that communicates and works in tandem with a group of external sensors or probes, or both. The external sensors and probes may be manufactured by different vendors, but the universal smart technology functions in a manner that does not require the user to have extensive knowledge of the unique characteristics of the function of each of the sensors and probes. The universal smart instrument Focus developed (the “Ubiquitor”) consists of a reusable foundation component which includes a wireless gateway (which allows the instrument to connect to the smartphone via Bluetooth and WiFi technology), universal smart application software (“Application”) which is installed on the user’s smartphone or other mobile device and allows monitoring of the sensor readouts on the smartphone’s screen. The Ubiquitor also connects to a variety of individual scientific sensors that collect data, from moisture, light, airflow, voltage, and a wide variety of applications. The data is then sent through a wired or wireless connection, or a combination thereof to the smartphone or other mobile device, and the data is organized and displayed on the smartphone screen. The smartphone or other mobile device, foundation, and sensor readouts together perform the functions of many traditional scientific and engineering instruments and are intended to replace the traditional, wired stand-alone instruments at a fraction of their cost.

 

Perfecular Inc. (“Perfecular”) was founded in September 2009 and is headquartered in Ontario, California, and is engaged in designing certain digital sensor products and sells a broad selection of horticultural sensors and filters in North America and Europe.

 

AVX Design & Integration, Inc. (“AVX”) was incorporated on June 16, 2000 in the state of California. AVX is an internet of things (“IoT”) installation and management company specializing in high performance and easy to use audio/video, home theater, lighting control, automation, and integration. Services provided by AVX include full integration of houses, apartments, commercial complexes, office spaces with audio, visual, and control systems to fully integrate devices in the low voltage field. AVX’s services also include partial equipment upgrade and installation.

 

Note 2 – Revision of Prior Period Financial Statements

 

The Company corrected certain errors in its 2019 financial statements. In accordance with ASC 50-10-S99 and S55 (formerly Staff Accounting Bulletins (“SAB”) No. 99 and No. 108), Accounting Changes and Error Corrections, the Company concluded that these errors were not, individually, and in the aggregate, quantitatively or qualitatively, material to the financial statements in these periods.

 

On March 15, 2019, the Company acquired AVX Design & Integration Inc. Upon further review, we noticed that some revenue recognized immediately after the acquisition and before the financial statement reporting period were recognized prematurely. There were also some expense reclassifications between expense items. Consequently, for the three months ended September 30, 2019 revenue was understated by $107,118, cost of revenue was understated by $211,104, selling expenses were overstated by $81,637, compensation - officers was overstated by $4,905, professional fees were overstated by $1,700, and general and administrative expenses were understated by $52,840. The Company had accounted for these errors correctly on the audited year end financials. For the nine months ended September 30, 2019 revenue was understated by $116,445, cost of revenue was understated by $315,495, selling expenses were overstated by $159,547, compensation - officers was understated by $3,420, professional fees were overstated by $13,452, and general and administrative expenses were understated by $56,804. The Company had accounted for these errors correctly on the audited year end financials.

 

 

 

 F-6 

 

 

The below discloses the effects of the revisions on the financial statements for the period reported.

 

Condensed consolidated statement of operations for the three months ended September 30, 2019

 

   Previously reported       Revised 
   For the three months ended       For the three months ended 
   9/30/2019   Adjustment   9/30/2019 
Revenue  $324,870   $107,118   $431,988 
Revenue - related party   7,300        7,300 
Total revenue   332,170    107,118    439,288 
                
Cost of Revenue   348,371    211,104    559,475 
                
Gross Profit   (16,201)   (103,986)   (120,187)
                
Operating Expenses:               
Selling   93,904    (81,637)   12,267 
Compensation - officers   44,905    (4,905)   40,000 
Research and development   66,282    7    66,289 
Professional fees   399,650    (1,700)   397,950 
General and administrative   269,961    52,840    322,801 
Total Operating Expenses   874,702    (35,395)   839,307 
                
Loss from Operations   (890,903)   (68,591)   (959,494)
                
Other Income (Expense):               
Interest income (expense), net   (232)   (16)   (248)
Other income   8,460    1,183    9,643 
Total other expense   8,228    1,167    9,395 
                
Loss before income taxes   (882,675)   (67,424)   (950,099)
                
Tax expense            
                
Net Loss  $(882,675)  $(67,424)  $(950,099)

 

 

 

 F-7 

 

 

Condensed consolidated statement of operations for the nine months ended September 30, 2019

 

   Previously reported       Revised 
   For the nine months ended       For the nine months ended 
   9/30/2019   Adjustment   9/30/2019 
Revenue  $984,945   $116,445   $1,101,390 
Revenue - related party   10,300        10,300 
Total revenue   995,245    116,445    1,111,690 
                
Cost of Revenue   752,451    315,495    1,067,946 
                
Gross Profit   242,794    (199,050)   43,744 
                
Operating Expenses:               
Selling   183,570    (159,547)   24,023 
Compensation - officers   106,580    3,420    110,000 
Research and development   193,002    7    193,009 
Professional fees   971,789    (13,452)   958,337 
General and administrative   619,131    56,804    675,935 
Total Operating Expenses   2,074,072    (112,768)   1,961,304 
                
Loss from Operations   (1,831,278)   (86,282)   (1,917,560)
                
Other Income (Expense):               
Interest income (expense), net   836    (16)   820 
Other income   10,440    1,183    11,623 
Total other expense   11,276    1,167    12,443 
                
Loss before income taxes   (1,820,002)   (85,115)   (1,905,117)
                
Tax expense            
                
Net Loss  $(1,820,002)  $(85,115)  $(1,905,117)

 

 

 

 F-8 

 

 

Condensed consolidated statement of cash flows

 

