IIOT-OXYS, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events; are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements Basis of Presentation The unaudited condensed consolidated financial information presented below and the following Management Discussion and Analysis of the Consolidated Financial Condition, Results of Operations, Stockholders’ Equity and Cash Flow for the quarterly periods ended September 30, 2021 and 2020 gives effect to our acquisition of OXYS Corporation (“ OXYS ”) on July 28, 2017. In accordance with the accounting reporting requirements for the recapitalization related to the “reverse merger” of OXYS, the financial statements for OXYS have been adjusted to reflect the change in the shares outstanding and the par value of the common stock of OXYS. Additionally, all intercompany transactions between the Company and OXYS have been eliminated. Forward-Looking Statements Statements in this management’s discussion and analysis of financial condition and results of operations contain certain forward-looking statements. To the extent that such statements are not recitations of historical fact, such statements constitute forward looking statements which, by definition involve risks and uncertainties. Where in any forward-looking statements, if we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Factors that may cause differences between actual results and those contemplated by forward-looking statements include those discussed in “Risk Factors” found in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (the “ SEC ”) on April 6, 2021, and are not limited to the following: · the unprecedented impact of COVID-19 pandemic on our business, customers, employees, subcontractors and supply chain, consultants, service providers, stockholders, investors and other stakeholders; · general market and economic conditions; · our ability to maintain and grow our business with our current customers; · our ability to meet the volume and service requirements of our customers; · industry consolidation, including acquisitions by us or our competitors; · capacity utilization and the efficiency of manufacturing operations; · success in developing new products; · timing of our new product introductions; · new product introductions by competitors; · the ability of competitors to more fully leverage low-cost geographies for manufacturing or distribution; · product pricing, including the impact of currency exchange rates; · effectiveness of sales and marketing resources and strategies; · adequate manufacturing capacity and supply of components and materials; · strategic relationships with our suppliers; · product quality and performance; · protection of our products and brand by effective use of intellectual property laws; · the financial strength of our competitors; · the outcome of any future litigation or commercial dispute; · barriers to entry imposed by competitors with significant market power in new markets; · government actions throughout the world; and · our ability to service secured debt, when due. 27 You should not rely on forward-looking statements in this document. This management’s discussion contains forward looking statements that involve risks and uncertainties. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” and similar expressions to identify these forward-looking statements. Prospective investors should not place undue reliance on these statements, which apply only as of the date of this document. Our actual results could differ materially from those anticipated in these forward-looking statements. Critical Accounting Policies The following discussions are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. These financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. We continually evaluate the accounting policies and estimates used to prepare the financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Trends and Uncertainties On July 28, 2017, we closed the reverse acquisition transaction under the Securities Exchange Agreement dated March 16, 2017, as reported in our Current Report on Form 8-K filed with the Commission on August 3, 2017. Following the closing, our business has been that of OXYS, Inc. and HereLab, Inc., our wholly-owned subsidiaries. Our operations have varied significantly following the closing since, prior to that time, we were an inactive shell company. Impact of COVID-19 During the year 2020, the effects of a new coronavirus (“ COVID-19 ”) and related actions to attempt to control its spread began to impact our business. The impact of COVID-19 on our operating results for the nine months ended September 30, 2021 limited our ability to obtain new business, in all material respects, due to the government mandated numerous measures, including closures of businesses, limitations on movements of individuals and goods, and the imposition of other restrictive measures, in its efforts to mitigate the spread of COVID-19 within the country. