NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND
2021
(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”). Focus Universal Inc. is a universal
smart instrument developer and manufacturer focused on the internet of things (“IoT”) industry, headquartered in Ontario,
California, specializing in the development and commercialization of novel and proprietary universal smart technologies and instruments
that solve problems plaguing the internet of things (“IoT”) industry by: (1) increasing overall chip integration by shifting
it to the device level; (2) creating a faster 5G cellular technology by using Ultra-narrowband technology; (3) leveraging ultra-narrowband
power line communication (“PLC”) technology; and (4) User Interface Machine auto generation technology. 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 test, and parameter measurement instruments
and functions. The Company’s 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 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. Focus Universal is also developing ultra-narrow band technology
that is hopefully capable of overcoming the noise problems communicating through power lines that have hindered the industry for over
a century. Focus Universal’s wireless communication technology may allow for longer-range coverage, might be more energy effective
and management believes has much faster data sending speeds than the current 5G technology speeds being used.
Perfecular Inc. (“Perfecular”), a
wholly-owned subsidiary of Focus, 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 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.
On December 23, 2021, Focus set up a branch in
Shenzhen China, Focus Universal (Shenzhen) Technology Company LTD. The subsidiary was registered to be engaged in IoT research and development,
equipment sales, and application services, software development and sales, software outsourcing, intelligent agricultural management,
intelligent instrumentation sales, and information consulting services. This excludes any projects subject to approval or that require
a separate business license in accordance with the local laws. China allows foreign entities to setup wholly owned limited liability companies
in China, also known as Wholly Foreign Owned Enterprises (WFOEs), in non “restricted” or “prohibited” industries
and business activities. The subsidiary’s business operation has been approved by the local government in Shenzhen to be qualified
as a WFOE entity in China. The entity is 100% owned by Focus Universal, Inc.
On January 5, 2022, the Company founded a wholly
owned subsidiary named Lusher Bioscientific, Inc. (“Lusher”) Lusher Bioscientific was founded to market to the hydroponic
and controlled agriculture market and to assist in the product development of IoT technology products within this sector. As of the date
of this filing, the Company has only founded the subsidiary and activities are in the introductory phase.
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., AVX Design & Integration, Inc.,
Focus Universal (Shenzhen) Technology Co., LTD and Lusher Bioscientific (collectively, the “Company”, “we”, “our”,
or “us”). All intercompany balances and transactions have been eliminated upon consolidation. The Company’s unaudited
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 six months
ended June 30, 2022, the Company had a net loss of $2,930,227 and negative cash flow from operating activities of $1,749,492.
With the January 1, 2022 beginning cash amount of $8,678,665, the Company will have enough cash to cover its projected annual cash burn
rate of $3,152,618 which is an increase from the previous year. This is a result of coming off of a year where the company
completed an uplisting transaction causing a greater than normal amount of expenditure, especially in professional fees. Overall, the
Company has adequate cash for the Company to continue operation as a going concern throughout 2022 without any additional capital raise.
As a result, the previous factors raising substantial doubt to continue as a going concern have been alleviated for the following year.
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 an unaudited condensed 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 unaudited condensed 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 unaudited condensed
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. As of June 30, 2022 and December 31, 2021, approximately $5,719,087 and $7,464,846 of the Company’s
cash was not insured by the FDIC. There were no cash equivalents held by the Company as of June 30, 2022 and December 31, 2021.
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 June 30, 2022 and December 31, 2021, allowance
for doubtful accounts amounted to $143,782 and $86,635, 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 a fair value adjustment 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 June 30, 2022 and December 31, 2021, inventory fair value adjustments amounted to $43,323 and $68,940, respectively.
Marketable Securities
The Company invests part of its excess treasury
cash in equity securities and money market funds according to company treasury and investment policies. Marketable securities represent
trading securities bought and held primarily for sale in the near-term to generate income on short-term price differences and are stated
at fair value. Realized and unrealized gains and losses are recorded in other income (expense), net.
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 |
|
| Fixed assets |
Useful life |
| Furniture |
5 years |
| Equipment |
5 years |
| Warehouse |
39 years |
| Improvement |
5 years |
| Land |
N/A |
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 those 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 June 30, 2022 and December 31, 2021, 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.
Warrants
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). The Company does not have any outstanding warrants as of June 30, 2022
and December 31, 2021, respectively.