   Previously reported       Revised 
   For the nine months ended       For the nine months ended 
   9/30/2019   Adjustment   9/30/2019 
Cash flows from operating activities:               
Net Loss  $(1,820,002)  $(85,115)  $(1,905,117)
Adjustments to reconcile net loss to net cash from operating activities:               
Inventories reserve   3,601        3,601 
Depreciation expense   112,107        112,107 
Amortization of intangible assets   16,521        16,521 
Amortization of right-of-use assets   48,569    (48,865)   (296)
Stock-based compensation   59,964        59,964 
Stock option compensation   172,900        172,900 
Changes in operating assets and liabilities:               
Accounts receivable   262,099    (68,373)   193,726 
Accounts receivable - related party   39,625        39,625 
Inventories   (5,210)       (5,210)
Other receivable   (3,625)       (3,625)
Prepaid expenses   68,914        68,914 
Deposit   7,210        7,210 
Accounts payable and accrued liabilities   (22,860)   184,324    161,464 
Accounts payable - related party   (4,921)       (4,921)
Other liabilities   (7,210)       (7,210)
Customer deposit   (5,348)   (30,836)   (36,184)
Net cash flows used in operating activities   (1,077,666)   (48,865)   (1,126,531)
                
Cash flows from investing activities:               
Cash from acquisition   201,482        201,482 
Purchase of property and equipment   (220,793)       (220,793)
Cash paid for acquisition   (550,000)       (550,000)
Net cash flows used in investing activities   (569,311)       (569,311)
                
Cash flows from financing activities:               
Payment on long term debt and finance lease obligation   (48,865)   48,865     
Net cash flows used in financing activities   (48,865)   48,865     
                
Net change in cash   (1,695,842)       (1,695,842)
                
Cash beginning of period   4,455,751        4,455,751 
                
Cash end of period  $2,759,909   $   $2,759,909 

 

There was no impact on the Company’s consolidated balance sheet.

 

 

 

 F-9 

 

 

Note 3 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Focus and its wholly-owned subsidiaries, Perfecular Inc. and AVX Design & Integration, Inc. (collectively, the “Company”, “we”, “our”, or “us”). All intercompany balances and transactions have been eliminated upon consolidation. The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. 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. Recently, the Company has devoted a substantial amount of resources to research and development to bring the Ubiquitor and its mobile application to full production and distribution. For the nine months ended September 30, 2020, the Company had a net loss of $1,988,333 and negative cash flow from operating activities of $1,725,512. As of September 30, 2020, the Company also had an accumulated deficit of $9,167,334. These factors raise certain doubts regarding the Company’s ability to continue as a going concern. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing for the long-term development and commercialization of its Ubiquitor product.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Perfecular Inc. and AVX Design & Integration. Focus and Perfecular, collectively “the entities” were under common control; therefore, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-50-45, the acquisition of Perfecular was accounted for as a business combination between entities under common control and treated similar to a pooling of interest transaction. On March 15, 2019, Focus entered into a stock purchase agreement with AVX whereby Focus purchased 100% of the outstanding stock of AVX. All significant intercompany transactions and balances have been eliminated.

 

Segment Reporting

 

The Company currently has two operating segments. In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company considers operating segments to be components of the Company’s business for which separate financial information is available and evaluated regularly by management in deciding how to allocate resources and to assess performance. Management reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company has determined that it has two operating and reportable segments.

 

Asset information by operating segment is not presented as the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s unaudited condensed consolidated financial statements.

 

 

 

 F-10 

 

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the accompanying consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.

 

The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Significant estimates in the accompanying financial statements include the lease term impacting right-of use asset and lease liability, useful lives of property and equipment, useful lives of intangible assets, allowance for doubtful accounts, inventory reserves, debt discounts, valuation of derivatives, and the valuation allowance on deferred tax assets. The Company regularly evaluates its estimates and assumptions.

 

Cash

 

The Company considers all highly liquid investments with a maturity of three months or less to be cash. At times, such investments may be in excess of Federal Deposit Insurance Corporation (FDIC) insurance limit. There were no cash equivalents held by the Company at September 30, 2020 and December 31, 2019.

 

Accounts Receivable

 

The Company grants credit to clients that sell the Company’s products or engage in construction service under credit terms that it believes are customary in the industry and do not require collateral to support customer receivables. The accounts receivable balances are generally collected within 30 to 90 days of the product sale.

 

Allowance for Doubtful Accounts

 

The Company estimates an allowance for doubtful accounts based on historical collection trends and review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change. As of September 30, 2020 and December 31, 2019, allowance for doubtful accounts amounted to $29,539 and $22,612, respectively.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company limits its exposure to credit loss by investing its cash with high credit quality financial institutions.

 

 

 

 F-11 

 

 

Inventory

 

Inventory consists primarily of parts and finished goods and is valued at the lower of the inventory’s cost or net realizable value under the first-in-first-out method. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to market value, if lower. Inventory allowances are recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as discontinued products. These estimates could vary significantly from actual requirements, for example, if future economic conditions, customer inventory levels, or competitive conditions differ from expectations. The Company regularly reviews the value of inventory based on historical usage and estimated future usage. If estimated realized value of our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. As of September 30, 2020 and December 31, 2019, inventory reserve amounted to $67,561 and $71,414, respectively.

 

Property and Equipment

 

Property and equipment are stated at cost. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts and any gain or loss is included in earnings. Maintenance and repairs are expensed currently. Major renewals and betterments are capitalized. Depreciation is computed using the straight-line method. Estimated useful lives are as follows:

 

Fixed assets Useful life
Furniture 5 years
Equipment 5 years
Warehouse 39 years
Improvement 5 years
Construction in progress
Land

 

Long-Lived Assets

 

The Company applies the provisions of FASB ASC Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Long-term assets of the Company are reviewed when circumstances warrant as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. Based on its review at September 30, 2020 and December 31, 2019, the Company believes there was no impairment of its long-lived assets.

