NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Note 1 – Organization and Operations
Focus Universal Inc. (the “Company”)
was incorporated under the laws of the State of Nevada on December 4, 2012 (“Inception”). We are a
universal
smart instrument developer and manufacturer, headquartered in the Los Angeles, California metropolitan area, specializing in the
development and commercialization of the novel and proprietary universal smart technologies and instruments. Universal smart technology
is an innovative, commercial, off-the-shelf technology with an innovative soft hardware integrated platform. Our platform provides
a unique and universal wireless solution for embedded design, industrial control, test and measurement. Our smart technology software
utilizes a smartphone, computer, or a mobile device as a platform and display that communicates and works in tandem with a group
of external sensors and probes manufactured by different vendors in a manner that requires the user to have little or no knowledge
of their unique characteristics. Our universal smart instrument (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),
a universal smart application software (our “Application”) which is installed on the user’s smartphone allowing
the sensor readouts to be monitored on the smartphone screen. The Ubiquitor also connects to a variety of individual scientific
sensors that collect unique data points, from moisture, light, and airflow to other things like electricity voltage meters and
a wide variety of applications. These data points are then sent wirelessly to the smartphone and the data is organized on the smartphone
screen. The smartphone, 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.
The Company and Perfecular were entities
under common control; therefore, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification
(“ASC”) 805-50-45, the acquisition of Perfecular was accounted for as a business combination between entities under
common control and treated similar to a pooling of interest transaction.
Perfecular Inc. was founded in September
2009 and is headquartered in Walnut, 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.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial
statements include the accounts of Focus Universal Inc. and its wholly-owned subsidiary, Perfecular Inc. All intercompany balances
and transactions have been eliminated upon consolidation. The Company’s consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain
reclassifications have been made to the consolidated financial statements for prior years to the current year’s presentation.
Such reclassifications have no effect on net income as previously reported. Please see Note 11, Reclassifications.
Segment Reporting
The Company currently has one operating
segment. 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 that evaluated
regularly by the Management in deciding how to allocate resources and in assessing performance. The Management reviews financial
information presented on a consolidated basis for purposes of allocation resources and evaluating financial performance. Accordingly,
the Company has determined that it has a single operating and reportable segment.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less to be cash and cash equivalents. At times, such investments may be in excess
of Federal Deposit Insurance Corporation (FDIC) insurance limit. There were no cash equivalents held by the Company at March 31,
2018 and December 31, 2017.
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.
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
observable inputs and not corroborated by market data.
|
Financial assets are considered Level
3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least
one significant model assumption or input is unobservable.
The 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. If the inputs used to measure the financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
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. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amount of the Company’s
financial assets and liabilities, such as cash and cash equivalent, prepaid expenses, accounts payable and accrued expenses, approximate
their fair value because of the short maturity of those instruments.
Transactions involving related parties
cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings
may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions
were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
It is not however practical to determine
the fair value of advances from stockholders, if any, due to their related party nature.
Inventory
Inventory is valued at the lower of the
inventory’s cost (first in, first out basis) or the current market price of the inventory. Management compares the cost of
inventory with its market value and an allowance is made to write down inventory to market value, if lower. Inventory allowances
are recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the
impact of new product introductions and specific identification of items, such as discontinued products. These estimates could
vary significantly from actual requirements 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 futu
re
usage.
As of March 31, 2018 and December 31, 2017, inventory reserve amounted to $27,067.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method. Estimated useful lives range from three to seven years on all categories
of depreciable assets. 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.
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.
Revenue Recognition
The Company applies ASC 605-10-S99-1 for
revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue
realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable,
and (iv) collectability is reasonably assured.
The Company derives its revenues from sales
contracts with its customer with revenues being generated upon rendering of services. Persuasive evidence of an arrangement is
demonstrated via invoice; service is considered provided when the service is delivered to the customers; and the sales price to
the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive.
Perfecular’s primary business functions
are designing and marketing products. Tianjin Guanglee serves as an original equipment manufacturer (“OEM”). Perfecular
determines the product specifications and the sales prices, and bears physical loss risks during shipping. Perfecular collects
full amount of accounts receivable from customers through direct wire transfers or letters of credit. Tianjin Guanglee invoices
Perfecular for the manufacturing costs and Perfecular pays these invoices.
Allowance for doubtful accounts
The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and
a 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. Management evaluated that there was no allowance for doubtful accounts at March 31, 2018 and
December 31, 2017 based on collection history.