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. |
The following table summarize financial assets
and liabilities measured at fair value on a recurring basis as of June 30, 2022:
| Schedule of Fair Value Assets And Liabilities
Measured On Recurring Basis | |
| | | |
| | | |
| | | |
| | |
| | |
June 30, 2022 (unaudited) | |
| | |
Fair Value | | |
Carrying | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Value | |
| Assets | |
| | |
| | |
| | |
| |
| Marketable securities: | |
| | | |
| | | |
| | | |
| | |
| Stock | |
$ | 163,490 | | |
$ | – | | |
$ | – | | |
$ | 163,490 | |
| Total assets measured at fair value | |
$ | 163,490 | | |
$ | – | | |
$ | – | | |
$ | 163,490 | |
The carrying amount
of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventories, other receivable, prepaid expenses,
deposit, accounts payable and accrued expenses, other current liabilities, customer deposit, 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.
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues,
expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from
net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s other comprehensive
loss for the six months ended June 30, 2022 and for the years ended December 31, 2021 was comprised of foreign currency translation adjustments.
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 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:
| · | 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 category, 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 provided to the customer. |
Revenue from our project construction 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, excluding depreciation & amortization
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 unaudited 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 unaudited condensed 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 unaudited condensed 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 unaudited condensed 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 unaudited condensed 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 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 greater than 50% likely of being 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 June 30, 2022 and December 31, 2021.
As of June 30, 2022 and December 31, 2021, 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 | |
| | |
| |
| Six Months Ended June 30, | |
2022 | | |
2021 | |
| Stock options | |
| 367,787 | | |
| 262,500 | |
| Total | |
| 367,787 | | |
| 262,500 | |
Reclassification
Certain reclassifications have been made to the
unaudited condensed consolidated financial statements for prior years to the current year’s presentation. Such reclassifications
have no effect on net income as previously reported.
Foreign Currency Translation and Transactions
The reporting and functional currency of Focus
is the USD. The functional currency of Focus Universal (Shenzhen) Technology Co. LTD, a wholly owned subsidiary of Focus located in China,
is the Renminbi (“RMB”).
For financial reporting purposes, the financial
statements of the Company’s Chinese subsidiary, which are prepared using the RMB, are translated into the Company’s reporting
currency, USD. Assets and liabilities are translated using the exchange rate on the balance sheet date. Revenue and expenses are
translated using average exchange rates prevailing during each reporting period. Stockholders’ equity is translated at historical
exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive loss
in stockholders’ equity.
Transactions denominated in currencies other than
the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions.
The resulting exchange difference, presented as foreign currency transaction loss, is included in the accompanying unaudited condensed
consolidated statements of operations. The exchange rates used for unaudited condensed consolidated financial statements are as follows:
| Schedule
Of Intercompany Foreign Currency Balances |
|
|
|
|
|
|
|
|
| |
|
Average Rate for the Six Months Ended
June 30, |
|
| |
|
2022
(Unaudited) |
|
|
2021
(Unaudited) |
|
| China Yuan (RMB) |
|
RMB |
6.4749 |
|
|
RMB |
6.4721 |
|
| United States Dollar ($) |
|
$ |
1.0000 |
|
|
$ |
1.0000 |
|
| |
|
Exchange Rate at |
|
| |
|
June 30, 2022
(Unaudited) |
|
|
December 31, 2021 |
|
| China Yuan (RMB) |
|
RMB |
6.6964 |
|
|
RMB |
6.3641 |
|
| United States Dollar ($) |
|
$ |
1.0000 |
|
|
$ |
1.0000 |
|
Note 3 – Recent Accounting Pronouncement
In June 2016, the FASB issued ASU No. 2016-13,
(Topic 326), Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments which amends the current
accounting guidance and requires the use of the new forward-looking “expected loss” model, rather than the “incurred
loss” model, which requires all expected losses to be determined based on historical experience, current conditions and reasonable
and supportable forecasts. This guidance amends the accounting for credit losses for most financial assets and certain other instruments
including trade and other receivables, held-to-maturity debt securities, loans and other instruments. In November 2019, the FASB issued
ASU No. 2019-10 to postpone the effective date of ASU No. 2016-13 for public business entities eligible to be smaller reporting companies
defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company
believes the adoption of ASU No. 2016-13 will not have a material impact on its financial position and results of operations.