 

 

 

 F-12 

 

 

Intangible Assets

 

The Company’s intangible assets were acquired from AVX. Amortization is computed using the straight-line method, and the Company evaluates for impairments annually. During the year ended December 31, 2019, the Company determined that the intangible assets associated with the acquisition of AVX were fully impaired. During the year ended December 31, 2019, impairment for intangible assets amounted to $47,975. Estimated useful lives of intangible assets are as follows:

 

Intangible assets Useful life
Market related intangible assets 5 years

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill with indefinite useful lives are tested for impairment at least annually at December 31 and whenever triggering events or changes in circumstances indicate its carrying value may not be recoverable. Assessment of the potential impairment of goodwill is an integral part of the Company’s normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management’s best estimates at a particular point in time. The dynamic economic environments in which the Company’s businesses operate and key economic and business assumptions related to projected selling prices, market growth, inflation rates, and operating expense ratios, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. The management tests for impairment annually at year end. During the year ended December 31, 2019, the Company determined that the goodwill associated with the acquisition of certain AVX assets was impaired and took a charge to earnings of $458,490.

 

Share-based Compensation

 

The Company accounts for stock-based compensation to employees in conformity with the provisions of ASC Topic 718, Stock-Based Compensation. Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement of operations based on their fair values at the date of grant.

 

The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period during which services are received.

 

The Company calculates the fair value of option grants utilizing the Black-Scholes pricing model and estimates the fair value of the stock based upon the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest.

 

The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight- line basis over the requisite service period of the award.

 

 

 

 F-13 

 

 

Fair Value of Financial Instruments

 

The Company follows paragraph ASC 825-10-50-10 for disclosures about fair value of its financial instruments and paragraph ASC 820-10-35-37 (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements.

 

To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

  Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.

 

  Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

 

  Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 2 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses, accounts payable, and accrued expenses, approximate their fair value because of the short maturity of those instruments.

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

However, it is not practical to determine the fair value of advances from stockholders, if any, due to their related party nature.

 

Revenue Recognition

 

On September 1, 2018, the Company adopted ASC 606 – Revenue from Contracts with Customers using the modified retrospective transition approach. The core principle of ASC 606 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled for exchange of those goods or services. The Company’s updated accounting policies and related disclosures are set forth below, including the disclosure for disaggregated revenue. The impact of adopting ASC 606 was not material to the Condensed Consolidated Financial Statements.

 

 

 

 F-14 

 

 

Revenue from the Company is recognized under Topic 606 in a manner that reasonably reflects the delivery of its services and products to customers in return for expected consideration and includes the following elements:

 

  executed contracts with the Company’s customers that it believes are legally enforceable;

 

  identification of performance obligations in the respective contract;

 

  determination of the transaction price for each performance obligation in the respective contract;

 

  allocation of the transaction price to each performance obligation; and

 

  recognition of revenue only when the Company satisfies each performance obligation.

 

These five elements, as applied to each of the Company’s revenue categories, is summarized below:

 

  Product sales – revenue is recognized at the time of sale of equipment to the customer.

 

  Service sales – revenue is recognized based on the service been provided to the customer.

 

Revenue from construction projects is recognized over time using the percentage-of-completion method under the cost approach. The percentage of completion is determined by estimating stage of work completed. Under this approach, recognized contract revenue equals the total estimated contract revenue multiplied by the percentage of completion. Our construction contracts are unit priced, and an account receivable is recorded for amounts invoiced based on actual units produced.

 

Cost of Revenue

 

Cost of revenue includes the cost of services, labor, and product incurred to provide product sales, service sales, and project sales.

 

Research and Development

 

Research and development costs are expensed as incurred. Research and development costs primarily consist of efforts to refine existing product models and develop new product models.

 

Related Parties

 

The Company follows ASC 850-10 for the identification of related parties and disclosure of related party transactions. Pursuant to ASC 850-10-20 the related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of ASC 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

 

 

 F-15 

 

 

The condensed consolidated financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the consolidated financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Commitments and Contingencies

 

The Company follows ASC 450-20 to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

 

Income Tax Provision

 

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (ASC 740). ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, the Company does not foresee generating taxable income in the near future and utilizing its deferred tax asset, therefore, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company has no material uncertain tax positions for any of the reporting periods presented.

 

Income taxes are accounted for using the asset and liability method. Deferred income taxes are provided for temporary differences in recognizing certain income, expense, and credit items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax basis of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. There was no material deferred tax asset or liabilities as of September 30, 2020 and December 31, 2019.

 

As of September 30, 2020 and December 31, 2019, the Company did not identify any material uncertain tax positions.

 

 

 

 F-16 

 

 

Basic and Diluted Net Income (Loss) Per Share

 

Net income (loss) per share is computed pursuant to ASC 260-10-45. Basic net income (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period.

 

Diluted EPS is computed by dividing net income (loss) by the weighted average number of shares of stock and potentially outstanding shares of stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.

 

Due to the net loss incurred by the Company, potentially dilutive instruments would be anti-dilutive. Accordingly, diluted loss per share is the same as basic loss for all periods presented. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

 

Nine months ended September 30,  2020   2019 
Stock options   210,000     
Total   210,000     

 

Subsequent Events

 

The Company follows the guidance in ASC 855-10-50 for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR. Based upon the review, other than described in Note 17 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.

 

Reclassification

 

Certain reclassifications have been made to the condensed consolidated financial statements for prior years to the current year’s presentation. Such reclassifications have no effect on net income as previously reported.

 

Note 4 – Recent Accounting Pronouncement

 

Recently Adopted Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Targeted Improvements; and ASU 2019-01, Codification Improvements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income.

 

The new standard was effective for the Company on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on January 1, 2019 and used the effective date as its date of initial application. Consequently, prior period financial information has not been recast and the disclosures required under the new standard have not been provided for dates and periods before January 1, 2019.

 

 

 

 F-17 

 

 

The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, it has not recognized ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.

 

The Company believes the most significant effects of the adoption of this standard relate to (1) the recognition of new ROU assets and lease liabilities on its consolidated balance sheet for its office operating leases and (2) providing new disclosures about its leasing activities. There was no change in its leasing activities as a result of adoption.

 

In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 is effective on January 1, 2019. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

In June 2020, the FASB issued ASU 2020-05 in response to the ongoing impacts to U.S. businesses in response to the COVID-19 pandemic. ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective Dates for Certain Entities provide a limited deferral of the effective dates for implementing previously issued ASU 606 and ASU 842 to give some relief to businesses considering the difficulties they are facing during the pandemic. These entities may defer application to fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. As the Company has already adopted ASU 606 and ASU 842, the Company does not anticipate any effect on its financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.