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. Governments around the world have mandated, and continue to introduce, orders to slow the transmission of the virus, including but not limited to shelter-in-place orders, quarantines, significant restrictions on travel, as well as work restrictions that prohibit many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets. Historical Background We were incorporated in the State of New Jersey on October 1, 2003 under the name of Creative Beauty Supply of New Jersey Corporation, and subsequently changed our name to Gotham Capital Holdings, Inc. on May 18, 2015. We commenced operations in the beauty supply industry as of January 1, 2004. On November 30, 2007, our Board of Directors approved a plan to dispose of our wholesale and retail beauty supply business. From January 1, 2009 until July 28, 2017, we had no operations and were a shell company. On March 16, 2017, our Board of Directors adopted resolutions, which were approved by shareholders holding a majority of our outstanding shares, to change our name to “IIOT-OXYS, Inc.”, to authorize a change of domicile from New Jersey to Nevada, to authorize a 2017 Stock Awards Plan, and to approve the Securities Exchange Agreement (the “ OXYS SEA ”) between the Company and OXYS Corporation (“ OXYS ”), a Nevada corporation incorporated on August 4, 2016. 28 Under the terms of the OXYS SEA we acquired 100% of the issued voting shares of OXYS in exchange for 34,687,244 shares of our Common Stock. We also cancelled 1,500,000 outstanding shares of our Common Stock and changed our management to Mr. DiBiase who also served in management of OXYS. Also, one of our principal shareholders entered into a consulting agreement with OXYS to provide consulting services during the transition. The OXYS SEA was effective on July 28, 2017, and our name was changed to “IIOT-OXYS, Inc.” at that time. Effective October 26, 2017, our domicile was changed from New Jersey to Nevada. On December 14, 2017, we entered into a Share Exchange Agreement (the “ HereLab SEA ”) with HereLab, Inc., a Delaware corporation (“ HereLab ”), and HereLab’s two shareholders pursuant to which we would acquire all the issued and outstanding shares of HereLab in exchange for the issuance of 1,650,000 shares of our Common Stock, on a pro rata basis, to HereLab’s two shareholders. The closing of the transaction occurred on January 11, 2018 and HereLab became our wholly-owned subsidiary. At the present time, we have two, wholly-owned subsidiaries which are OXYS Corporation and HereLab, Inc., through which our operations are conducted. General Overview IIOT-OXYS, Inc., a Nevada corporation (the “ Company ”), and OXYS, were originally established for the purposes of designing, building, testing, and selling Edge Computing systems for the Industrial Internet. Both companies were, and presently are, early-stage technology startups that are largely pre-revenue in their development phase. HereLab is also an early-stage technology development company. We received our first revenues in the last quarter of 2017, continued to realize revenues until 2020 when the pandemic hit, and we have failed to realize revenues through 2021. We develop hardware, software and algorithms that monitor, measure and predict conditions for energy, structural, agricultural and medical applications. We use domain-specific Artificial Intelligence to solve industrial and environmental challenges. Our engineered solutions focus on common sense approaches to machine learning, algorithm development and hardware and software products. Our customers have issues and they need improvements. We design a system of hardware and software, assemble, install, monitor data and apply our algorithms to help provide the customer insights. We use off the shelf components, with reconfigurable hardware architecture that adapts to a wide range of customer needs and applications. We use open-source software tools, while still creating proprietary content for customers, thereby reducing software development time and cost. The software works with the hardware to collect data from the equipment or structure that is being monitored. We focus on developing insights. We develop algorithms that help our customers create insights from vast data streams. The data collected is analyzed and reports are created for the customer. From these insights, the customer can act to improve their process, product or structure. Results of Operations for the Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020 For the three months ended September 30, 2021, we recorded revenues of $5,280 by providing professional engineering services to a customer, and incurred cost of sales of $1,785. We incurred professional fees of $88,421, interest expense of $100,701, payroll expense of $112,541, amortization of intangible assets of $12,477, and other general and administrative expenses (“ G&A ”) of $7,569. We recorded a loss of $18,103 due to change in the fair market value of derivative liability, $5,626 preferred stock dividend, and recorded $10,000 as other income for the EIDL Supplemental advance received under the CARES Act from Small Business Administration. As a result, we incurred a net loss of $331,433 for the three months ended September 30, 2021. Comparatively, for the three months ended September 30, 2020, we recorded revenues of $0 and incurred related cost of sales of $0. We incurred professional fees of $240,919, interest expense of $72,681, amortization of intangible assets of $12,477, G&A expenses of $11,121, patent license fees of $1,644, and a gain due to change in fair market value of derivative liability of $25,181, loss on extinguishment of debt of $16,205. As a result, we incurred a net loss of $329,866 for the three months ended September 30, 2020. 