The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in, Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management beliefs, and certain assumptions made by our management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth herein and in other reports and documents that we file from time to time with theSecurities and Exchange Commission , particularly the Report on Form 10-K, Form 10-Q and any Current Reports on Form 8-K.
Narrative Description of the Business
Focus Universal Inc. (the "Company," "we," "us," or "our") is aNevada corporation. We believe we have developed five proprietary technologies utilizing our patent portfolio which we believe solve the most fundamental problems plaguing the internet of things ("IoT") industry through: (1) increasing overall chip integration by shifting integration from the component level 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; (4) proprietary User Interface Machine auto generation technology; and (5) incorporating all our core technologies into a single chip. Our Universal Smart Technology is designed to overcome instrumentation interoperability and interchangeability. The electronic design starts from a 90% completed common foundation we call our universal smart instrumentation platform ("USIP"), instead of the current method of building each stand-alone instrument from scratch. Our method eliminates redundant hardware and software and results in significant cost savings and production efficiency. We believe we have developed software machine auto generation technology to replace the manual software designs which are currently in use and cannot satisfy the exponential growth of future IoT industry demand. We believe our ultra-narrowband PLC enables our users to send data over existing electrical power cables and immediately establish a ubiquitous data network without substantial new investment for a dedicated wiring infrastructure. We believe our ultra-narrow band technology is capable of overcoming the noise problems communicating through power lines that have hindered our competitors for over a century. We believe our wireless communication technology allows for longer-range coverage, is more energy effective and has much faster data sending speeds than the current 5G technology speeds being used. We also provide sensor devices and are a wholesaler of various air filters and digital, analog, and quantum light meter systems.
For the three and nine months ended
Our Current Products Include:
We are a wholesaler of various digital, analog, and quantum light meters and filtration products, including fan speed adjusters, carbon filters and HEPA filtration systems. We source these products from various manufacturers inChina and then sell them to a majorU.S. distributor, Hydrofarm, who resells our products directly to consumers through retail distribution channels and in some cases, places its own branding on our products. During the development phase, the company uses generic electronic device casings to house the prototype equipment before the final design and manufacturing process. As an update to our product line development: we plan to phase out the traditional, lower-margin products and are preparing to launch a new line of products that have been in development for several years. These newer technology products will be released in phases, and we intend that increasing amounts of technology will be layered upon these products. Additionally, we plan to continue to increase our efforts in protecting more intellectual property and have continued to develop technologies for long-term growth. We have developed products in both the controlled agriculture industry and home automation industries. We have existing relationships in both sectors. 24
We are building a
In our hydroponics segment, our honeycomb activated carbon filter product has been issued a patent inOctober 2022 , and the production of the products in several different formats has been completed and are ready to ship to theUSA for nationwide marketing.
Our products on the home automation front are also beginning production. Of note, (1) smart wall touch light switches, (2) digital control smart wall touch light switches, (3) smart timers, and finally (4) smart controllers are ready for production. Currently, ourShenzhen subsidiary unit mainly focuses on product development and commercialization. An important electrode with a "Total Dissolved Solids" ("TDS") meter design, which applications in all solubility measurements, was completed and approved by our US management team. Furthermore, our devices and sensors with applications within hydroponics again, including (1) pH meter, (2) CO2 meter, (3) dissolved oxygen meter, (4) digital light meter, (5) new (and vastly improved) quantum par meter are under intensive testing and we expect to send our new versions to our US headquarters for management approval inNovember 2022 . In summary, our entire smart home and hydroponic IoT are expected to be completed by the end of 2022. Beyond IoT products, as an NIPL (our software platform for interoperability within IoT) derivative product, a complementary office automation software was developed, and we believe the remaining major technical difficulties have been overcome. This specific software was designated to assist in completing financial reports faster, more accurately, and allow ease of update, eliminating the need for increased staffing especially in time sensitive projects. It is designed to save CPAs, auditors, accounting, or legal significant of time in preparation ofSEC financial reports and other internal financial reporting. Eighty percent (80%) of this software development has been completed and we hope to launch beta versions by the end of 2022.