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
At June 30, 2022 and December 31, 2021, inventory
consisted of the following:
| Schedule of Inventory | |
| | |
| |
| | |
June 30, 2022 | | |
December 31, 2021 | |
| Parts | |
$ | 21,480 | | |
$ | 12,470 | |
| Finished goods | |
| 34,778 | | |
| 10,419 | |
| Inventory | |
$ | 56,258 | | |
$ | 22,889 | |
Note 5 – Deposits
Deposit balance as of June 30, 2022 amounted to
$42,203 for lease agreement and utility deposit and third-party payroll service deposit. Deposit balance as of December 31, 2021 amounted
to $39,901 for lease agreement and utility deposit.
Note 6 – Property and Equipment
At June 30, 2022 and December 31, 2021, property and equipment consisted
of the following:
| Schedule of property and equipment | |
| | |
| |
| | |
June 30, 2022 | | |
December 31, 2021 | |
| Warehouse | |
$ | 3,789,773 | | |
$ | 3,789,773 | |
| Land | |
| 731,515 | | |
| 731,515 | |
| Building improvement | |
| 240,256 | | |
| 238,666 | |
| Furniture and fixture | |
| 38,103 | | |
| 27,631 | |
| Equipment | |
| 98,109 | | |
| 71,368 | |
| Software | |
| 1,995 | | |
| 1,995 | |
| Total cost | |
| 4,899,751 | | |
| 4,860,948 | |
| Less accumulated depreciation | |
| (589,626 | ) | |
| (507,608 | ) |
| Property and equipment, net | |
$ | 4,310,125 | | |
$ | 4,353,340 | |
Depreciation expense for the six months ended
June 30, 2022 and 2021 amounted to $82,063 and $80,872, 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 security deposit, shown as non-current
liabilities as of June 30, 2022 and other liability in other current liability as of December 31, 2021.
Note 7 – Related Party Transactions
Revenue generated from Vitashower Corp., a company
owned by the Chief Executive Officer’s wife, amounted to $31,542 and $15,141 for the six months ended June 30, 2022 and 2021, respectively.
Account receivable balance due from Vitashower Corp. amounted to $85,992 and $15,176 as of June 30, 2022 and December 31, 2021, respectively.
Purchases generated from Vitashower Corp. amounted to $0 and $0 for the six months ended June 30, 2022 and 2021, respectively. There were
accounts payable balances of $0 and $0 due to Vitashower Corp. as of June 30, 2022 and December 31, 2021, respectively.
Service revenue generated from one of the Company’s
directors, amounted to $2,278 and $0 for the six months ended June 30, 2022 and 2021, respectively. Account receivable balance due from
this director amounted to $2,278 and $0 as of June 30, 2022 and December 31, 2021, respectively.
Compensation for services provided by the President
and Chief Executive Officer for the six months ended June 30, 2022 and 2021 amounted to $60,000 and $60,000, respectively. Of subsequent
note, Tianjin Guanglee was once owned by the Chief Executive Officer Desheng Wang, as fully disclosed in the annual report in 2017. Since
then, during 2018, the entity was transferred to another individual and was not considered a related party transaction per guidelines,
and further subsequent changes to the vendor are noted in Note 8 found below.
Note 8 – Business Concentration and Risks
Major customers
Three customers accounted for 34% of the total
accounts receivable as of June 30, 2022 and one customer accounted for 48% of the total accounts receivable as of December 31, 2021, respectively.
These three customers accounted for 54% of the total revenue for the six months ended June 30, 2022 and one customer accounted for 78%
of total revenue for the six months ended June 30, 2021, respectively.
Major vendors
One vendor, Tianjin Guanglee, accounted for 0%
and 0% of total accounts payable at June 30, 2022 and December 31, 2021, respectively. This same vendor, Tianjin Guanglee, accounted for
24% and 77% of the total purchases for the six months ended June 30, 2022 and 2021, respectively. Of subsequent note, Tianjin Guanglee
was once owned by the Chief Executive Officer Desheng Wang, as fully disclosed in the annual report in 2017. In 2018, Dr. Wang transferred
the ownership of the entity to an unrelated third party in a transaction not considered a related party transaction per the guidelines.