 

In December 2019, FASB issued ASU 2019-12, Income Taxes, which provides for certain updates to reduce complexity in the accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect the implementation of ASU 2019-12 to have a material effect on its consolidated financial statements.

  

Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.

 

 

 

 F-18 

 

 

Note 5 – Inventory, net

 

At September 30, 2020 and December 31, 2019, inventory consisted of the following:

 

   September 30,
2020
   December 31,
2019
 
Parts  $52,674   $31,458 
Finished goods   80,885    102,889 
Total   133,559    134,347 
Less inventory reserve   (67,561)   (71,414)
Inventory, net  $65,998   $62,933 

 

Note 6 – Deposit

 

Deposit balance as of September 30, 2020 amounted to $106,630, including $6,630 for lease agreement deposit and $100,000 for payment made into an escrow account. Balance as of December 31, 2019 amounted to $6,630 for lease agreement deposit.

 

On August 31, 2020, the Company executed a binding letter of intent with Communication Wiring Specialists, Inc., a California S-Corporation (“CWS”) whereby the Company will purchase one hundred percent (100%) of the issued and outstanding common stock of CWS for five million dollars ($5,000,000). When the transaction closes, CWS will be capitalized with one million dollars ($1,000,000). The purchase price structure included a refundable deposit amount of $100,000 to be held in an escrow account upon execution of the letter of intent. The letter of intent may be terminated by mutual written consent by the Company and CWS, or on November 30, 2020 if the Closing has not occurred.

 

Note 7 – Acquisition

 

On March 15, 2019, the Company entered into and closed an asset purchase agreement with AVX Design & Integration, Inc. (“AVX”) as stated in Note 1. A summary of the purchase price and the purchase price allocations at fair value is below.

 

Purchase price    
Cash  $550,000 
29,286 shares of common stock (1)   290,716 
Secured promissory note   50,000 
Total purchase price  $890,716 
      
Allocation of purchase price     
Cash  $201,482 
Accounts receivable   234,561 
Inventories   16,000 
Property and equipment   10,381 
Operating lease right-of-use assets   157,213 
Deposits   5,968 
Intangible assets   57,000 
Goodwill   458,016 
Accounts payable and accrued liabilities   (81,478)
Operating lease liability   (168,427)
Purchase price  $890,716 

 

(1) – the fair value of the common stock was calculated based on the closing market price of the Company’s common stock at the date of acquisition.

  

 

 

 F-19 

 

 

Note 8 – Property and Equipment

 

At September 30, 2020 and December 31, 2019, property and equipment consisted of the following:

 

   June 30,
2020
   December 31,
2019
 
Warehouse  $3,789,773   $3,789,773 
Land   731,515    731,515 
Building Improvement   238,666    238,666 
Furniture and fixture   27,631    27,631 
Equipment   48,378    47,064 
Software   1,995    1,995 
Total cost   4,837,958    4,836,644 
Less accumulated depreciation   (304,890)   (183,206)
Property and equipment, net  $4,533,068   $4,653,438 

 

Depreciation expense for the nine months ended September 30, 2020 and 2019 amounted to $121,684 and $112,107, respectively.

 

The Company purchased a warehouse in Ontario, California in September 2018 and leased an unused portion to a third party. The tenant paid $12,335 as a security deposit, shown as other liability in non-current liability.

 

Note 9 – Promissory Note - Related Party

 

On March 15, 2019, when the Company purchased AVX Design & Integration, Inc. the Company agreed to pay the predecessor owner with a promissory note as one of the forms of consideration. The note was $50,000 with a fixed interest rate of 6% per annum payable in 12 equal monthly payments commencing on June 1, 2019 with interest calculated from the initial payment date through the date in which all amount due under the note is paid off. As of December 31, 2019, the balance of the promissory note was $50,000 and $1,750 accrued interest incurred for the nine months and 15 days ended December 31, 2019. The note and interest amount of $50,000 and $1,831 were paid off on January 10, 2020.

 

Note 10 – Related Party Transactions

 

Revenue generated from Vitashower Corp., a company owned by the CEO’s wife, amounted to $21,267 and $10,300 for the nine months ended September 30, 2020 and 2019, respectively. Account receivable balance due from Vitashower Corp. amounted to $22,410 and $0 as of September 30, 2020 and December 31, 2019, respectively.

 

Compensation for services provided by the President and Chief Executive Officer for the nine months ended September 30, 2020 and 2019 amounted to $90,000 and $90,000, respectively.

 

Note 11 – Business Concentration and Risks

 

Major customers

 

One customer accounted for 24% and 18% of the total accounts receivable as of September 30, 2020 and December 31, 2019, respectively.

 

 

 

 F-20 

 

 

Major vendors

 

One vendor accounted for 0% and 21% of total accounts payable at September 30, 2020 and December 31, 2019, respectively.

 

Note 12 – Operating Lease Right-of-use Asset and Operating Lease Liability

 

Operating lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value is our incremental borrowing rate, estimated to be 15%, as the interest rate implicit in our lease is not readily determinable. During the nine months ended September 30, 2020 and 2019, the Company recorded $48,885 and $32,412, respectively as operating lease expense.

 

The Company currently has a lease agreement for AVX’s operation for a monthly payment of $5,258 and shall increase by 3% every year. The lease commenced July 1, 2015 and expires on August 31, 2022. A security deposit of $5,968 was also held for the duration of the lease term.

 

In adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients,’ which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. On March 15, 2019 when AVX was acquired, upon adoption of ASC Topic 842, the Company recorded a right-of-use asset.