While we will continue to sell the following products through Hydrofarm, we expect to have upgraded versions of certain products to re-introduce new versions after the older version are discontinued:
Specifically, we sell the following products through Hydrofarm:
Fan speed adjuster device. We provide a fan speed adjuster device to our client Hydrofarm. Designed specifically for centrifugal fans with brushless motors, our adjuster device helps ensure longer life by preventing damage to fan motors by adjusting the speed of centrifugal fans without causing the motor to hum. These devices are rated for 350 watts max, have 120VAC voltage capacity and feature an internal, electronic auto-resetting circuit breaker. Carbon filter devices. We sell two types of carbon filter devices to our client Hydrofarm. These carbon filter devices are professional grade filters specifically designed and used to filter air in greenhouses that might be polluted by fermenting organics. One of these filters can be attached to a centrifugal fan to scrub the air in a constant circle or can be attached to an exhaust line as a single pass filter, which moves air out of the growing area and filters unwanted odors and removes pollens, dust, and other debris in the air. The other filter is designed to be used with fans from 0-6000 C.F.M. HEPA filtration device. We provide a high-efficiency particulate arrestance ("HEPA") filtration device at wholesale prices to our client Hydrofarm. Manufactured, tested, certified, and labeled in accordance with current HEPA filter standards, this device is targeted towards greenhouses and grow rooms and designed to keep insects, bacteria, and mold out of grow rooms. We sell these devices in various sizes.
Digital light meter. We provide a handheld digital light meter that is used to measure luminance in fc units, or foot-candles.
Quantum par meter. We provide a handheld quantum par meter used to measure photosynthetically active radiation ("PAR"). This fully portable handheld PAR meter is designed to measure PAR flux in wavelengths ranging from 400 to 700 nm. It is designed to measure up to 10,000 µmol.
Ubiquitor Wireless Universal Sensor Device
We are developing a device we call the Ubiquitor, which replaces the functions of traditional digital measurement and sensing products by integrating many digital sensors and measurement tools into one single digital device. We believe the platform represents a technological advancement in the IoT marketplace by integrating large numbers of technologies, including cloud technology, wired and wireless communication technology, software programming, instrumentation technology, artificial intelligence, PLC, and sensor networking into a single platform. The result of such integration is a smaller, cheaper and faster circuit system design than those currently offered in the instrumentation market. 25 OurUSIP technology that will make the Ubiquitor possible is an advanced software and hardware integrated instrumentation platform that uses a large-scale modular design approach. The large-scale modular design approach subdivides instruments into a foundation component (aUSIP ) and architecture-specific components (sensor nodes), which together replaces the functions of traditional instruments at a fraction of their cost. TheUSIP has an open architecture, incorporating a variety of individual instrument functions, sensors, and probes from different industries and vendors. The platform features the ability to connect potentially thousands of different sensors or probes, addressing major limitations present in traditional instrumentation systems. TheUSIP , which is compatible with a significant percentage of the instruments currently manufactured, consists of universal and reusable hardware and software. The universal hardware in theUSIP is (i) a smartphone, computer, or any mobile device capable of running our software that includes a display and either hardware controls or software control surfaces, and (ii) our Ubiquitor, which is designed to be the universal data logger that acts as a bridge between the computer or mobile device and the sensor nodes. We call our flagshipUSIP device the "Ubiquitor" due to its ability to measure and test a variety of electrical and physical phenomena such as voltage, current, temperature, pressure, sound, light, and humidity-both wired and wirelessly. We have created and assembled prototype models of the Ubiquitor in limited quantities and plan to expand our assembly in 2023. Our prototype Ubiquitor is compatible with standard desktop computers running either Windows OS or MacOS and Android- or iOS-based mobile devices and acts as a conduit that communicates with a group of sensors or probes manufactured by different vendors in a manner that requires the user to have little or no knowledge of their unique specifications. The data readout is displayed on the computer or mobile device display in application software we have created