29 Results of Operations for the Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020 For the nine months ended September 30, 2021, we earned $5,280 in revenues and $1,275 in cost of sales. We incurred professional fees of $464,917, payroll expense of $250,820, interest expense of $333,039, payroll expense of $250,820, amortization of intangible assets of $37,295, and G&A expenses of $22,009. We recorded a gain on extinguishment of debt of $120,000, preferred stock dividend of $16,694, and a gain due to change in the fair market value of derivative liability of $172,558. As a result, we incurred a net loss of $818,211 for the nine months ended September 30, 2021. Comparatively, for the nine months ended September 30, 2020, we earned revenues of $41,771 and incurred related cost of sales of $21,121. We incurred professional fees of $672,256, interest expense of $640,404, amortization of intangible assets of $37,159, patent license fees of $4,932, and G&A expense of $40,056. We recorded a loss due to change in the fair market value of derivative liability of $114,051, loss on extinguishment of debt of $16,205, partially offset by miscellaneous income of $409. As a result, we incurred a net loss of $1,504,004 for the nine months ended September 30, 2020. Year over Year (YoY) revenue for the three months ended September 30, 2021 was more than in same period of 2020. While customer acquisition times continue to be longer than anticipated, we accrued revenue for the first time in the past four quarters. Our Annual Report on Form 10-K for the year ended December 31, 2020 disclosed risks of ongoing concerns, and those concerns still exist. Our achievements, to date, bolster our optimism for future growth. Year to Date, in 2021 · We generated revenue during Q3 by sub-contracting to our partner Aingura IIoT, S.L. on recent projects they were awarded, several of which were the direct or indirect result of our partnership. We expect additional sub-contracts in future quarters. · We have entered into a total of six NDAs with potential customers; two New England Biotech companies, two Medical Device Component Manufacturers, one Biomedical company, and one South American Structural Health Monitoring company. The signing of an NDA is the first step in our collaboration with our customers. We expect these agreements to lead to new business in due time. · We have entered into NDAs with two major New England Universities to pursue an NSF grant associated with our Structural Health Monitoring expertise. · We have secured significant funding, which has supported ongoing operations throughout 2021. · We named a new interim CTO, emphasizing our focus on the Artificial Intelligence (AI) and Machine Learning (ML) aspects of our business. The interim CTO successfully completed his term and will continue to provide technical guidance as Advisory Board Chairman. Our CEO, as part of his responsibilities, will assume the duties of CTO until we finalize a successor. · We have rebuilt our Advisory Board with two new members, our former CTO who will serve as a technical advisor and overall leader of the Advisory Board, and the second with a strong legal and business background. We believe the underlying strengths of the Company are still in place: an experienced leadership team; contributions of our former interim CTO (and now Advisory Board Chairman) leading our technology team; and strong execution on contracts to date. Those completed contracts to date have produced two successful pilot programs: one on manufacturing operations for our Fortune 500 Pharma customer, and a pilot with a full year of data collection and analysis on our structural health monitoring program for a New England state’s DOT. Our continued focus on high potential growth markets (specifically Biotech, Pharma, and Medical Device Operations, as well as Structural Health Monitoring), have yielded numerous prospects for future growth. Furthermore, the strength of our target market, the Industrial Internet of Things (IIoT), continues: Market research shows the worldwide IIoT market in 2021 was $76.7 billion USD and is projected to be $106.1 billion USD by 2026 (6.7% CAGR). 1 ___________________ 1 Industrial IoT Market Report, July 2021, MarketandMarkets Research Private Ltd. Industrial IoT Market Size, Share and Trends Forecast to 2026 | MarketsandMarkets™ 30 As anticipated, revenue has been generated in the last half of 2021, yielding YoY revenue growth that exceeds that for the same period of 2020. This is due to the hard work of the past year that has resulted in two successful pilots, in two of our key target industry verticals. We now have data and algorithms to build strong use cases and marketing collateral that can be leveraged to extend contracts with current customers and win additional contracts with new customers in all targeted industry segments. Also, the strength of the Aingura IIoT, S.G. collaboration agreement has bolstered financial stability, added talent breadth and depth, and complimentary industry segment experience. We previously announced our partner, Aingura IIoT, S.L., won an initial contract with ArcelorMittal, the largest steel manufacturer in North America, South America, and Europe and is further evidence of this collaboration’s value. Furthermore, the continued liquidity of our stock has attracted funding opportunities, and access to additional capital has and will enable funding of business development, staff augmentation, and inorganic growth opportunities. Combined with our underlying strengths: experienced leadership; savvy technological talent, and operational execution excellence; we believe future revenue growth is achievable. Liquidity and Capital Resources At September 30, 2021, we