FOCUS UNIVERSAL INC. The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether in future filings with theSecurities and Exchange Commission . Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties, and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or our behalf. We disclaim any obligation to update forward-looking statements.Focus Universal Inc. , aNevada corporation (the "Company," "we," "us," or "our"), has developed the five proprietary platform technologies described in the Business Section, starting on page 1. These are: (1) device on a chip; (2) universal smart instrumentation platform ("USIP"); (3) ultra-narrowband technology; (4) ultra-narrowband power line communication ("PLC") technology; and (5) natural integrated programming language ("NIPL"). 47 Our main sources of revenue are derived from our sales of sensor devices and our wholesaling of various digital, analog, and quantum light meters and filtration products, including fan speed adjusters, carbon filters and HEPA filtration systems. We source these products from manufacturers inChina and then sell them to a majorU.S. distributor, Hydrofarm, who resells our products directly to consumers through its established retail distribution channels and, in some cases, places its own branding on our products. For the year endedDecember 31, 2021 , our primary source of revenue was from sales of these agricultural sensors and measurement equipment sold through Hydrofarm. Hydrofarm was not our primary source of revenue for the year endedDecember 31, 2022 .
For a greater description of our technologies, our business segments and the products we are currently selling, see "Part I - Item 1. Business" above.
Ubiquitor Wireless Universal Sensor Device
OurUSIP technology is an advanced software and hardware integrated instrumentation platform that uses a large-scale modular design approach. The large-scale modular design approach subdivides instruments into a foundation component (aUSIP ) and architecture-specific components (sensor nodes). TheUSIP has an open architecture, incorporating a variety of individual instrument functions, sensors, and probes from different industries and vendors. The platform features the ability to connect potentially thousands of different sensors or probes, addressing major limitations present in traditional instrumentation systems. The result of such integration is a smaller, cheaper, and faster circuit system design than those currently offered in the instrumentation market. TheUSIP , which is compatible with a significant percentage of the instruments currently manufactured, consists of universal and reusable hardware and software. The universal hardware in theUSIP is (i) a smartphone, computer, or any mobile device capable of running our software that includes a display and either hardware controls or software control surfaces, and (ii) our Ubiquitor. We have created and assembled prototype models of the Ubiquitor in limited quantities and plan to expand our assembly in 2023. Our prototype Ubiquitor is compatible with standard desktop computers running Windows OS or MacOS and Android- or iOS-based mobile devices, and acts as a conduit that communicates with a group of sensors or probes manufactured by different vendors in a manner that requires the user to have little or no knowledge of their unique specifications. The data readout is displayed on the computer or mobile device display. We are designing the application software (the "App") to have a graphical representation of control and indicator elements common in traditional tangible instruments, such as knobs, buttons, dials, and graphs, etc. Our developers are designing and implementing a soft control touch screen interface that supports real-time data monitoring and facilitates instrument control and operation. The Company continues to devote a substantial number of resources to research and development despite a slight decrease to the overall number year over year to bring the Ubiquitor and its App to full production and distribution. We anticipate that the sales and marketing involved with bringing the Ubiquitor to market will require us to hire several new employees in order to gain traction in the market. We intend to introduce the Ubiquitor in smart home and commercial installations to reduce costs and increase functionality, as well as implement the Ubiquitor device in greenhouses and other agricultural warehouses that require regulation of light, humidity, moisture, and other measurable scientific units required to create optimal growing conditions. We have completed an initial production run of prototype Ubiquitor devices and intend to proceed into full-scale production. The Ubiquitor's sensor analytics system integrates event-monitoring, storage and analytics software in a cohesive package that provides a holistic view of the sensor data it is reading.
For a description of the physical hardware, see illustrations in "Figures 5-10 in Part I - Item 1. Business Section 5. "Developing a universal smart instrumentation platform ("USIP")" above.