for use with a Windows PC and are creating for use with a Mac. We are designing the application software (the "App") to have a graphical representation of control and indicator elements common in traditional tangible instruments, such as knobs, buttons, dials, and graphs, etc. Utilizing the Ubiquitor and the App, users and instrument manufacturers will be free to add, remove or change a sensor module for their special industrial or educational application without needing to create their own application software and design their own hardware. Our developers are designing and implementing a soft control touch screen interface that supports real-time data monitoring and facilitates instrument control and operation. Recently, we have devoted a substantial number of resources to research and development in both the US andChina to bring the Ubiquitor and its App to full production and distribution. We anticipate that the sales and marketing involved with bringing the Ubiquitor to market will require us to hire a number of new sales and marketing employees in order to gain traction in the market. We expect to continue this process throughout 2023. We intend to introduce the Ubiquitor in smart home installations to reduce costs and increase functionality, as well as implement the Ubiquitor device in greenhouses and other agricultural warehouses that require regulation of light, humidity, temperature, and other measurable scientific units required to create optimal growing conditions. Our universal smart development protocol focuses not only on the design of the hardware and software modules but also on the design of the overall universal smart instruments system, guided by the principles of structure, universality and modularity. As mentioned, we believe we address the core and fundamental issues facing the IoT marketplace. Our Ubiquitor device is a fully modular system with a universal sensor node and gateway system that uses a computer or mobile device as the output display module responsible for displaying the readings of various sensor nodes. We have completed an initial production run of prototype Ubiquitor devices and intend to proceed into full-scale production. We intend to design the Ubiquitor's sensor analytics system to integrate event-monitoring, storage and analytics software in a cohesive package that provides a holistic view of the sensor data it is reading. During the development phase, the company uses generic electronic device casings to house the prototype equipment before final design and manufacturing process.
The physical hardware of the Ubiquitor will consist of:
1. The sensor nodes, which come in hundreds of different varieties of sensor instruments in the form of a USB stick, with both male and female ports; and 2. The Ubiquitor instrument as the main hardware gateway, which is a small cell phone-sized device with integrated circuits. We believe the Ubiquitor device can connect up to thousands of potential sensor nodes, and integrate data using embedded software to display the data and all analytics onto a digital screen (desktop, smartphone or mobile device displays) using a Wi-Fi connection. As disclosed in our patent application, we have already tested up to 256 sensor instrument readouts. Most types of nodes and probes can connect to the hardware. If the sensor size is bigger than the standard probe size, it is possible to simply use a USB cable to connect the probe and the hub. All data and analytics are displayed on a single screen, with tools that record and keep track of all measurements, and sort and display analytic information in easy-to-read charts. 26
The Ubiquitor will be a general platform that collects data in real time, up to 100 Hz per second; and thus, is intended to be adapted to many industrial uses.
By using the universal hardware or
1. Cut production costs. Smartphone technology is widely used on the small
sensor device market. By utilizing smartphone technology, the Ubiquitor
will add superior functionality and performance, improve the product's
quality, and cut production costs. 2. Reduce the effort required to develop a new sensor product. With the
Ubiquitor, we believe that there will be no need for device manufacturers
to research and develop new monitoring and operating components because
they will just need to develop new sensor nodes or probes that may be integrated into our software technology. 3. Reduce clutter. It is anticipated that the Ubiquitor could dispense with some of the hassle of connecting cables, since the Ubiquitor allows wireless transmission of sensor data and may allow wireless access to networks, such as a PLC network. We have not yet started research and development of a second generation Ubiquitor device, but once we demonstrate the market for this product, we intend to begin such research and development. Currently our research and development is focused on concepts we can implement in the current first generation Ubiquitor device.