 

Right-of-use asset is summarized below:

 

   September 30, 2020 
Office lease  $157,213 
Less: accumulated amortization   (59,565)
Right-of-use asset, net  $97,648 

 

Operating Lease liability is summarized below:

   September 30, 2020 
Office lease  $106,596 
Less: current portion   (50,969)
Long-term portion  $55,627 

 

Maturity of lease liability is as follows:

 

Year ending December 31, 2020  $15,775 
Year ending December 31, 2021   64,048 
Year ending December 31, 2022   43,655 
Total future minimum lease payment   123,478 
Imputed interest   (16,882)
Lease Obligation, net  $106,596 

 

 

 

 F-21 

 

 

Note 13 – Loans

 

Paycheck Protection Program

 

On April 24, 2020, AVX Design & Integration, Inc. entered into an agreement to receive a U.S. Small Business Administration Loan (“SBA Loan”) from JPMorgan Chase Bank, N.A. related to the COVID-19 pandemic in the amount of $116,460, which we received on May 1, 2020. The SBA Loan has a fixed interest rate of 0.98 percent per annum and a maturity date two years from the date the loan was issued.

 

On May 4, 2020, Perfecular Inc. entered into an agreement to receive a U.S. Small Business Administration Loan (“SBA Loan”) from Bank of America related to the COVID-19 pandemic in the amount of $151,500, which we received on May 4, 2020. The SBA Loan has a fixed interest rate of 1 percent per annum and a maturity date two years from the date loan was issued.

 

The application for these funds required the Company in good faith to certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The guidance and requirements with respect to the certification made by the Company did not contain any objective criteria and is subject to interpretation.  Despite the Company’s understanding under the CARES Act that given the Company’s circumstances it satisfied all eligible requirements for the SBA Loan, management will continue to assess the Company’s continued qualification if or when updated or revised guidance is released by the U.S. Department of the Treasury. If a determination is subsequently made that the Company’s qualification status has changed, the Company may be required to, among other matters, return the SBA Loan. Under the terms of the SBA Loan, the Company may be eligible for full or partial loan forgiveness, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the SBA Loan.

 

Economic Injury Disaster Loan

 

On June 4, 2020, Perfecular Inc. entered into an agreement to receive a U.S. Small Business Administration Loan (“SBA Loan”) from Bank of America related to the COVID-19 pandemic in the amount of $81,100, which we received on June 4, 2020. The SBA Loan has a fixed interest rate of 3.75 percent per annum and a maturity date thirty years from the date loan was issued.

 

On June 5, 2020, AVX Design & Integration, Inc. entered into an agreement to receive a U.S. Small Business Administration Loan (“SBA Loan”) from JPMorgan Chase Bank, N.A. related to the COVID-19 pandemic in the amount of $56,800, which we received on June 5, 2020. The SBA Loan has a fixed interest rate of 3.75 percent per annum and a maturity date thirty years from the date loan was issued.

 

Borrower will use all of the proceeds from this Loan solely as working capital to alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter.

 

For loan amounts of greater than $25,000, Borrower hereby grants to the SBA, the secured party hereunder, a continuing security interest in and to any and all “Collateral” as described herein to secure payment and performance of all debts, liabilities, and obligations of Borrower to the SBA hereunder without limitation, including but not limited to all interest, other fees and expenses (all hereinafter called “Obligations”). The Collateral includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereof: all tangible and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes, (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software, and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories, parts, supplies, and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

 

 

 

 F-22 

 

 

   June 30, 2020 
SBA Loan  $405,860 
Less: current portion   (150,006)
Long term portion  $255,854 

 

Interest expense incurred from the loans amounted to $2,290 for the nine months ended September 30, 2020.

 

Economic Injury Disaster Loan advance

 

In response to the COVID-19 pandemic, small businesses, including agricultural businesses, and non-profit organizations in all U.S. states, Washington D.C., and U.S. territories can apply for an Economic Injury Disaster Loan (EIDL). The EIDL program is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to COVID-19. EIDL proceeds can be used to cover a wide array of working capital and normal operating expenses, such as continuation to health care benefits, rent, utilities, and fixed debt payments. The amount of the EIDL Advance was determined by the number of employees indicated on the EIDL application at $1,000 per employee, up to a maximum of $10,000. The EIDL Advance does not have to be repaid. Recipients did not have to be approved for an EIDL loan in order to receive the EIDL.

 

On June 16, 2020, the Company received a $10,000 EIDL Advance and recorded the receipt as other income.

 

Note 14 – Stockholders’ Equity

 

Shares authorized

 

Upon formation, the total number of shares of all classes of stock that the Company is authorized to issue is seventy-five million (75,000,000) shares of common stock, par value $0.001 per share.

 

Common stock

 

As of September 30, 2020 the Company had 40,959,741 shares of common stock issued and outstanding.

 

During the nine months ended September 30, 2020, the Company did not issue common stock.

 

Shares to be issued for compensation

 

The Company entered into agreements with third-party consultants for financing and management consultation. The Company has incurred consulting service fees paid in cash amounting to $36,000 for the nine months ended September 30, 2020, which the Company intends to issue stock as compensation for services rendered. Expenses incurred but not yet paid in shares as of September 30, 2020 and September 30, 2019 amounted to $86,709 and $35,455, respectively.

 

 

 

 F-23 

 

 

During the nine months ended September 30, 2019, the Company had the following transactions pertaining to its common stock:

 

  Issued 13,445 shares to consultants in exchange for professional services rendered. The shares were valued at $96,509 based on the closing price of the Company’s common stock on the dates that the shares were deemed earned, according to the agreements; and

 

  Issued 39,286 shares as consideration for the AVX acquisition valued at $290,716. The value of the common stock was determined based on the market price on the day of the closing of the acquisition.

 

Stock options

 

On August 6, 2019, each member of the Board was granted 30,000 options to purchase shares at $5.70 per share. As of September 30, 2020, there were 210,000 options granted, 210,000 options vested, 0 options unvested, and 210,000 outstanding stock options.

 

For the nine months ended September 30, 2020 and 2019, the Company’s stock option compensation expenses amounted to $605,150 and $172,900, respectively.