48 We believe the Ubiquitor device can connect up to thousands of potential sensor nodes integrate data using embedded software to display the data and all analytics onto a digital screen (desktop, smartphone or mobile device displays) using a wired or Wi-Fi connection. As disclosed in our patent application, we have already tested up to 256 sensor instrument readouts. Most types of nodes and probes can connect to the hardware. If the sensor size is bigger than the standard probe size, it is possible to simply use a USB cable to connect the probe and the hub. All data and analytics are displayed on a single screen, with tools that record and keep track of all measurements, and sort and display analytic information in easy-to-read charts.
The Ubiquitor is a general platform that collects data in real time and is intended to be adapted to many industrial uses.
Also, we plan to design a full line of products for the gardening industry by
integrating the Ubiquitor device into a gardening system. The system would
include the Ubiquitor connected to a light control node, temperature sensor,
humidity sensor, digital light sensor, quantum PAR sensor, pH sensor, total
dissolved solids ("TDS") sensor and carbon dioxide sensor. We believe the
combination of the Ubiquitor with these sensors would offer the same features as
a combination of dozens or even hundreds of different standalone instruments in
the gardening industry. The Ubiquitor-powered gardening system would be used to
replace these standalone devices and could offer another case study of the
effectiveness of the application of universal smart technology to such systems.
Research and Development Efforts of Power Line Communication
Power Line Communication ("PLC") is a communication technology that enables
sending data over existing power cables. One advantage of this technology is
that PLC does not require substantial new investment for its communications
infrastructure. Rather, PLC utilizes existing power lines, thereby forming a
distribution network that penetrates most residential, commercial, and
industrial premises. Accordingly, connectivity via PLC is a cost-effective and
scalable interconnectivity approach for the IoT. We believe PLC can be an
integral part of our communication infrastructure for the IoT, which enables
reliable, real-time measurements, monitoring and control. A large variety of
appliances may be interconnected by transmitting data through the same wires
that provide electrical energy.
Our PLC technology uses an ultra-narrowband spectrum channel of less than 1 KHz
to establish a long-distance link between transmitter and receiver. Thus, we
believe that our proprietary ultra-narrowband PLC technology will offer a
promising alternative to wireless networks and provide the backbone
communication infrastructure for IoT devices.
The primary design goal of the power line network is electric power
distribution, not data transmission. The harsh electrical noise present on power
lines and variations in equipment and standards make data transmission over the
power grid difficult. These technological challenges have impeded, or even
halted, progression of PLC technology.
49
We continue to build upon our existing research and development with the
intention of inventing an ultra-narrowband PLC technology that attempts to
tackle two challenges: 1) overcoming interference caused by electronic noise on
the power line system; and 2) bandwidth. Preliminary internal testing suggests
that we have achieved significant noise rejection and interference suppression.
In our preliminary internal testing, we have been able to increase bandwidth to
4 megabits per second with the potential for more, while simultaneously
effectively dealing with electrical noise and interference. Based on the
promising results of our internal testing, we have begun designing a proprietary
PLC microchip and have set an intended launch date for 2023.
[[Image Removed: Diagram
Description automatically generated]]
We believe that because residential and commercial structures already include
multiple power outlets, the power line infrastructure represents an excellent
network to share data among intelligent devices, particularly in the smart home
installations that we are currently performing through AVX.
We plan to leverage the communications technology of PLC to enhance the
Ubiquitor and make the Ubiquitor a central component of the smart home and
gardening systems we are currently developing. The goal would be that our
Ubiquitor would be used to send or receive control signals from a smart device,
and control hundreds of devices in near real time. We intend to apply the same
concept to commercial and industrial applications.
On December 23, 2021 , Focus Universal (Shenzhen) Technology Co. LTD was founded
as a mainland China office for manufacturing procurement expertise and support
research and development activities. Focus Universal (Shenzhen) Technology Co.