Note 9 – Lease
The Company recorded its operating lease expense
of $237,045 and $32,590 for the six months ended June 30, 2022 and 2021, respectively.
On April 8, 2015, AVX Design & Integration
Inc. entered an eighty-six month commercial lease with a third party for an approximately 2,592 square foot office space. The lease commenced
on July 1, 2015, and will end on August 31, 2022. The monthly rent is $4,536 with approximately a 3% increase rate in each additional
year. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow
an amount equal to the lease payments for the asset under similar term, which is 15%. Lease expense for the lease is recognized on a straight-line
basis over the lease term. As of August, the company has not entered into any new commercial lease for AVX Design & Integration Inc.
On December 7, 2021, Focus Universal (Shenzhen)
Technology Co. LTD entered into a thirty-eight month commercial lease with a third party for an approximately 5,895 square foot office
space. The lease commenced on December 25, 2021 and will end on February 28, 2025. The monthly rent is RMB70,097 (approximately $11,053)
with approximately an 11.1% to 12.5% increase rate in each additional year. The incremental borrowing rate for a lease is the rate of
interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar
term, which is 10%. Lease expense for the lease is recognized on a straight-line basis over the lease term.
Operating lease right-of-use assets represent
the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation
to make lease payments arising from the lease. As of June 30, 2022 and December 31, 2021, operating lease right-of use assets and lease
liabilities were as follows:
| Schedule of operating Right-of-use asset and liability | |
| | |
| |
| | |
June 30, 2022 | | |
December 31, 2021 | |
| Operating lease right-of-use assets | |
$ | 215,750 | | |
$ | 420,137 | |
| Lease liabilities, current portion | |
$ | 114,119 | | |
$ | 121,568 | |
| Lease liabilities, less current portion | |
$ | 231,271 | | |
$ | 302,387 | |
Lease term and discount rate:
| Schedule Lease term and discount rate |
|
|
|
|
| |
|
June 30, 2022 |
|
December 31, 2021 |
| Weighted average remaining lease term |
|
|
|
|
| Operating lease |
|
0.17 to 2.67 years |
|
0.67 to 3.17 years |
| Weighted average discount rate |
|
|
|
|
| Operating lease |
|
10% - 15% |
|
10% - 15% |
The minimum future lease payments are as follows:
| Schedule of maturity of lease liabilities | |
| |
| | |
Amount | |
| Year ending December 31, 2022 | |
$ | 73,964 | |
| Year ending December 31, 2023 | |
| 140,008 | |
| Year ending December 31, 2024 | |
| 155,709 | |
| Year ending December 31, 2025 | |
| 26,170 | |
| Total minimum lease payment | |
| 395,851 | |
| Less: imputed interest | |
| (50,463 | ) |
| Present value of future minimum lease payments | |
$ | 345,389 | |
Note 10 – Loans
Paycheck Protection Program
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. On April 4, 2022, the SBA authorized full forgiveness of this loan principal amount of $158,547
and $1,570 interest.
| Schedule of debt | |
| | |
| |
| | |
June 30, 2022 | | |
December 31, 2021 | |
| SBA Loan | |
$ | – | | |
$ | 158,547 | |
| Less: current portion | |
| – | | |
| (132,618 | ) |
| Long term portion | |
$ | – | | |
$ | 25,929 | |
Interest expense incurred from the loans amounted
to $288 and $22,827 for the six months ended June 30, 2022 and 2021, 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 six months ended June 30, 2022, the
Company issued 153,776 shares of common stock.
On April 4, 2022, the Company issued 121,149 shares
of its Common Stock to Boustead Securities LLC. (“Boustead”), which is the warrants exercised by Boustead on September 7,
2021 with the exercise price $6.25 and the shares were valued at $1,776,044 upon cashless exercise option of warrants related to completion
of the Company’s public offering.
On May 2, 2022, the Company issued 32,627 shares
to consultants in exchange for professional services rendered. The shares were valued at $154,709 based on the closing price of the Company’s
common stock on the dates that the shares were deemed earned, according to the agreements.
During the year ended December 31, 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 June 30, 2022 and December 31, 2021 and
2020, the Company had 43,413,517 shares and 43,259,741 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 $8,000 for the three months ended June 30, 2022, which the Company intends to issue stock as compensation for services
rendered. Expenses incurred and paid in shares as of June 30, 2022 amounted to $154,709.