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 consolidated financial statements shall
include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other
similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of
consolidated financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s)
involved; (b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which income statements are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the consolidated financial statements; (c) the dollar amounts of transactions for each of
the periods for which income statements are presented and the effects of any change in the method of establishing the terms from
that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented
and, if not otherwise apparent, the terms and manner of settlement.
Commitments and Contingencies
The Company follows ASC 450-20 to report
accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The
Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings,
the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of
the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are
generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe,
based upon information available at this time that these matters will have a material adverse effect on the Company’s financial
position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely
affect the Company’s business, financial position, and results of operations or cash flows.
Stock Based Compensation
The Company accounts for employee and non-employee
stock awards under ASC 718, whereby equity instruments issued to employees for services are recorded based on the fair value of
the instrument issued and those issued to non-employees are recorded based on the fair value of the consideration received or the
fair value of the equity instrument, whichever is more reliably measurable.
There were no outstanding stock options
as of March 31, 2018 and December 31, 2017.
Income Tax Provision
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 assets or liabilities as of March 31, 2018 and December
31, 2017.
As of March 31, 2018 and December 31, 2017,
the Company did not identify any material uncertain tax positions.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed
pursuant to ASC 260-10-45. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period.
Diluted net income (loss) per common share
is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding
shares of common 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.
There were no potentially dilutive debt
or equity instruments issued and outstanding at any time during the three months ended March 31, 2018 and 2017.
Cash Flows Reporting
The Company adopted ASC 230-10-45-24 for
cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing
activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”)
as defined by ASC 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities
by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals
of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all
items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting
currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect
of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and
ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting
in cash receipts or payments in the period pursuant to ASC 830-230-45-1.
Subsequent Events
The Company follows the guidance in ASC
855-10-50 for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial
statements were issued. Pursuant to ASU 2010-09, the Company as an SEC filer considers its financial statements issued when they
are widely distributed to users, such as through filing them on EDGAR.
Note 3 – Property and Equipment
At March 31, 2018 and December 31, 2017,
property and equipment consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Computers
|
|
$
|
1,029
|
|
|
$
|
1,029
|
|
Furniture and fixture
|
|
|
8,850
|
|
|
|
8,850
|
|
Total cost
|
|
|
9,879
|
|
|
|
9,879
|
|
Less accumulated depreciation
|
|
|
(4,088
|
)
|
|
|
(3,543
|
)
|
Property and equipment, net
|
|
$
|
5,791
|
|
|
$
|
6,336
|
|
Depreciation expense for the three months
ended March 31, 2018 and 2017 amounted to $545 and $456, respectively.
Note 4 – Convertible Promissory
Notes
On June 30, 2017 and July 28, 2017, the
Company received $420,000 and $80,000, respectively through a series of two unsecured convertible promissory notes from the same
unrelated third party (the “2017 Notes”). The 2017 Notes bear interest at 10% per annum, are due on June 30, 2020 and
July 28, 2020 respectively and are unsecured. The 2017 Notes contain a provision that allows the note holder to convert the outstanding
balance into shares of the Company's common stock at $1.75 per share. The Company determined that the convertible promissory notes
contain beneficial conversion features that are valued at $420,000 and $80,000 respectively; however, the amount recorded as the
beneficial conversion feature is limited to the face amount of the convertible promissory note. This beneficial conversion feature
of $420,000 and $80,000 has been recorded in the financial statements to additional paid-in capital and as a discount to the convertible
promissory payable. The debt discounts are being amortized over the terms of the 2017 Notes. The Company recognized interest expense
of $41,667 during the three months ended March 31, 2018 related to the amortization of the debt discounts.
Note 5 – Related Party Transactions
Revenue generated from Vitashower Corp.,
a company owned by the CEO, amounted to $7,375 and $3,008 for the three months ended March 31, 2018 and 2017.
Compensation for services provided by the
President and Chief Executive Officer for the three months ended March 31, 2018 and 2017 amounted to $30,000 and $30,000, respectively.
Note 6 – Business Concentration
and Risks
Major customers
One customer accounted for 100% of the
total accounts receivable as of March 31, 2018 and December 31, 2017.
Major vendors
One vendor accounted for 94% and 92% of
total accounts payable at March 31, 2018 and December 31, 2017, respectively.
Note 7 – Commitments and Contingencies
On April 24, 2017, we entered into
a two-year industrial/commercial lease within a larger multi-tenant industrial complex with Walnut Park Business Center, LLC. We
leased a 2,800-square foot warehouse with a 1,400-square foot office space inside which will allow us to assemble our
products as well as efficiently run our administrative operations in the same building. The lease commenced on May 1, 2017 and
will end on April 30, 2019. We will pay $3,500 per month until May 1, 2018 when the rent will increase to $3,605 per month. The
warehouse is located at 820511 East Walnut Drive North, Walnut, California. Rent expense under this lease will be recognized over
the life of the lease term on a straight-line basis. Straight-line monthly rent expense over the life of the lease will be $3,553.