Research and Development Efforts of Power Line Communication
Power Line Communication ("PLC") is a communication technology that enables sending data over existing power cables. One advantage of this technology is that PLC does not require substantial new investment for its communications infrastructure.Rather, PLC utilizes existing power lines, thereby forming a distribution network that already penetrates all residential, commercial and industrial premises. Accordingly, connectivity via PLC is potentially the most cost-effective, scalable interconnectivity approach for the IoT. We believe PLC can be an integral part of our communication infrastructure for the IoT, which enables reliable, real-time measurements, monitoring and control. A large variety of appliances may be interconnected by transmitting data through the same wires that provide electrical energy. Our patented PLC is an innovative communication technology that enables sending data over existing power cables in the electric grid. Because PLC uses the existing power lines, it does not require substantial new investment for a dedicated wiring infrastructure. Existing power lines already form a distribution network that penetrates most residential, commercial, and industrial properties. Given that the power grid is, for the most part, an established ubiquitous network, we believe that PLC is potentially the most cost-effective, scalable interconnectivity approach for the backbone communication infrastructure required for the IoT. PLC allows IoT devices to be plugged into power outlets to establish a connection using the existing electrical wiring, permitting data sharing without the inconvenience of running dedicated network cables. Historically, the primary design goal of the power line network was electric power distribution. The power line network was not originally designed to function as a communication channel. Consequently, while PLC has been around for many years, the harsh electrical noise present on power lines and variations in equipment and standards make communications over the power grid difficult and present several challenges for data transfer. Signals propagating along the power line are subjected to substantial amounts of noise, attenuation, and distortion. PLC is susceptible to noise from devices linked to the power supply infrastructure. Because of these factors, previous attempts at implementing PLC technology resulted in power companies and internet service providers deciding that the technology is not a viable means of delivering data or broadband internet access. We have successfully developed ultra-narrowband PLC technology that we believe can transfer readable data through the power grid. According to our internal testing, our ultra-narrowband PLC technology can send and receive data without the customary interference that occurs in standard office and residential environments, achieving speeds of 4 Mbps at a bandwidth of less than 1000 Hz. We utilized six industrial fans simultaneously to test noise interference and disturbance, and no significant interference was found. By comparison, a single hair dryer will render legacy PLC technology completely useless. We have completed the development of our 4Mbps PLC modules and the printed circuit board layout. These modules will be used for IoT systems involving over 1,000 sensors. Penetrating physical barriers like walls within a single floor or reaching out to different floors in a single building is a challenge for the wireless technology that current IoT systems use. Moreover, wireless networks often face performance issues due to radio-frequency interference caused by microwave ovens, cordless telephones, or even Bluetooth devices at home. However, our PLC technology can reach every node connected via the power lines. We believe our technology will convert virtually every standard wall socket into an access point, making it a more consistent and reliable system for crucial and sensitive operations. Our ultra-narrowband PLC technology's ability to reach long distances via power lines will become especially useful in commercial networks that require the ability to avoid physical barriers like walls, underground structures, and hills. We believe that our PLC technology can be integral to any smart city, community, or campus. 27 For example, the 5G cellular network promises exciting advances for telecommunication service providers, but implementing the 5G network will be challenging. The implementation will require building out dense, low-latency edge networks in ways that are affordable, secure and easily maintainable ways. 5G antennas will be able to handle more users and to transmit more data, but they will have a shorter transmission range. 5G networks will also require frequencies of up to 300 GHz. This requirement means wireless carriers must bid for the costly higher spectrum bands to roll out their respective 5G networks. Generally speaking, wireless networks are typically slower and more expensive than existing wired networks and extremely susceptible to interference from radio signals, radiation, walls and other forms of interference. Additionally, wireless networks may be accessed by any device within range of the network's signal, making the information transmitted on a wireless network susceptible to access by unauthorized recipients. We are currently developing a wired alternative to wireless networks that utilize installed power lines to transmit information. Our PLC technology uses an ultra-narrow band spectrum channel of less than 1 KHz to establish a long-distance link between transmitter and receiver. Thus, we believe that our proprietary ultra-narrow band PLC technology will offer a promising alternative to wireless networks and provide the backbone communication infrastructure for IoT devices. We believe that because residential and commercial structures already include multiple power outlets, the power line infrastructure represents an excellent network to share data among intelligent devices, particularly in the smart home installations that we are currently performing through AVX. Using PLC technology would mean that the requirement for costly ethernet cable networks to carry network information could be eliminated, as the same signals may be carried