On August 30, 2021, the Company entered into a
Representative Common Stock Purchase Warrant agreement (“Warrant Agreement”) with its placement agent, 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 year ended December 31, 2021, the Company recorded a loss
from change in 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:
| Schedule of 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 warrants 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 year ended December 31, 2021, the Company has a gain on settlement of derivative liability which amounted to $550,406.
121,149 shares were issued to Boustead which amounted to $17,776,044 as of June 30, 2022.
Employee compensation
On February 11, 2022 (“Vesting Date”),
the Company entered into a Restricted Stock Award Agreement (“Award Agreement”) with nine employees for 290,000 shares of
the $0.001 par value voting common stock subject to the terms and to the fulfillment of the conditions set in the plan. The first 20%
of the restricted shares was granted and vested on February 11, 2022. 20% of the restricted shares will vest on each anniversary of the
Vesting Date until fourth anniversary of the Vesting Date. There were 58,000 shares granted as of March 31, 2022. The fair value of above
employee compensation was $609,580 as of June 30, 2022.
In November 2021, the Company entered into a one-year
employment agreement with VP of Finance and Head of Investor Relations of the Company, pursuant to which the Company rewards 10,000-share
bonus consisting of shares of $0.001 par value voting common stock, which will be granted in 2,500 blocks every quarter based on certain
performance metrics.
During the six months ended June 30, 2022, the
Company recognized VP of Finance and Head of Investor Relations of the Company employee compensation amount of $75,340. During the six
months ended June 30, 2022 and 2021, the Company total employee compensation amount were $684,920 and $0, respectively.
Stock options
On August 6, 2019, each member of the Board was
granted 30,000 options to purchase shares at $5.70 per share.
On January 4, 2021, each member of the Board was
granted 15,000 options to purchase shares at $3.00 per share.
On December 31, 2021, each member of the Board
was granted 15,000 options to purchase shares at $8.86 per share.
As of December 31, 2021, there were 420,000 options
granted, 315,288 options vested, 104,713 options unvested, and 420,000 outstanding stock options.
For the six months ended June 31, 2022 and 2021,
the Company’s stock option compensation expenses amounted to $456,750 and $213,675, 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 option activity | |
| | |
| |
| | |
June 30, 2022 | | |
June 30, 2021 | |
| Risk-free interest rate | |
| 0.93 – 1.52% | | |
| 0.93% | |
| Expected life of the options | |
| 10 years | | |
| 10 years | |
| Expected volatility | |
| 122.93 – 148.18% | | |
| 122.93% | |
| Expected dividend yield | |
| 0% | | |
| 0% | |
The following is a summary of the option activity
from December 31, 2021 to June 30, 2022:
| Schedule of options by exercise price | |
| | |
| | |
| | |
| |
| Options | |
Shares | | |
Weighted average exercise price | | |
Weighted Average Remaining Contractual Life | | |
Aggregate Intrinsic Value | |
| Outstanding at December 31, 2021 | |
| 420,000 | | |
$ | 5.82 | | |
| 8.56 | | |
| – | |
| Granted | |
| – | | |
$ | – | | |
| – | | |
| – | |
| Exercised | |
| – | | |
$ | – | | |
| – | | |
| – | |
| Forfeited or expired | |
| – | | |
$ | – | | |
| – | | |
| – | |
| Outstanding at June 30, 2022 | |
| 420,000 | | |
$ | 5.82 | | |
| 8.56 | | |
| 2,354,100 | |
| Vested as of June 30, 2022 | |
| 367,787 | | |
$ | 5.38 | | |
| 8.35 | | |
| 2,220,435 | |
| Exercisable at June 30, 2022 | |
| 367,787 | | |
$ | 5.38 | | |
| 8.35 | | |
| 2,220,435 | |
Note 12 – Segment reporting
The Company consists of two types of operations.
