NOTES TO THE CONDENSED UNAUDITED 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 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
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, apartment, commercial complex, 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 – 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
In the long term, the continuation of the Company
as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to repay its debt
obligations, to obtain necessary equity financing to continue operations, and the attainment of profitable operations. For the nine months
ended September 30, 2021, the Company had a net loss of $2,500,415
and negative cash flow from operating activities of $1,496,812.
In February, 2021 the Company had obtained a $1,500,000
loan from a financial institution and a $1,500,000
loan commitment from a private related party. The loan from the financial institution requires monthly payments starting February
2021 and with the final payment due in 2026. The related party loan will accrue interest at 10%
until March
15, 2022, or six months from the date the loan is funded, whichever is later (the “Initial Interest Accrual Date”).
Interest on any unpaid principal after Initial Interest Accrual Date shall accrue at a fixed rate of 12% per annum until paid. The Company
reserves the right to prepay this loan agreement (in whole or in part) after 6 months of the first day with no prepayment penalty. The
Company may make, in its sole discretion, payments of interest only, or interest and principal, provided that the principal is not paid
in full prior to six months from the date the loan is funded.
The Company raised $11.5 million through an underwritten
public offering in September 2021. With the January 1, 2021 beginning cash amount of $583,325 and the loan of $1,500,000, the Company
will have enough cash to cover its projected annual cash burn rate of $1,967,074. With an underwritten public offering $11.5 million in
September 2021, the Company will have adequate reserves to continue operations in 2021 and 2022.
In 2020 the Company had negative operating cashflow of approximately $1.96
million, mainly resulting from net loss. The Company is currently developing its products and licenses and expects to generate profit
once the products and licenses are available for the market, which will begin to alleviate the negative cashflow. Currently, the Company
is testing 4 Mbps ultra-narrowband power line communication printed circuit boards, the testing was completed in second quarter of 2021.
The ultra-narrowband power line communication products will launch in fourth quarter of 2021. The portable universal smart device is
also in the final printed circuit board layout stage, the Company is planning to launch this product in fourth quarter of 2021. Initially,
new products would require cash to manufacture and promote. The Company expects to begin generating positive cashflow with the launch
of above-mentioned products from second quarter of 2022.
Overall, we have adequate cash for the Company
to continue operation as a going concern throughout 2021 and 2022 with capital raising. Thus, the previous factors raising substantial
doubt to continue as a going concern have been alleviated.
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.
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, allowance for doubtful
accounts, inventory reserves, 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, 2021 and December 31, 2020.
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, 2021 and December 31, 2020, allowance
for doubtful accounts amounted to $52,313 and $44,519, 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.
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, 2021 and December 31, 2020, inventory reserve amounted to $72,251 and $70,562, 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:
Schedule of estimated useful lives of property, plant and equipment
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Fixed assets
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Useful life
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Furniture
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5 years
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Equipment
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5 years
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Warehouse
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39 years
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Improvement
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5 years
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Construction in progress
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Land
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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, 2021 and December 31, 2020, the Company believes there was no impairment of its long-lived assets.
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.
Warrant
The Company accounts for warrants as either equity-classified
or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance
in FASB ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”).
The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability
pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether
the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net
cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This
assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly
period end date while the warrants are outstanding.
For issued or modified warrants that meet all
of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the
time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required
to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated
fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the warrants
was estimated using a Black-Scholes pricing model (see Note 11).
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:
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Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
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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.
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Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.
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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.
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:
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executed contracts with the Company’s customers that it believes are legally enforceable;
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identification of performance obligations in the respective contract;
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determination of the transaction price for each performance obligation in the respective contract;
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allocation of the transaction price to each performance obligation; and
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recognition of revenue only when the Company satisfies each performance obligation.
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These five elements, as applied to each of the
Company’s revenue categories, is summarized below:
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Product sales – revenue is recognized at the time of sale of equipment to the customer.
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Service sales – revenue is recognized based on the service been provided to the customer.
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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.
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.
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, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020,
the Company did not identify any material uncertain tax positions.
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.
Schedule of anti dilutive shares
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Nine months ended September 30,
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2021
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2020
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Stock options
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288,750
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210,000
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Total
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288,750
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210,000
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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 14 – 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 3 – 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.
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 condensed 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 adoption of this ASU did not have a material effect on its condensed
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 condensed
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.
Note 4 – Inventory, net
At September 30, 2021 and December 31, 2020,
inventory consisted of the following:
Schedule of Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Parts
|
|
$
|
42,110
|
|
|
$
|
45,509
|
|
Finished goods
|
|
|
49,979
|
|
|
|
67,549
|
|
Total
|
|
|
92,089
|
|
|
|
113,058
|
|
Less inventory reserve
|
|
|
(72,251
|
)
|
|
|
(70,562
|
)
|
Inventory, net
|
|
$
|
19,838
|
|
|
$
|
42,496
|
|
Note 5 – Deposit
Deposit balance as of September 30, 2021 amounted
to $6,630 for lease agreement and utility deposit. Deposit balance as of December 31, 2020 amounted to $106,630, including $6,630 for
lease agreement and utility deposit and $100,000 for payment made into an escrow account for purchasing a target company. On March 26,
2021, the management of target company decided to terminate the LOI. The LOI was terminated effective as of March 29, 2021 and $100,000
was returned on March 29, 2021.