on the existing power lines. We plan to leverage the communications technology of PLC to enhance the Ubiquitor and make the Ubiquitor a central component of the smart home and gardening systems we are currently developing. The goal would be that our Ubiquitor would be used to send or receive control signals from a smart device, and control hundreds of devices in near real time. We intend to apply the same concept to commercial and industrial applications. Also, we plan to design a full line of products for the gardening industry by integrating the Ubiquitor device into a gardening system. The system would include a light control node, temperature sensor, humidity sensor, digital light sensor, quantum PAR sensor, pH sensor, total dissolved solids ("TDS") sensor and carbon dioxide sensor design. We believe combining these sensors would offer the same features as combining dozens or even hundreds of different instruments in the gardening industry. The Ubiquitor would be used to replace these devices and could offer another case study of the effectiveness of the application of universal smart technology to such systems. The development of universal smart instruments and the IoT have a considerable amount of overlap, with the only difference being the number of sensor nodes involved. We plan to take advantage of this overlap and unify universal smart instruments and the IoT into a single system, building the IoT infrastructure for both residential and commercial uses and charging monthly subscription fees. End users will be able to plug any peripheral devices into the power outlet and enjoy the IoT connectivity throughout their home.
Eventually, we hope to establish five divisions to bring our technology together: 1) AVX with new shared distributed smart home products powered by the Ubiquitor; 2) an IT division in software machine design; 3) Universal Smart Instrumentation; 4) PLC; and 5) an IoT division.
Intellectual Property Protection
OnNovember 4, 2016 , we filed aU.S. patent application number 15/344,041 with the USPTO. OnMarch 5, 2018 , we issued a press release announcing that the USPTO published an Issue Notification forU.S. Patent Application No. 9924295 entitled "Universal Smart Device," which covers a patent application regarding the Company's Universal Smart Device. The patent was issued onMarch 20, 2018 . Subsequent to our internal research and development efforts, we filed with the USPTO onJune 2, 2017 a patent application regarding a process for improving a spectral response curve of a photo sensor. The small and cost-effective multicolor sensor and its related software protected by the patent we believe could achieve a spectral response that approximates an ideal photo response to take optical measurement. The patent was issued onFebruary 26, 2019 . In addition, we have been notified that the USPTO published a notice of allowance for a patent application we filed onMarch 12, 2018 as application No. 15/925,400. The patent title is a "Universal Smart Device," which is a universal smart instrument that unifies heterogeneous measurement probes into a single device that can analyze, publish, and share the data analyzed. The issue fee was paid onMarch 14, 2019 . 28 OnNovember 29, 2019 , the Company filed an international utility patent application filed through the patent cooperation treaty as application PCT/US2019/63880. InApril 2020 , the Company was notified that it received a favorable international search report from theInternational Searching Authority regarding this patent application, which patents the Company's PLC technology.The World International Property Organization report cited only three category "A" documents, indicating that the Company's application met both the novelty and non-obviousness patentability requirements. Consequently, the Company is optimistic that the patent covering the claims for its PLC technology will be issued in due course and will allow the Company to implement strong protections on the PLC technology worldwide. In the fourth quarter of 2021, we hired the law firm ofKnobbe Martens, Olson & Bear, LLP to serve as outside intellectual property counsel for the Company. The firm is working on further transferring the Company's provisional patent applications to formal patent applications which should number 13 according if all proceed according to plan. In addition, Knobbe Martens is also working on further filing four previously unfiled patents during the same timeframe and extending an existing patent application intoEurope andAustralia . In addition, inMay 2022 , the Company also engagedChang & Hale, LLP law firm as suggested by our counsel atKnobbe, Martens, Olsen & Bear, LLP to assist with two new patents, however Knobbe Martens still remains our main IP counsel. The company now has 24 total patents and patent applications in various phases with theUS Patent and Trademark Office , with two more provisional patents filed this quarter.