Focus Universal, Inc. (“Corporate”) involves operations related to research and development of technology products, non-specific
financing, executive expense, operations and investor relations of the public entity, and general shared management and costs across subsidiary
units which spread across all functional categories. Perfecular Inc. (“Perfecular”) involve wholesale, marketing, and production
of universal smart instrument and devices in the hydroponic and controlled agricultural segments. 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.
| Segment Reporting | |
| | |
| | |
| | |
| |
| | |
Six Months Ended June 30, 2022 | |
| | |
Corporate | | |
Perfecular | | |
AVX | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Revenue | |
$ | – | | |
$ | 47,650 | | |
$ | 140,339 | | |
$ | 187,989 | |
| Revenue - related party | |
| – | | |
| 31,542 | | |
| 2,278 | | |
| 33,820 | |
| Total revenue | |
| – | | |
| 79,192 | | |
| 142,617 | | |
| 221,809 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost and Operating Expenses | |
| | | |
| | | |
| | | |
| | |
| Cost of Revenue, excluding depreciation & amortization | |
| – | | |
| 60,702 | | |
| 139,861 | | |
| 200,563 | |
| Selling expense | |
| – | | |
| 48,085 | | |
| 7,802 | | |
| 55,887 | |
| Compensation - officers and directors | |
| 110,040 | | |
| – | | |
| – | | |
| 110,040 | |
| Research and development | |
| 729,105 | | |
| – | | |
| – | | |
| 729,105 | |
| Professional fees | |
| 522,546 | | |
| – | | |
| 12,661 | | |
| 535,207 | |
| General and administrative | |
| 446,576 | | |
| 1,141,522 | | |
| 132,118 | | |
| 1,720,216 | |
| Total Cost and Operating Expenses | |
| 1,808,267 | | |
| 1,250,309 | | |
| 292,442 | | |
| 3,351,018 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from Operations | |
| (1,808,267 | ) | |
| (1,171,117 | ) | |
| (149,825 | ) | |
| (3,129,209 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other Income (Expense): | |
| | | |
| | | |
| | | |
| | |
| Interest income (expense), net | |
| 490 | | |
| (288 | ) | |
| 48 | | |
| 250 | |
| Unrealized loss on marketable equity securities | |
| (74,626 | ) | |
| – | | |
| – | | |
| (74,626 | ) |
| Realized gain on marketable equity securities | |
| 10,281 | | |
| – | | |
| – | | |
| 10,281 | |
| Other income (expense), net | |
| 105,560 | | |
| 160,117 | | |
| (3,600 | ) | |
| 263,077 | |
| Total other income (expense) | |
| 42,705 | | |
| 159,829 | | |
| (3,552 | ) | |
| 198,982 | |
| | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Tax expense | |
| – | | |
| – | | |
| – | | |
| – | |
| | |
| | | |
| | | |
| | | |
| | |
| Net Loss | |
$ | (1,765,562 | ) | |
$ | (1,011,288 | ) | |
$ | (153,377 | ) | |
$ | (2,930,227 | ) |
Note 13 – 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 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 June 30, 2022 and December 31, 2021.
Note 14 –Subsequent Events
Regarding election of directors, on August 10,
2022, the Board of Directors appointed Sean Warren to serve on the Board of Directors as an independent director. The appointment of Mr.
Warren fills a board seat previously vacated by Mr. Greg Butterfield. As a director, Mr. Warren’s term begins August 10, 2022, and
expires at the annual meeting of the stockholders to be held in 2023. It has been determined and accepted that Mr. Warren will serve as
a member on the audit and compensation committees of the Board of Directors. Mr. Warren will have the same compensation arrangement for
his service as the other independent directors. That compensation currently consists of cash compensation and an option grant.
Mr. Sean Warren is a seasoned executive with over
25 years of experience in technology and enterprise technology systems and has previously served on Focus Universal’s board of directors
beginning on June 8, 2018. His areas of expertise include software development, cloud management, enterprise infrastructure development
and full spectrum of IT compliance. Mr. Warren currently serves as the Vice President of OPSA Change Delivery for Wells Fargo and has
since 2019. From 2016 to 2018, he served as Director of IT Operations at Domo, Inc. Mr. Warren has also previous served as the CIO of
Mountain Medical, Veyo Medical and Vice President of IT at Larry Miller. He has also worked for technology companies including Omniture,
Adobe. Mr. Warren graduated from Florida State University with a degree in accounting. He is qualified to serve as a director because
of his accounting experience, his experience serving on public company boards and experience with the financial industry and information
technology.
The Company has evaluated other subsequent events
through the date these unaudited condensed consolidated financial statements were issued and determined that there were no other subsequent
events or transactions other than this election of director event that require recognition or disclosures in the unaudited condensed consolidated
financial statements.