Total rent expense was $10,500 and $15,000
for the three months ended March 31, 2018 and 2017, respectively.
Future minimum lease commitments are as follows:
December 31,
|
|
Rent Expense
|
|
2018
|
|
$
|
32,130
|
|
2019
|
|
|
14,420
|
|
Thereafter
|
|
|
–
|
|
Note 8 – Stockholders’ Equity
Shares authorized
Upon formation the total number of shares
of all classes of stock which the Company is authorized to issue is seventy-five million (75,000,000) shares of common stock, par
value $0.001 per share.
Common stock
As of March 31, 2018 the Company had 34,574,706
shares of common stock issued and outstanding.
Note 9 – Going Concern
In August 2014, the FASB issued ACU 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard requires management
to assess the company’s ability to continue as a going concern. Disclosures are required if there is substantial doubt as
to the company’s continuation as a going concern within one year after the issue date of financial statements. The standard
provides guidance for making the assessment, including consideration of management’s plans which may alleviate doubt regarding
the Company’s ability to continue as a going concern. ASU 2014-15 is effective for years ending after December 15, 2016.
The Company has adopted this standard for the year ending December 31, 2017 and three months ending March 31, 2018.
These financial statements have been prepared
on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal
course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its
shareholders, the ability of the Company to repay its debt obligations, to obtain necessary equity financing to continue operations,
and the attainment of profitable operations. Recently, the Company has devoted a substantial amount of resources to research and
development to bring the Ubiquitor and its mobile application to full production and distribution. For the three months ended March
31, 2018, the Company had net loss of $203,833 and negative cash flow from operating activities of $141,872. As of March 31, 2018
the Company also had an accumulated deficit of $2,182,627. These factors raise certain doubts regarding the Company’s ability
to continue as a going concern. There are no assurances, however, that the Company will be successful in obtaining an adequate
level of financing for the long-term development and commercialization of its Ubiquitor product.
Note 10 – Restatement
|
|
Previously reported
|
|
|
|
|
|
|
Restated
|
|
|
|
3/31/2017
|
|
|
Adjustment
|
|
|
|
3/31/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
82,190
|
|
|
|
184,255
|
|
{a}
|
|
$
|
266,445
|
|
Revenue - related party
|
|
|
–
|
|
|
|
3,008
|
|
{b}
|
|
|
3,008
|
|
Total revenue
|
|
|
82,190
|
|
|
|
|
|
|
|
|
269,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
|
20,336
|
|
|
|
187,263
|
|
{a}
|
|
|
207,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
61,854
|
|
|
|
|
|
|
|
|
61,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation - officers
|
|
|
30,000
|
|
|
|
|
|
|
|
|
30,000
|
|
Research and development
|
|
|
62,909
|
|
|
|
|
|
|
|
|
62,909
|
|
Professional fees
|
|
|
27,981
|
|
|
|
|
|
|
|
|
27,981
|
|
General and administrative
|
|
|
54,476
|
|
|
|
|
|
|
|
|
54,476
|
|
Total Operating Expenses
|
|
|
175,366
|
|
|
|
|
|
|
|
|
175,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(113,512
|
)
|
|
|
|
|
|
|
|
(113,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
34
|
|
|
|
|
|
|
|
|
34
|
|
Other income
|
|
|
4,763
|
|
|
|
|
|
|
|
|
4,763
|
|
Total other expense
|
|
|
4,797
|
|
|
|
|
|
|
|
|
4,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(108,715
|
)
|
|
|
|
|
|
|
|
(108,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
–
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(108,715
|
)
|
|
|
|
|
|
|
$
|
(108,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weight Average Number of Common Shares Outstanding - Basic and Diluted
|
|
|
34,574,706
|
|
|
|
|
|
|
|
|
34,574,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
–
|
|
|
|
|
|
|
|
$
|
–
|
|
{a} The Company previously recorded shipment
of sales shipped directly from vendor to customer as net of cost of goods sold. The Company corrected the error by recording sales
at gross amount and separately record cost of goods sold amount.
{b} Revenue generated from Vitashower Corp.,
a company owned by the CEO, amounted to $3,008 for the three months ended March 31, 2017 was reclassified to be separately disclosed.
Note 11 – Subsequent Events
The Company has evaluated all events that
occurred after the consolidated balance sheet date through the date when the consolidated financial statements were issued to determine
if they must be reported.