As a note,
Competitors
We have identified several competitors we have identified, specifically in the
wireless sensor node industry, including traditional instruments or device
manufacturers such as
Hach developed and launched the SC1000 Multi-parameter Universal Controller, a probe module for connecting up to 32 digital sensors or analyzers. However, their products are not compatible with smart phones yet; and we believe their price point is still prohibitive to consumers.Monnit Corporation offers a range of wireless and remote sensors. Many of Monnit's products are web-based wireless sensors that usually are not portable because of their power consumption. Also, the sensors' real-time updates are slow; and we believe security of the web-based sensor data acquisition may also be a concern. In addition to purchasing the device, consumers usually have to pay monthly fees for using web-based services. We are not trying to compete with traditional instruments or device manufacturers because we utilize our Ubiquitor device in conjunction with our smartphone application, which we believe will be a completely different product category. Market Potential We believe that wireless universal smart technology will play a critical role for traditional instrument manufacturers, as it is too expensive and difficult to develop for medium or smaller companies. The cost factor is the first consideration when deciding whether a company wants to develop smart wireless technologies and implement them in their products or use them in their field testing. We also hope to play a role in academic laboratories, particularly with smaller academic laboratories that are sensitive to price. Results of Operations
For the three months ended
Revenue, cost of revenue and gross profit
Our consolidated gross revenue for the three months endedSeptember 30, 2022 and 2021 was$60,654 and$634,777 , respectively, which included revenue from related parties of$5,968 and$0 , respectively. Revenue for the three months endedSeptember 30, 2022 decreased$574,123 due to sales decrease from major customer of Perfecular andAVX Design & Integration Inc. being unable to generate more service work or develop a big project of high competitive environment inLos Angeles area. Additionally, the company is midstream in shifting toward more higher technology products and revenues, and diversifying away from more generalized hydroponic equipment of which remain in higher inventory levels
within the industry. 29
Cost of revenue for the three months ended
Operating Expenses
The major components of our cost and operating expenses for the three months
ended
For the three For the three Increase months ended months ended (Decrease) September 30, 2022 September 30, 2021 $ Selling expense 76,984 14,776 62,208
Compensation - officers and directors 34,000
34,600 (600 ) Research and development 133,109 55,525 77,584 Professional fees 150,943 343,787 (192,844 ) General and administrative 597,143 422,309 174,834 Total operating expenses $ 992,179 $ 870,997$ 121,182
Selling expenses for the three months endedSeptember 30, 2022 was$76,984 , compared to$14,776 for the three months endedSeptember 30, 2021 . Selling expense incurred was mainly from marketing fees, including expenses related to the Company's management ringing the closing bell for Nasdaq, and a one-time sales return for Perfecular. The increase of selling expenses was due to an increase in marketing fees.