LTD is designed to function as a branch office accessing high level ability to
source products and build relationships with manufacturers in the region and as
a lower cost form of support research and development as engineers are more
plentiful in the region. This last quarter of 2022, this office has continued to
grow to double digit headcount and has also begun to handle other online and
simple phone marketing and marketing materials production activities, provided a
cost and quality benefit exists at the time.
Research and Development Efforts of 5G Cellular Technology
Just like our ultra-narrowband technology can be used to reduce noise in powerline communication technology, our internal research suggests that our ultra-narrowband technology can be leveraged to create a type of 5G wireless communication technology that can achieve both low band 5G coverage and we believe 1 Gbps high band speed. We employ an ultra-narrow spectrum channel (<1KHz) to establish an ultra-long-distance link between the 5G base station and the receiver which reduces noise and interference entering the bandwidth.
For a description of the ultra-narrowband technology and the 5G applications, see "Part I - Item 1. Business, Section 2. "Creating a faster 5G cellular technology by using ultra-narrowband technology" above.
50
Intellectual Property Protection
OnNovember 4, 2016 , we filed aU.S. patent application number 15/344,041 with the USPTO. OnMarch 5, 2018 , we issued a press release announcing that the USPTO published an Issue Notification forU.S. Patent Application No. 9924295 entitled "Universal Smart Device," which covers a patent application regarding the Company's Universal Smart Device. The patent was issued onMarch 20, 2018 . Subsequent to our internal research and development efforts, we filed with the USPTO onJune 2, 2017 , a patent application regarding a process for improving the spectral response curve of a photo sensor. The small and cost-effective multicolor sensor and its related software protected by the potential patent we believe could achieve a spectral response that approximates an ideal photo response to measure optical measurement. The patent was issued onFebruary 26, 2019 . OnNovember 29, 2019 , the Company filed an international utility patent application filed through the patent cooperation treaty as application PCT/US2019/63880. InApril 2020 , the Company was notified that it received a favorable international search report from theInternational Searching Authority regarding this patent application, which patents the Company's PLC technology.The World International Property Organization report cited only three category "A" documents, indicating that the Company's application met both the novelty and non-obviousness patentability requirements. Consequently, the Company is optimistic that the patent covering the claims for its PLC technology will be issued in due course and will allow the Company to implement strong protections on the PLC technology worldwide. OnMay 19, 2021 , we filed thirteen provisional patent applications with the USPTO that we had been researching and developing for years encompassing a broad spectrum of technology areas including sensor technology, wired and wireless communications, power line communications, computer security, software solutions, interconnected technological communications, smart home systems and methods for both home and hydroponic areas, dynamic password cipher, local file security, payment card security, infrared sensor, and a method and apparatus for high data rate transmission. In the fourth quarter of 2021, we hired the law firm ofKnobbe Martens, Olson & Bear, LLP based inOrange County, CA to serve as outside intellectual property counsel for the Company. The firm is working on transferring the Company's provisional patent applications to formal patent applications in addition to filing new provisional patents. In 2021, we filed 14 patents. We filed 18 domestic patents in 2022 (plus two international patents in 2022), and so far have filed 3 patents in 2023.
In addition, the Company's patent number 11,488,468 was allowed and subsequently
issued on
Competitors There are several competitors we have identified in the wireless sensor node industry, including traditional instruments or devices manufacturers such asHanna Instruments and Extech Instruments. Hach developed and launched the SC1000 Multi-parameter Universal Controller, a probe module for connecting a maximum to 32 digital sensors or analyzers. However, we believe their current price points are still cost prohibitive to consumers.Monnit Corporation offers a range of wireless and remote sensors. Many of Monnit's products are web-based wireless sensors that usually are not portable because of their power consumption. Also, the sensors' real-time updates are slow; and we believe security of the web-based sensor data acquisition also may be a concern. In addition to purchasing the device, consumers usually have to pay monthly fees for using web-based services. We are not trying to compete with traditional instruments or device manufacturers because we utilize our Ubiquitor device in conjunction with our smartphone application, which we believe will be a completely different product category. 51 IoT Installation Industry There are several companies that compete with AVX in smart home installations, includingVivint Smart Home , Crestron andControl4 . However, we believe we can distinguish ourselves from our competitors by offering a substantially lower price. An installation by Crestron ranges between$20,000 and$100,000 and byControl4 between$20,000 and$40,000 . The cheapest competitor we can identify in this sector isVivint Smart Home , which costs less than$5,000 to install; however, we understand that theVivint Smart Home focuses on security systems only and that users have no other smart applications, which our smart home product line would include.