 

The fair value of the warrants listed above was determined using the Black-Scholes option pricing model with the following assumptions:

 

   September 30,   September 30, 
   2020   2019 
Risk-free interest rate   1.71%    1.71% 
Expected life of the options   10 years    10 years 
Expected volatility   158.86%    158.86% 
Expected dividend yield   0%    0% 

 

The following is a summary of options activity from December 31, 2019 to September 30, 2020:

 

Options  Shares   Weighted average exercise price   Weighted Average Remaining Contractual Life   Aggregate Intrinsic Value 
Outstanding at December 31, 2019   210,000   $9.61    9.61     
   Granted                
   Exercised                
   Forfeited or expired                
Outstanding at September 30, 2020   210,000   $9.61    9.61     
Vested as of September 30, 2020   210,000   $5.70    9.61     
Exercisable at September 30, 2020   210,000   $9.61    9.61     

 

 

 

 F-24 

 

 

The exercise price for options outstanding and exercisable at September 30, 2020:

 

Outstanding   Exercisable 
              
Number of    Exercise   Number of    Exercise 
Options    Price   Options    Price 
30,000   $5.70   30,000   $5.70 
30,000    5.70   30,000    5.70 
30,000    5.70   30,000    5.70 
30,000    5.70   30,000    5.70 
30,000    5.70   30,000    5.70 
30,000    5.70   30,000    5.70 
30,000    5.70   30,000    5.70 
210,000        210,000      

 

Note 15 – Segment reporting

 

The Company consists of two types of operations. Focus Universal, Inc. and Perfecular Inc. (“Focus”) involve wholesale, research and development of universal smart instrument and farming devices. AVX Design & Integration, Inc. (“AVX”) is an IoT installation and management company specializeing in high performance and easy to use audio/gideo, home theater, lighting control, automation, and integration. The table below discloses income statement information by segment.

 

   Nine months ended September 30, 2020 
   Focus   AVX   Total 
             
Revenue  $667,443   $600,450   $1,267,893 
Revenue - related party   21,267        21,267 
Total revenue   688,710    600,450    1,289,160 
                
Cost of Revenue   492,533    543,067    1,035,600 
                
Gross Profit   196,177    57,383    253,560 
                
Operating Expenses:               
Selling   8,936    8,760    17,696 
Compensation - officers   102,000        102,000 
Research and development   194,232        194,232 
Professional fees   1,066,525    4,844    1,071,369 
General and administrative   729,186    244,939    974,125 
Total Operating Expenses   2,100,879    258,543    2,359,422 
                
Loss from Operations   (1,904,702)   (201,160)   (2,105,862)
                
Other Income (Expense):               
Interest income (expense), net   (994)   (849)   (1,843)
Interest (expense) – related party   (81)       (81)
Other income   113,706    5,747    119,453 
Total other income (expense)   112,631    4,898    117,729 
                
Loss before income taxes   (1,792,071)   (196,262)   (1,988,333)
                
Tax expense            
                
Net Loss  $(1,792,071)  $(196,262)  $(1,988,333)

  

 

 

 F-25 

 

 

Note 16 – Commitments and Contingencies

 

In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonable estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees, and other directly related costs expected to be incurred.

 

Note 17 – Subsequent Events

 

The Company has evaluated all other subsequent events through the date these condensed consolidated financial statements were issued and determine that there were no subsequent events or transactions that require recognition or disclosures in the condensed consolidated financial statements.

 

On October 19, 2020, the Company subleased 3,000 feet of its warehouse and one office space for eight months commencing December 1, 2020 with the option to extend the lease to twelve months. The monthly lease is $2,400 with a $4,800 deposit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 F-26 

 

 

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 that provides sensor devices and a wholesaler of various air filters and digital, analog, and quantum light meter systems. We plan to focus our future business on our universal smart instrumentation technology, which we are currently developing. Our universal smart instrumentation technology features a Universal Smart Instrumentation Platform (“USIP”), which we believe will replace the functions of thousands of traditional wired measurement and sensing instruments at a fraction of their current market prices. This technology addresses major limitations present in traditional hardware and represents a technological advancement in the Internet of Things (“IoT”) marketplace. We call our flagship USIP device the “Ubiquitor” because it can be used 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.

 

The Company entered the residential and commercial automation installation service industry through the acquisition of AVX Design and Integration, Inc. (“AVX”) in March of 2019. AVX was established in 2000 with the goal of providing high-performance, easy-to-use audio/video, home theater, lighting control, automation and integration services for high-net-worth residential projects. We believe we can integrate our Ubiquitor device into the IoT installation business in both residential and commercial spaces and substantially reduce the costs of IoT installation as well as enhance IoT integration capabilities. We believe the Ubiquitor will be integral in our distributed shared universal smart home products, and we plan to have AVX install these products starting in the greater Los Angeles area.

 

Additionally, we are performing research and development on an electric power line communication technology and have filed three patents with the U.S. Patent and Trademark Office (“USPTO”) related to our Ubiquitor device and the design of a quantum PAR photo sensor. Eventually, we hope that power line communications technology can further enhance smart IoT installations powered by the Ubiquitor.

 

For the nine months ended September 30, 2020 and 2019, we generated a significant amount of revenue from sales of a broad selection of agricultural sensors and measurement equipment which was the primary business for Perfecular Inc. and is now our primary business.

 

 

 

 4 

 

 

Our current products include:

 

Scientific Instrument Research and Development and Sales 

 

Engineers and scientists use instrumentation to observe, understand, and manage real-world data and phenomena, events, and processes related to their industries or areas of expertise. Instrumentation systems that we are researching and developing measure and control electrical signals, such as voltage, current, and power, as well as, for example, temperature, pressure, speed, flow, volume, torque, light sensing, and vibration. Common general-purpose instruments in our market segment include, for example, voltmeters, signal generators, oscilloscopes, data loggers, spectrum analyzers, cameras, and temperature and pressure monitors and controllers. Systems that perform measurement and control can be generally categorized as test, measurement, and embedded systems.

 

A New Approach to Measurement and Sensing

 

We offer a different approach than what is currently on the market because our devices link handheld devices and sensors with common smartphone computing power through an application on the smartphone on both iOS and Android devices. Tapping into the computing power of a smartphone enables a standard measurement device to increase its capabilities.