Note 6 – Property and Equipment
At September 30, 2021 and December 31, 2020, property and equipment
consisted of the following:
Schedule of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
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
|
|
|
55,253
|
|
|
|
48,378
|
|
Software
|
|
|
1,995
|
|
|
|
1,995
|
|
Total cost
|
|
|
4,844,833
|
|
|
|
4,837,958
|
|
Less accumulated depreciation
|
|
|
(467,380
|
)
|
|
|
(345,448
|
)
|
Property and equipment, net
|
|
$
|
4,377,453
|
|
|
$
|
4,492,510
|
|
Depreciation expense for the nine months ended
September 30, 2021 and 2020 amounted to $121,932 and $121,684, 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, included in other liability in other current liabilities as of September 30, 2021 and non-current
liabilities as of December 31, 2020.
Note 7 – Related Party Transactions
Revenue generated from Vitashower Corp., a company
owned by the CEO’s wife, amounted to $15,141 and $21,267 for the nine months ended September 30, 2021 and 2020, respectively. Account
receivable balance due from Vitashower Corp. amounted to $0 and $0 as of September 30, 2021 and December 31, 2020, respectively. Purchases
generated from Vitashower Corp. amounted to $3,379 and $0 for the nine months ended September 30, 2021 and 2021, respectively. There were
accounts payable balances of $0 and $17,371 due to Vitashower Corp. as of September 30, 2021 and December 31, 2020, respectively.
Compensation for services provided by the President
and Chief Executive Officer for the nine months ended September 30, 2021 and 2020 amounted to $90,000 and $90,000, respectively.
Note 8 – Business Concentration and Risks
Major customers
One customer accounted for 39% and 0% of the
total accounts receivable as of September 30, 2021 and December 31, 2020, respectively. This customer accounted for 81% and 50% of the
total revenue for the period ended September 30, 2021 and 2020, respectively.
Major vendors
One vendor accounted for 100% and 0% of total
accounts payable at September 30, 2021 and December 31, 2020, respectively. This vendor accounted for 83% and 61% of the total purchases
for the period ended September 30, 2021 and 2020, respectively.
Note 9 – 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, 2021 and 2020, the Company recorded $48,885
and $48,885, 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:
Schedule of operating Right-of-use asset and liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Office lease
|
|
$
|
157,213
|
|
|
$
|
157,213
|
|
Less: accumulated amortization
|
|
|
(106,714
|
)
|
|
|
(70,655
|
)
|
Right-of-use asset, net
|
|
$
|
50,499
|
|
|
$
|
86,558
|
|
Operating Lease liability is summarized below:
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Office lease
|
|
$
|
55,627
|
|
|
$
|
94,671
|
|
Less: current portion
|
|
|
(55,627
|
)
|
|
|
(53,384
|
)
|
Long-term portion
|
|
$
|
–
|
|
|
$
|
41,287
|
|
Maturity of lease liability is as follows:
Schedule of maturity of lease liabilities
|
|
|
|
|
|
|
|
|
Year ending December 31, 2021
|
|
$
|
16,249
|
|
Year ending December 31, 2022
|
|
|
43,654
|
|
Total future minimum lease payment
|
|
|
59,903
|
|
Imputed interest
|
|
|
(4,276
|
)
|
Lease Obligation, net
|
|
$
|
55,627
|
|
Note 10 – 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 $107,460, 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 July 8, 2021, SBA authorized full forgiveness
of this loan and the Company recognized principal amount of $107,460 and $1,267 interest to other income.
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. On April 28, 2021, SBA authorized full forgiveness of
this loan and the Company recognized principal amount of $151,500
and $1,490 interest
to other income.
On March 2, 2021, Perfecular Inc. entered
into an agreement to receive a U.S. Small Business Administration Loan (“SBA Loan”) from Wells Fargo related to the
COVID-19 pandemic in the amount of $158,547,
which we received on March 3, 2021. 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 balance of principal and interest were $158,547 and $927,
respectively, due as of September 30, 2021. There were no principal and interest due as of December 31, 2020.
On March 10, 2021, AVX Design & Integration,
Inc. entered into an agreement to receive an SBA Loan from Chase Bank related to the COVID-19 pandemic in the amount of $108,750.
The SBA Loan has a fixed interest rate of 0.98
percent per annum and a maturity date five years from the date loan was issued. The balance of principal and interest were $108,750
and $623,
respectively, due as of September 30, 2021. There were no principal and interest due as of December 31, 2020
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 September 13, 2021, the Company paid this loan off with loan principal
amount of $81,100 and $3,624 interest.