Air Filtration Systems and Meter Products Industry
The air filtration system and meter products industry is a niche industry. The global industrial air filtration market was valued at$23.83 billion by 2029 and analysts expect it to register a CAGR of 7.2% because of the industrial need to control air quality across a range of industries.22Air purification methods are an effective way to control contaminants and improve indoor air quality and as a result, many national and local governments overseeing indoor air quality and other emissions are enacting stricter workforce health and safety regulations in this area, which drives demand. ___________________ 22 Fortune, The global air filters market is projected to grow from$14.68 billion in 2022 to$23.83 billion by 2029, exhibiting a CAGR of 7.2% in forecast period, 2022-2029, https://www.fortunebusinessinsights.com/industry-reports/air-filters-market-101676, (last accessedMarch 7, 2023 ) 52 Market Potential We believe universal wireless smart technology will play a critical role for traditional instrument manufacturers, as currently simply the undertaking of an IoT project is too expensive and difficult to develop for medium or smaller companies and carries 75% failure rate according to Cisco Systems22. The cost factor is the first consideration when deciding whether a company wants to develop smart wireless technologies and implement them in their products or use them in their field testing. We also hope to play a role in academic laboratories, particularly with smaller academic laboratories that are sensitive to price. Regarding the larger IoT industry statistics, overall enterprise IoT spending increased to$201 Billion in 2022, an increase of 21.5%. The outlook for growth in 2023 is 18.5% from this large base of enterprise spending23. More specifically, the IoT sensors market is projected to reach$26 Billion by 2026 from$11.1 Billion in 202224. The IoT marketplace size assessments usually include the hardware components and the software components which often contain a Software as a Service (SaaS) model. Additionally, the rising need for reliable high bandwidth communication for IoT devices is expected to rise to$664.75 Billion in 2028, spearheaded by the currently predominant services in the 5G category25. We would also expect this market to grow with the addition of new categories of services delivering reliable high bandwidth communication for IoT devices and would cannibalize and expand the existing services where the new services proved to be more effective and efficient. We also expect our recent growth within our IoT Installation Services segment to bolster and complement our AVX Design and Integration and all other related installation businesses of these IoT products. The number of new contracts we have signed thus far in a limited amount of time through the segment is 9 with an average value of$52,257.44 and a total collection value of$470,317 in signed contracts to date, of which we have already collected$233,515.89 . Additionally, thus far, we have an aggregate$615,797 in contracts agreed in principle, of which we expect to be signed and deposits paid. This is compared to our highest AVX revenue for calendar year of$817,233 in 2019,$705,877 for 2020,$252,958 for 2021, and$260,871 for 2022 for the entire calendar year. While statistics regarding the IoT installation sectors are difficult to aggregate given that the work is often are pieced off into various contractor service categories, the residential custom installation market ranges from$5.7B to$12 .1B27, and we would expect the commercial and industrial installation markets to be larger than the residential for IoT devices.