Compensation - officers and directors were
Research and development costs were
Professional fees were$150,943 during the three months endedSeptember 30, 2022 , compared to$343,787 during the three months endedSeptember 30, 2021 . The decrease in these fees compared to the prior period was due to the fact that in the prior period we were uplisting to Nasdaq by pursuing an underwritten offering. General and administrative expenses of$597,143 incurred during the three months endedSeptember 30, 2022 primarily consisted of stock-based compensation of$195,750 , salaries of$110,024 , rent of$43,266 , insurance expense of$72,274 , and depreciation expense of$41,115 . General and administrative expenses of$422,309 incurred during the three months endedSeptember 30, 2021 primarily consisted of stock-based compensation of$106,837 , salaries of$82,382 , insurance expense of$116,546 and depreciation expense of$41,062 . Other Income (expense) Other income of$31,946 incurred during the three months endedSeptember 30, 2022 primarily consisted of interest income of$2,635 , unrealized gain on marketable equity securities of$42,101 , realized loss on marketable equity securities of$31,486 and other income of$18,696 . Other expenses of$580,200 incurred during the three months endedSeptember 30, 2021 primarily consisted of interest expense of$14,069 , gain on extinguishment of debt$107,460 , change in fair value of warrant liability of$1,284,780 , gain on settlement of derivative liability of$550,406 and other income of$60,783 . Net Losses
During the three months ended
30
For the nine months ended
Revenue
Our consolidated gross revenue for the nine months endedSeptember 30, 2022 and 2021 was$282,463 and$1,259,920 , respectively, which included revenue from related parties of$39,788 and$15,141 , respectively. Revenue for the nine months endedSeptember 30, 2022 decreased$977,457 due to sales decrease from Hydrofarm to Perfecular andAVX Design & Integration Inc. being unable to generate more service work or develop a big project in the highly competitive environment of theLos Angeles area. As mentioned, the company is midstream in shifting toward more higher technology products and revenues and diversifying away from generalized hydroponic equipment.
Cost of revenue for the nine months ended
Operating Expenses
The major components of our cost and operating expenses for the nine months
ended
For the nine For the nine months ended months ended Increase September 30, September 30, (Decrease) 2022 2021 $ Selling expense 132,871 15,734 117,137 Compensation - officers and directors 144,040 107,700 36,340 Research and development 862,214 165,897 696,317 Professional fees 686,150 801,262 (115,112 ) General and administrative 2,317,359 1,286,943 1,030,416 Total operating expenses$ 4,142,634 $ 2,377,536 $ 1,765,098
Selling expense for the nine months ended
Compensation - officers and directors were$144,040 and$107,700 for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase was due to granting equity compensation. Research and development costs were$862,214 and$165,897 for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase was due to an increase in research and development employee compensation; and on research and development costs incurred by our Chinese subsidiary. Professional fees were$686,150 during the nine months endedSeptember 30, 2022 compared to$801,262 during the nine months endedSeptember 30, 2021 . The decrease in professional fees compared to the prior period was due to the fact that in 2021 the Company was uplisting to Nasdaq and conducted an underwritten offering.
General and administrative expenses of$2,317,359 incurred during the nine months endedSeptember 30, 2022 primarily consisted of stock-based compensation of$652,500 , salaries of$579,958 , rent of$280,311 , insurance expense of$330,768 , and depreciation expense of$123,177 . General and administrative expenses of$1,286,943 incurred during the nine months endedSeptember 30, 2021 primarily consisted of stock-based compensation of$320,512 , salaries of$344,133 , depreciation expense of$121,933 , and insurance expense of$251,690 . The major portion of increase these expenses were related to increase director's stock-based compensation. 31 Other Income (expense) Other income of$230,928 incurred during the nine months endedSeptember 30, 2022 primarily consisted of interest income of$2,885 , unrealized loss on marketable equity securities of$32,525 , realized loss on marketable equity securities of$21,205 and other income of$281,773 . Other expense of$360,133 incurred during the nine months endedSeptember 30, 2021 primarily consisted of interest expense of$36,825 , gain on extinguishment of debt for SBA PPP forgiveness loan amount of$260,450 , change in fair value of warrant liability amount of$1,284,780 , gain on settlement of derivative liability amount of$550,406 and other income of$150,616 . Net Losses
