IIOT-OXYS, Inc. 10-K

Item 7. 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 above and in “Risk Factors.” 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 23 Basis of Presentation The 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 periods ended December 31, 2022 and 2021 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” 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; · the impact of conflict between the Russian Federation and Ukraine on our operations; · geo-political events, such as the crisis in Ukraine, government responses to such events and the related impact on the economy both nationally and internationally; · 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. 24 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 year ended December 31, 2020 was limited, 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. 25 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. At the present time, we have two, wholly-owned subsidiaries which are OXYS Corporation and HereLab, Inc. (an entity immaterial to our operations), 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 realized nominal 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. 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 Year Ended December 31, 2022 compared to the year ended December 31, 2021 For the year ended December 31, 2022, we earned revenues of $88,904 and incurred related cost of sales of $10,499. Our operating expenses were $733,071 which included professional fees of $268,837, payroll costs of $373,774, amortization of intangible assets of $49,500, and general and administrative expenses of $40,960. We recorded net other expenses of $369,560 consisting of recording loss on derivatives of $200,519, interest expense of $377,138 offset by gain on change in fair market value of derivative liability of $190,462 and interest income on note receivable of $17,634. We also recorded $52,654 as preferred stock dividend on convertible preferred stock for the year ended December 31, 2022. As a result, we incurred a net loss of $1,076,881 for the year ended December 31, 2022. Comparatively, for the year ended December 31, 2021, we earned revenues of $11,280 and incurred related cost of sales of $2,040. Our Operating expenses were $889,141 which included professional fees of $508,153, payroll costs of $301,707, amortization of intangible assets of $49,771, and general and administrative expenses of $29,510. We recorded net other expenses of $161,333, consisting of interest expense of $430,999 on notes payable due to amortization of debt discount and interest payable on notes payable, offset by gain on change in the fair market value of derivative liability of $102,966, gain on extinguishment of debt of $120,000, other income of $46,700 consisting of forgiveness of PPP Loan of $36,700 and EIDL advance of $10,000, We also recorded $22,320 as preferred stock dividend on convertible preferred stock for the year ended December 31, 2021. As a result, we incurred a net loss of $1,063,554 for the year ended December 31, 2021. 26 During the current and prior period, we did not record an income tax benefit due to the uncertainty associated with the Company’s ability to utilize the deferred tax assets. Year over Year (YoY) revenue increased significantly in 2022 over 2021, by 7.9X (688% increase). This YoY growth was anticipated by our leadership team in our 2021 Annual Report on Form 10-K, and we’re pleased to deliver this growth for our shareholders. We had a strong finish to 2022, with fourth quarter revenue exceeding that in the third quarter, also as promised. It marked three consecutive quarters of quarter-over-quarter revenue growth. While our Quarterly Report on Form 10-Q for the period ended September 30, 2022 disclosed risks of ongoing concerns (and those concerns still exist), there are several factors that led to this strong growth in 2022 which are as follows: - Our DOT Bridge Monitoring contract: We were awarded a six-figure sub-contract from a major northeast state's DOT for bridge monitoring, in addition to the extension that was given on the previous contract. This enabled us to deliver consistent revenue beginning in the second quarter, continuing through the remainder of the year, and will continue through June of 2023. We believe this substantiates the strength of our Structural Health Monitoring (SHM) solutions and bolsters our ability to gain new business in this vertical with both current and new customers. - Our continued focus on our Smart Manufacturing vertical enabled us to secure a CNC Proof of Concept (POC) contract in December 2022. The POC successfully kicked off in January 2023. - Our partnership with the Canadian Indoor Air Quality Sensor and IIoT Platform company, Aretas Sensor Networks, with whom we entered into an NDA in the first quarter, progressed well through the year. In addition to the initial collaborative agreement signed in the first quarter, we signed an algorithm development contract in the second quarter and recorded revenue from that contract in the third quarter. We also signed a co-marketing and co-selling agreement with Aretas in the third quarter and began selling in the fourth quarter of 2022. - We secured and retained key talent. The full time Machine Learning Engineer, hired in the first quarter, expanded our focus on the Artificial Intelligence (AI) and Machine Learning (ML) aspects of our business. Our CEO, Cliff Emmons, and COO, Karen McNemar, both renewed their employment contracts in June, ensuring stable experienced leadership focused on long-term growth. These accomplishments are proof that our