 

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.

 

 

 

 5 

 

 

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.

 

Ubiquitor Wireless Universal Sensor Device

 

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 that displays the readings of various probe modules. We have completed an initial production run of prototype devices and intend to develop 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 probes, 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 main hardware gateway, which is a small cell phone-sized device with integrated circuits.

 

We believe this device can connect up to 2,500 sensor instruments, and integrate data using embedded software to display the data and all analytics onto a digital screen (desktop or mobile displays) using a WiFi connection. As disclosed in our patent application, we have already tested up to 256 sensor instrument readouts. Most types of 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, up to 100 hz per second; and thus, is intended to be adapted to many industrial uses.

  

By using the smartphone as a substitute platform, we believe we could achieve the following efficiencies:

 

  1. Cut production costs. Smartphone technology will advance and become more widely used than the vast majority of products 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 heads based on 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 generation Ubiquitor device.

 

 

 

 6 

 

 

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 number 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 U.S patent application number 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.

 

Competitors

 

There are several competitors we have identified in the wireless sensor node industry, including traditional instrument and 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 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 instrument or device manufacturers because we utilize our Ubiquitor device in conjunction with our generic instrument’s smartphone application, which we believe will be a completely different product category.

 

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 that are sensitive to price.

 

 

 

 7 

 

 

Results of Operations for the three months ended September 30, 2020 compared to the three months ended September 30, 2019

 

Revenue, cost of sales and gross profit

 

Our consolidated gross revenue for the three months ended September 30, 2020 and 2019 was $544,003 and $439,288, respectively, which included revenue from related parties of $0 and $7,300, respectively. Revenue for the three months ended September 30, 2020 increased $104,715 mainly due to an increase in contracts from AVX, resulting in gross profit of $159,632 and gross loss of $120,187 for the same period in 2019.

 

Operating Costs and Expenses

 

The major components of our operating expenses for the three months ended September 30, 2020 and 2019 are outlined in the table below:

 

   For the three months ended September 30, 2020   For the three months ended September 30, 2019   Increase
(Decrease)
$
 
Selling expense  $677   $12,267   $(11,590)
Officer compensation   34,000    40,000    (6,000)
Research and development   62,039    66,289    (4,250)
Professional fees   243,799    397,950    (154,151)
General and administrative   294,795    322,801    (28,006)
Total operating expenses  $635,310   $839,307   $(203,997)

 

Selling expense for the three months ended September 30, 2020 was $677, compared to $12,267 for the three months ended September 30, 2019. In 2019, the Company acquired AVX, consolidating its selling expenses for its operation. Selling expense incurred was mainly from outside services and outside sales. The decrease of selling expense was due to a decrease in outside sales.

 

Officer compensation was $34,000 and $40,000 for the three months ended September 30, 2020 and 2019, respectively. The decrease was due to an adjustment of the Chief Financial Officer’s compensation.

 

Research and development costs were $62,039 and $66,289 for the three months ended September 30, 2020 and 2019, respectively. The decrease in 2020 was due to more spending on supplies incurred in the first quarter of 2020 on research and development efforts and less supplies were needed in the later quarters.

 

Professional fees were $397,950 during the three months ended September 30, 2019 compared to $243,799 during the three months ended September 30, 2020. The professional fees mainly consist of legal, accounting, and consulting expenses related to litigation, acquisitions, an annual audit, SEC filings, preparing for a listing on the NASDAQ Capital Market, and stock options granted to the board of directors. The decrease was due to temporary hold on NASDAQ application review requested by NASDAQ as well as delay in fund raising.

 

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. General and administrative expenses of $322,801 incurred during the three months ended September 30, 2019 primarily consisted of salaries of $130,026, insurance expense of $54,208, and depreciation expense of $40,939. Salary expense decreased due to reduction of employees from the acquired entity. Increase in insurance expenses are due to the acquisition of AVX as well as related expenses for the possible future NASDAQ uplisting and an increase in insurance premiums. Depreciation expense decreased due to some fixed assets being fully depreciated.

 

 

 8 

 

 

Net Losses

 

During the three months ended September 30, 2020 and 2019, we incurred net losses of $438,360 and $950,099 respectively, due to the factors discussed above.

 

For the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019

 

Revenue, Cost of Sales and Gross Profit

        

Our consolidated gross revenue for the nine months ended September 30, 2020 and 2019 was $1,289,160 and $1,111,690, respectively, which included revenue from related parties of $21,267 and $10,300, respectively. Revenue for the nine months ended September 30, 2020 increased $177,470 due to the acquisition of AVX, resulting in gross profit of $253,560 and $43,744 for the nine months ended September 30, 2020 and 2019, respectively.

 

Operating Costs and Expenses

 

The major components of our operating expenses for the nine months ended September 30, 2020 and 2019 are outlined in the table below:

 

   For the nine months ended September 30, 2020   For the nine months ended September 30, 2019   Increase
(Decrease)
$
 
Selling expense  $17,696   $24,023   $(6,327)
Officer compensation   102,000    110,000    (8,000)
Research and development   194,232    193,009    1,223 
Professional fees   1,071,369    958,337    113,032 
General and administrative   974,125    675,935    298,190 
Total operating expenses  $2,359,422   $1,961,304   $398,118 

 

Selling expense for the nine months ended September 30, 2020 was $17,696, compared to $24,023 for the nine months ended September 30, 2019. In 2019, the Company acquired AVX, consolidating its selling expenses for its operation. Selling expense incurred was mainly from outside services and outside sales. The decrease of selling expense was due to a decrease in outside sales.

 

Officer compensation was $102,000 and $110,000 for the nine months ended September 30, 2020 and 2019, respectively. The decrease was due to an adjustment of the Chief Financial Officer’s compensation.

 

Research and development costs were $194,232 and $193,009 for the nine months ended September 30, 2020 and 2019, respectively. The increase was due to an increase of supplies needed for research and development in 2020.