________________________
22 Cisco Systems, Connected Futures, Executive Business Insights,
23 IoT Analytics, Market Insights for the Internet of Things,February 7, 2023 , Global IoT market size to grow 19% in 2023-IoT shows resilience despite economic downturn, https://iot-analytics.com/iot-market-size/
24 Markets and Markets, IoT Sensors Market by Sensor Type, Network Technology, Vertical, Application, and Geography - Global Forecast -2026, https://www.marketsandmarkets.com/Market-Reports/sensors-iot-market-26520972.html
25 Cision PRNewswire,
reliable-communication-to-iot-devices-is-expected-to-boost-overall-market-growth-301432173.html
26 CEPro. How Big is the Custom Installation Market?,
53 Results of Operations
For the year ended
Revenue Our consolidated gross revenue for the years endedDecember 31, 2022 and 2021 was$353,619 and$1,434,446 , respectively, which included revenue from related parties of$49,782 and$29,084 , respectively. Revenue for the year endedDecember 31, 2022 decreased$1,080,827 due toAVX Design & Integration Inc. being unable to generate more service work or develop a big project during the pandemic. As mentioned, the company is midstream in shifting toward more higher technology products and revenues and diversifying away from generalized hydroponic equipment.
Cost of revenue and Gross Profit
Cost of revenue for the year endedDecember 31, 2022 was$330,899 , compared to$1,137,287 for the year endedDecember 31, 2021 . This decrease in cost of revenue was related to the decrease in revenues. In addition to the decrease in revenue, gross profit decreased to$22,720 for the year endedDecember 31, 2022 compared to$297,159 for the year endedDecember 31, 2021 . Operating Expenses
The major components of our operating expenses for the years ended
For the year For the year Increase
ended December ended December (Decrease)
31, 2022 31, 2021 $
Selling expense $ 142,372 $ 39,821 $ 102,551
Compensation - officers and directors 1,055,133 661,171 393,962
Research and development 1,060,385 220,469 839,916
Professional fees 896,385 1,030,159 (133,774 )
General and administrative 2,074,091 1,362,126 711,965
Total costs and operating expenses $ 5,228,366 $ 3,313,746 $ 1,914,620
Selling expense for the year ended December 31, 2022 was $142,372 , compared to
$39,821 for the year ended December 31, 2021 . Selling expense incurred was
mainly from third party advertising fees. The increase of selling expense was
due to an increase in advertising fees.
Compensation - officers and directors were $1,055,133 and $661,171 for the years
ended December 31, 2022 and 2021, respectively. The increase was due to increase
in directors' stock-based compensation - options.
Research and development costs were $1,060,385 and $220,469 for the years ended
December 31, 2022 and 2021, respectively. The increase was due to an increase
number of employee in research and development department.
Professional fees were $896,385 during the year ended December 31, 2022 compared
to $1,030,159 during the year ended December 31, 2021 . The decrease in
professional fees mainly resulted from the Nasdaq uplist in 2021 compared to the
current period.
General and administrative expenses of $2,074,091 incurred during the year ended
December 31, 2022 primarily consisted of salaries of $739,943 , insurance expense
of $406,612 , rent of $209,738 , office expense of $188,464 , payroll taxes of
$136,614 and depreciation expense of $165,293 . General and administrative
expenses of $1,362,126 incurred during the year ended December 31, 2021
primarily consisted of salaries of $487,073 , insurance expense of $359,372 and
depreciation expense of $162,160 . The increase was mainly due to increased
expense in China entity.
54
Other Income (expense)
Other income of $278,709 incurred during the year ended December 31, 2022 ,
primarily consisted of interest income of $3,887 , forgiveness of debt of
$158,547 , unrealized loss on marketable equity securities of $42,395 , realized
loss on marketable equity securities of $21,205 , rental income of $166,288 and
other income of $13,587 . Other expense of $204,390 incurred during the year
ended December 31, 2021 , primarily consisted of interest expense of $37,608 ,
forgiveness of debt of $371,118 , change in fair value of warrant liability of
$1,284,780 , gain on settlement of derivative liability of $550,406 , rental
income of $186,212 and other income of $10,262 .