successful pilots in our key industry verticals have resulted in new business and will continue to do so in 2023 and beyond. Also, the strength of the Aingura IIoT, S.G. collaboration agreement has bolstered financial stability, added talent breadth and depth, and provides complimentary industry segment experience. Furthermore, liquidity of our stock has attracted funding that gives us access to additional capital. This capital will enable the funding of business development, staff augmentation, and inorganic growth opportunities. It is anticipated that 2023 YoY revenue growth will meet or exceed that of 2022. This is due to these aforementioned reasons: the strength of the Aingura IIoT, S.G. collaboration, successful pilots in all three of our key target industries, use cases and marketing collateral from the pilots’ data and algorithms, experienced leadership, savvy technological talent, and operational execution excellence. Our continued focus on high potential growth markets, has yielded numerous prospects for future growth. Furthermore, the strength of our target markets continues, the global smart manufacturing (also known as Industry 4.0) was $97.6 B USD in 2022 and will reach $228.3 B USD by 2027 (CAGR 18.5%); 1 the worldwide Structural Health Monitoring (SHM) industry was $2.0 billion USD in 2021 and will reach $4.0 billion USD by 2027 (CAGR of 14.6%). 2 Through our collaborations with Aretas Sensor Networks, we have access to a third market, Indoor Air Quality Monitors, which was estimated at $3.7 billion USD in 2020 and projected to reach $6.4 billion USD in 2027, growing at 8.2% CAGR. 3 We believe our strengths in these markets will yield breakthroughs in additional new contracts with current customers, as well as new customers in all targeted industry segments. By combining the resulting organic growth with strong strategic partnerships, we believe these revenue goals are achievable. _________________ 1 https://www.marketsandmarkets.com/Enquiry_Before_BuyingNew.asp?id=105448439&utm_source=SE-NA&utm_medium=Email 2 https://www.marketsandmarkets.com/Market-Reports/structural-health-monitoring-market-101431220.html 3 https://www.reportlinker.com/p05957040/Global-Indoor-Air-Quality-Monitors-Industry.html 27 Liquidity and Capital Resources for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 At December 31, 2022, we had a cash balance of $33,336, which represents a $13,485 decrease from the $46,821 cash balance at December 31, 2021. This decrease was primarily as a result of net cash used in operating activities of $657,009, cash paid for note receivable of $200,000, and cash received from convertible notes payable of $545,924 and cash received from the sale of Series B Preferred Stock of $297,600. Our working capital deficit at December 31, 2022 was $1,606,828, as compared to a working capital deficit of $1,108,786 at December 31, 2021, respectively. For the year ended December 31, 2022, we incurred a net loss of $1,076,881. Net cash flows used in operating activities was $657,009 for the year ended December 31, 2022. For the year ended December 31, 2021, we incurred a net loss of $1,063,554. Net cash flows used in operating activities was $628,103 for the year ended December 31, 2021. For the year ended December 31, 2022, cash used in investing activities was $200,000 payment towards a note receivable. For the year ended December 31, 2022, net cash flows provided by financing activities were $843,534, consisting of cash received from the issuance of Convertible Notes payable of $545,924 and cash proceeds from sale of Series B Preferred Stock of $297,600, respectively. For the year ended December 31, 2021, net cash flows provided by financing activities were $571,850, consisting of cash received from the issuance of Convertible Notes payable of $470,850 and cash proceeds from sale of Series B Preferred Stock of $101,000, respectively. The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. As shown in the accompanying financial statements, we have incurred net loss from operations of $1,076,881 for the year ended December 31, 2022, and net loss of $1,063,554 for the year ended December 31, 2021, and have an accumulated deficit of $9,307,137 as of December 31, 2022, which raises substantial doubt about our ability to continue as a going concern. Recently Issued Accounting Standards In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ ASU ”) ASU No. 2019-12, Income Taxes (Topic 740) , Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements. Effective January 1, 2022, we early adopted ASU 2020-06, “ Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” using the modified retrospective method of adoption. ASU 2020-06 simplifies the accounting for convertible instruments by removing certain separation models in Subtopic 470- 20, Debt—Debt with Conversion and Other Options , for convertible instruments. Under ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. We now account for our Convertible Notes as single liabilities measured at amortized cost. Other accounting standards that have been issued or proposed by FASB and do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. 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. 28 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. Item 7A. Quantitative And Qualitative Disclosures About Market Risk As a Smaller Reporting Company, we are not required to furnish information under this Item 7A. Item 8. Financial Statements The financial statements and supplementary data required by this item are included following the signature page of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.