 

Professional fees were $958,337 during the nine months ended September 30, 2019 compared to $1,071,369 during the nine months ended September 30, 2020. The increase in professional fees mainly resulted from legal, accounting, and consulting expenses related to litigation, acquisitions, an annual audit, SEC filings, preparing for a listing on the NASDAQ Capital Market, and stock options granted to the board of directors.

 

 

 

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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. General and administrative expenses of $675,935 incurred during the nine months ended September 30, 2019 primarily consisted of salaries of $255,720, depreciation expense of $112,106, and insurance expense of $129,086. The increase was due to increased salaries, increased insurance premiums, and depreciation expense. Salary expense increased due to additional employees from the acquired entity as well as additional employees hired. The increase in insurance expense is due to the acquisition of AVX as well as NASDAQ uplisting related expenses and an increase in insurance premiums. Depreciation expense increased mainly due to additional fixed assets acquired with AVX.

 

Net Losses

 

During the nine months ended September 30, 2020 and 2019, we incurred net losses of $1,988,333 and $1,905,117 respectively, due to the factors discussed above.

 

Liquidity and Capital Resources

 

Working Capital

 

   September 30,
2020
   December 31,
2019
 
Current Assets  $1,397,624   $2,440,112 
Current Liabilities   (369,762)   (432,999)
Working Capital  $1,027,862   $2,007,113 

 

Cash Flows

 

The table below, for the periods indicated, provides selected cash flow information:

 

   For the nine months ended September 30, 2020   For the nine months ended September 30, 2019 
Net cash used in operating activities  $(1,725,512)  $(1,126,531)
Net cash used in investing activities   (1,314)   (569,311)
Net cash provided by financing activities   355,860     
Net change in cash  $(1,370,966)  $(1,695,842)

 

 

 

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Cash Flows from Operating Activities

 

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, increase of accounts receivable – related party of $22,410, decrease in inventory of $788, increase in other receivables of $200, increase in prepaid expenses of $30,689, increase in deposits of $100,000, 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 a net of $1,593 in amortization of right-of-use assets. Our net cash outflows from operating activities of $1,126,531 for the nine months ended September 30, 2019, was primarily the result of our net loss of $1,905,117 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 $193,726, decrease of accounts receivable – related party of $39,625, increase in inventory of $5,210, increase in other receivables of $3,625, decrease in prepaid expenses of $68,914, decrease in deposits of $7,210, increase in accounts payable and accrued liabilities of $161,464, decrease in accounts payable – related party of $4,921, decrease in other current liabilities of $7,210, and a decrease in customer deposits of $36,184. Non-cash expense includes add-backs of $3,601 in inventory reserve, $112,107 in depreciation expense, $16,521 in amortization of intangible assets, $296 in amortization of right-of-use asset, $59,964 in stock-based compensation, and $172,900 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, collection of accounts receivable, and timing of billings and payments.

 

Cash Flows from Investing Activities

 

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. The Company acquired AVX in March 2019, resulting in a cash outflow from investment activities of $569,311 for the nine months ended September 30, 2019, which includes $220,793 in purchases of property and equipment, $201,482 cash provided from the acquisition of AVX, and $550,000 cash paid for the acquisition.

 

Cash Flows from Financing Activities

 

For the nine months ended September 30, 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 $405,860. For the nine months ended September 30, 2019, there was no cash flow from financing activities.

 

Going Concern

 

These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. 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. Recently, the Company has devoted a substantial amount of resources to research and development to bring the Ubiquitor and its mobile application to full production and distribution. For the nine months ended September 30, 2020, the Company had a net loss of $1,988,333 and negative cash flow from operating activities of $1,725,512. As of September 30, 2020, the Company also had an accumulated deficit of $9,167,334. These factors raise certain doubts regarding the Company’s ability to continue as a going concern. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing for the long-term development and commercialization of its Ubiquitor product.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2020, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation SK.

 

 

 

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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.

  

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a15(e) and 15d15(e) under the Securities and Exchange Act of 1934, at the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, particularly during the period when this report was being prepared.

 

Our management concluded we did not maintain effective controls over the Company’s financial reporting. The material weaknesses in our internal control over financial reporting, caused principally by inadequate staffing and technical expertise in key positions, resulted in overly relying on outside consultants to make numerous adjustments to our financial statements. Additionally, the significant deficiencies or material weaknesses could result in future material misstatement of the consolidated financial statements that would not be prevented or detected. Management has concluded that the identified control deficiencies constitutes a material weakness.

 

Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Internal Controls

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

  

 

 

 

 

 

 

 

 

 

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PART II.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

We were not subject to any new legal proceedings during the nine months ended September 30, 2020 and there are currently no new legal proceedings, to which we are a party, which could have a material adverse effect on our business, financial condition or operating results.

 

ITEM 1A.  RISK FACTORS

 

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.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

No shares or common stock were sold during the nine months ended September 30, 2020. 

  

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

No senior securities were issued and outstanding during the nine-month periods ended September 30, 2020 or 2019.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable to our Company.

 

ITEM 5.  OTHER INFORMATION

 

Our common stock has been quoted on the OTCQB and on the OTC Link since July 31, 2014 under the symbol “FCUV”. 

  

 

 

 

 

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ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

Exhibits

 

The following financial information is filed as part of this report:

 

(a)   (1) FINANCIAL STATEMENTS
   
  (2) SCHEDULES
   
  (3) EXHIBITS. The following exhibits required by Item 601 to be filed herewith are incorporated by reference to previously filed documents:

 

Exhibit

Number

Description
   
10.1 Warehouse Lease by and between the Company and A&D Electronics LLC, dated October 19, 2020
   
31.1 Certification of CEO pursuant to Sec. 302
   
31.2 Certification of CFO pursuant to Sec. 302
   
32.1 Certification of CEO pursuant to Sec. 906
   
32.2 Certification of CFO pursuant to Sec. 906
   
101.INS XBRL Instances Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Focus Universal Inc.
       
Dated: November 12, 2020 By:  

/s/ Desheng Wang

Desheng Wang

Chief Executive Officer

       
Dated: November 12, 2020 By:  

/s/ Duncan Lee

Duncan Lee

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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