Net Losses
During the years ended
Liquidity and Capital Resources
Working Capital
December 31 , December 31,
2022 2021
Current Assets
Cash Flows
The table below, for the periods indicated, provides selected cash flow
information:
For the year For the year
ended December ended December
31, 2022 31, 2021
Net cash used in operating activities $ (2,957,983 ) $ (1,969,445 )
Net cash used in investing activities (211,257 ) (22,990 )
Net cash provided by (used in) financing activities (1,158,547 ) 10,087,818
Effect of exchange rate (7,452 ) (43 )
Net change in cash $ (4,335,239 ) $ 8,095,340 Cash Flows from Operating Activities
Our net cash outflows from operating activities of$2,957,983 for the year endedDecember 31, 2022 , was primarily the result of our net loss of$4,926,937 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$37,335 , increase in accounts receivable - related party of$19,331 , increase in inventory of$53,684 , decrease in other receivable of$13,057 , decrease in prepaid expenses of$158,474 , decrease in deposits of$4,035 , decrease in operating lease right-of-use asset of$139,754 , decrease in accounts payable and accrued liabilities of$21,722 , decrease in other current liabilities of$17,135 , decrease in customer deposit of$271 , decrease in lease liabilities of$117,245 , and increase in other liabilities of$12,335 . Non-cash expense included add-backs of$136,337 in bad debt expense,$166,266 in depreciation expense,$42,395 in unrealized loss on marketable equity securities,$21,205 in realized loss on marketable equity securities,$719,975 in stock-based compensation - shares,$849,043 in stock-based compensation - options, reduction in inventory fair value net realizable of$27,199 . 55 Our net cash outflows from operating activities of$1,969,445 for the year endedDecember 31, 2021 , was primarily the result of our net loss of$3,220,977 and changes in our operating assets and liabilities offset by the add-back of non-cash expenses. The change in operating assets and liabilities includes an increase in accounts receivable of$28,875 , increase in accounts receivable - related party of$15,176 , decrease in inventory of$21,229 , increase in other receivable of$13,057 , increase in prepaid expenses of$210,017 , decrease in deposits of$66,767 , increase in operating lease right-of-use asset of$333,140 , increase in accounts payable and accrued liabilities of$94,484 , decrease in accounts payable - related party of$17,471 , increase in other current liabilities of$17,299 , decrease in customer deposit of$57,106 , increase in lease liabilities of$328,846 , and decrease in other liabilities of$17,135 . Non-cash expense included add-backs of$42,116 in bad debt expense,$162,160 in depreciation expense,$1,284,780 in change in fair value of warrant liability,$48,000 in stock-based compensation,$429,856 in stock option compensation, reduction in inventory reserve of$1,622 , and gain on settlement of derivative liability of$550,406 .
We expect that cash flows from operating activities may fluctuate in future periods because of a number of factors, including fluctuations in our net revenues and operating results, utilization of new revenue streams, collection of accounts receivable, and timing of billings and payments.
Cash Flows from Investing Activities
For the year endedDecember 31, 2022 , we had cash outflow from investing activities of$211,257 . That was primarily the result from the purchase of property and equipment of$42,187 , purchase of marketable securities of$768,949 and proceeds from sales of marketable securities of$599,879 . For the year endedDecember 31, 2021 , we had cash outflow from investing activities of$22,990 from the purchase of property and equipment.
Cash Flows from Financing Activities
For the year endedDecember 31, 2022 , cash outflows from financing activities of$1,158,547 . That was primarily the result from purchase of treasury stock of$1,000,000 , and forgiveness of debt of$158,547 . For the year endedDecember 31, 2021 , cash inflows of$10,087,818 were due to proceeds of SBA loans of$267,297 , repayment of SBA loans of$246,650 , proceeds from bank loan of$1,500,000 , repayment of the bank loan of$1,500,000 , proceeds from issuance of shares of$10,326,131 , and forgiveness of debt of$258,960 .
Off-Balance Sheet Arrangements
As of
© Edgar Online, source