During the nine months ended
Liquidity and Capital Resources
Working Capital September 30, December 31, 2022 2021 Current Assets$ 6,591,072 $ 9,214,340 Current Liabilities (2,278,440 ) (571,442 ) Working Capital$ 4,312,632 $ 8,642,898 Cash Flows The table below, for the periods indicated, provides selected cash flow information: For the nine For the nine months ended months ended September 30, September 30, 2022 2021
Net cash used in operating activities$ (2,435,157 ) $ (1,496,812 ) Net cash used in investing activities (177,738 ) (6,875 ) Net cash provided by financing activities -
10,455,528 Effect of exchange rate (3,352 ) - Net change in cash$ (2,616,247 ) $ 8,951,841
Cash Flows from Operating Activities
Our net cash outflows from operating activities of$2,435,157 for the nine months endedSeptember 30, 2022 was primarily the result of our net loss of$3,872,247 and changes in our operating assets and liabilities offset by the add-back of non-cash expenses. The change in operating assets and liabilities includes an increase in accounts receivable of$32,257 , an increase in accounts receivable - related party of$45,413 , an increase in inventories of$5,087 , a decrease in prepaid expense of$116,648 , an decrease in deposit of$1,998 , a decrease in operating lease right-of-use asset of$226,468 , an decrease in accounts payable and accrued liabilities of$120,121 , a decrease in other current liabilities of$17,135 , an decrease in customer deposit of$271 , a decrease in lease liabilities of$94,542 , an increase in other liabilities of$12,335 . Non-cash expense included add-backs of$72,108 in bad debt expense,$21,133 in reduction of inventory fair value adjustments,$123,908 in depreciation expense,$32,525 in unrealized loss on marketable equity securities,$21,205 in realized loss on marketable securities,$158,547 in gain on forgiveness of debt,$671,901 in stock-based compensation - shares, and$652,500 in stock option compensation. 32
Our net cash outflows from operating activities of$1,496,812 for the nine months endedSeptember 30, 2021 , was primarily the result of our net loss of$2,500,415 and changes in our operating assets and liabilities offset by the add-back of non-cash expenses. The change in operating assets and liabilities includes an increase in accounts receivable of$120,503 , a decrease in inventory of$20,969 , an increase in prepaid expenses of$55,280 , a decrease in deposits of$100,000 , a decrease in operating lease right-of-use asset of$36,059 , an increase in accounts payable and accrued liabilities of$172,474 , a decrease in accounts payable - related party of$17,471 , an increase in other current liabilities of$17,299 , a decrease in customer deposits of$57,106 , a decrease in lease liabilities of$39,044 , and a decrease in other liabilities of$17,135 . Non-cash expense includes add-backs of$7,794 in bad debt expense,$1,689 in inventory reserve reductions,$121,932 in depreciation expense,$258,960 in gain on extinguishment of debt,$1,284,780 in change in fair value of warrant liability,$550,406 in gain on settlement of derivative liability,$36,000 in stock-based compensation, and$320,512 in stock option compensation. We expect that cash flows from operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our net revenues and operating results, utilization of new revenue streams, in line with our shifting revenue streams, collection of accounts receivable, and timing
of billings and payments.
Cash Flows from Investing Activities
For the nine months endedSeptember 30, 2022 we had cash outflow from investing activities of$177,738 . That was primarily the result from the purchase of property and equipment of$39,193 , purchase of marketable securities of$768,949 , and proceeds from sales of marketable securities of$630,404 . For the nine months endedSeptember 30, 2021 we had cash outflow from investing activities of$6,875 from the purchase of property and equipment.
Cash Flows from Financing Activities
There were no financing activities for the nine months endedSeptember 30, 2022 . For the nine months endedSeptember 30, 2021 , cash inflows of$10,455,528 were due to proceeds of SBA loans of$267,297 , payment of an SBA loan of$137,900 , proceeds from bank loan of$1,500,000 , payment on bank loan of$1,500,000 , and net proceeds of$10,326,131 from an underwritten public offering. 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 endedSeptember 30, 2022 , the Company had a net loss of$3,872,247 and negative cash flow from operating activities of$2,435,157 . With aJanuary 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 service 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.
Off-Balance Sheet Arrangements
As of
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