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. On September 22, 2021, the Company paid this
loan off with loan principal amount of $56,800 and $2,743 interest.
Bank Loan
On January 8, 2021, Focus Universal Inc. entered
into a secured promissory note agreement with East West Bank in the amount of $1,500,000.
The note has a variable interest rate of 0.25%
above Wall Street Journal Prime Rate. The note requires monthly payments with the final payment of $1,357,178
due on January
22, 2026. On September 22, 2021, the Company paid this loan off with loan principal amount of $1,500,000
and $32,366
interest.
Economic Injury Disaster Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
SBA Loan
|
|
$
|
267,297
|
|
|
$
|
396,860
|
|
Less: current portion
|
|
|
(178,639
|
)
|
|
|
(194,125
|
)
|
Long term portion
|
|
$
|
88,658
|
|
|
$
|
202,735
|
|
Interest expense incurred from the loans amounted
to $37,238 and $2,290 for the nine months ended September 30, 2021 and 2020, respectively.
Note 11 – 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
During the nine months ended September 30, 2021,
the Company issued 2,300,000 shares of common stock.
On September 2, 2021, the Company closed its initial
public offering (“IPO”) under a registration statement effective August 30, 2021, in which it issued and sold 2,000,000 shares
of its Common Stock at a purchase price of $5.00 per share. On September 2, 2021, the Company closed on the IPO’s overallotment
option, selling an additional 300,000 shares of Common Stock to the IPO’s underwriters at the public offering price of $5.00 per
share. The Company received net proceeds of approximately $10.3 million from the IPO after deducting underwriting fee and offering expenses.
As of September 30, 2021 and December 31, 2020,
the Company had 43,259,741 and 40,959,741 shares of common stock issued and outstanding, respectively.
Shares to be issued for compensation
The Company entered into agreements with third
party consultants for financing and management consulting. The Company has incurred consulting service fees not paid in cash amounting
to $36,000 for the nine months ended September 30, 2021, which the Company intends to issue stock as compensation for services rendered.
Expenses incurred but not yet paid in shares as of September 30, 2021 and December 31, 2020 amounted to $134,709 and $98,709, respectively.
On August 30, 2021, the Company entered Representative
Common Stock Purchase Warrant agreement (“Warrant Agreement”) with its placement agent, Boustead Securities LLC. (“Boustead”)
for 161,000 shares and the exercise price is $6.25. Boustead exercised the warrants on September 7, 2021. The fair value of the warrants
was $1,041,670 and $2,326,450 as of August 30 and September 7, 2021, respectively. For the nine months ended September 30, 2021, the
Company change the fair value of warrant liability which amounted to a
difference of
$1,284,780.
These warrants were valued using a Black-Scholes
pricing model with the following assumptions:
|
|
August 30,
|
|
|
|
|
|
|
2021 (Initial
|
|
|
September 7,
|
|
|
|
Measurement)
|
|
|
2021
|
|
Risk-free interest rate
|
|
|
0.77%
|
|
|
|
0.82%
|
|
Expected term
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
194.37%
|
|
|
|
204.27%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Fair value of units (using Black-Scholes)
|
|
$
|
6.47
|
|
|
$
|
14.45
|
|
This Warrant Agreement allowed for cashless exercise
option, which is calculated by the percentage difference between exercise and trading price, which resulted in a reduced number of warrants
being exercisable. On September 7, 2021, Boustead exercised 121,149 shares with fair value of $1,776,044 upon cashless exercise option
of warrants related to completion of the Company’s public offering. The shares will be issued six months after these warrants have
been exercised. For the nine months ended September 30, 2021, the Company has a gain on settlement of derivative liability which amounted
to $550,406. Shares to be issued as of September 30, 2021 and December 31, 2020 amounted to $1,776,044 and $0, respectively.
Stock options
On January 4, 2021, each member of the Board was
granted 15,000 options to purchase shares at $3.00 per share.
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, 2021, there were 315,000 options
granted, 288,750 options vested, 26,250 options unvested, and 315,000 outstanding stock options.
For the nine months ended September 30, 2021 and
2020, the Company’s stock option compensation expenses amounted to $320,512 and $605,150, respectively.
The fair value of the stock options listed above was
determined using the Black-Scholes option pricing model with the following assumptions:
Schedule of assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Risk-free interest rate
|
|
|
0.93%
|
|
|
|
1.71%
|
|
Expected life of the options
|
|
|
10 years
|
|
|
|
10 years
|
|
Expected volatility
|
|
|
122.93%
|
|
|
|
158.86%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
The following is a summary of options activity
from December 31, 2020 to September 30, 2021:
The exercise price for options outstanding and
exercisable at September 30, 2021:
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 specializing
in high performance and easy to use audio/video, home theater, lighting control, automation, and integration. The table below discloses
income statement information by segment.
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 reasonably 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. There were no recorded litigation loss contingencies
as of September 30, 2021 and December 31, 2020.