reported a cash balance of $103,013, which represents a $61 decrease from the $103,074 cash balance at December 31, 2020. This decrease in cash was primarily the result of cash used in operating activities of $521,911 offset by the cash proceeds received from sale of common stock of $521,850, net of commissions. At September 30, 2020, we reported a cash balance of $48,495, and recorded a cash increase of $24,283 for the nine months ended September 30, 2020. Operating Activities Net cash used in operating activities for the nine months ended September 30, 2021 was $521,911, primarily as a result of our net loss of $818,211, gain on extinguishment of debt of $120,000, amortization of debt discount on convertible notes payable of $269,734, amortization of intangible assets of $37,294, and change is operating assets and liabilities of $109,273 due to increase in accounts receivable of $5,280, increase in prepaid expense of $5,346, increase in accounts payable of $10,167, increase in accrued liabilities of $84,757, increase in shares payable to related parties of $333,950, offset by decrease in derivative liability of $172,558, and decrease in salaries payable to related parties of $136,417. Net cash used in operating activities for the nine months ended September 30, 2020 was $41,717, primarily as a result of our net loss of $1,504,004, loss on extinguishment of debt of $16,205, loss on issuance of default warrants of $163,433, increase in penalty due to penalty provisions of $146,250, increase in principal due to fees of $16,726, amortization of discount on notes payable of $90,149, amortization of intangible assets of $37,159, loss on change in FMV of derivative liability of $114,051, loss on derivative liability of $159,888, and change in operating assets and liabilities of $718,426 due to decrease in accounts receivable of $11,760, decrease in prepaid expense of $1,282, increase in accounts payable of $37,371, increase in accrued liabilities of $24,267, increase in deferred revenues of $46,425, increase in shares payable to related parties of $545,673 and increase in salaries payable to related parties of $51,648. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2021 and 2020, was $0. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2021 was $521,850 consisting of cash proceeds from sale of common stock of $532,500, net of commissions paid of $10,650. Net cash provided by financing activities for the nine months ended September 30, 2020 was $66,000 consisting of cash received from Payroll Protection Program of $36,700, cash received from convertible note payable of $129,300, and cash paid for settlement of notes payable of $100,000. 31 The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, we have incurred losses from operations of $818,211 and $1,504,004 for the nine months ended September 30, 2021 and 2020, respectively, and have an accumulated deficiency which raises substantial doubt about our ability to continue as a going concern. Management believes we will continue to incur losses and negative cash flows from operating activities for the foreseeable future and will need additional equity or debt financing to sustain its operations until we can achieve profitability and positive cash flows. Management plans to seek additional debt and/or equity financing for us but cannot assure that such financing will be available on acceptable terms. At our current rate of expenditure, we anticipate that we will not be able to maintain our current operations for the next twelve months; however, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of equity securities. There is no assurance that we will be successful in raising this additional capital or in achieving profitable operations. Our continuation as a going concern is dependent upon our ability to ultimately attain profitable operations, generate sufficient cash flow to meet our obligations, and obtain additional financing as may be required. Our auditors have included a going concern qualification in their auditors’ report dated April 6, 2021. Such a going concern qualification may make it more difficult for us to raise funds when needed. The outcome of this uncertainty cannot be assured. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that management will be successful in implementing its business plan or that the successful implementation of such business plan will actually improve our operating results. Recently Issued Accounting Standards Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources. Emerging Growth Company We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Certain specified reduced reporting and other regulatory requirements that are available to public companies that are emerging growth companies. These provisions include: 1. an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002; 2. an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; 3. an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about our audit and our financial statements; and 4. reduced disclosure about our executive compensation arrangements. 32 We have elected to take advantage of the exemption from the adoption of new or revised financial accounting standards until they would apply to private companies. As a result of this election, our financial statements may not be comparable to public companies required to adopt these new requirements. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the Company has elected not to provide the disclosure required by this item.