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, 2022. 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 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, 2023 and 2022 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 conflicts between the Russian Federation and Ukraine and Israel in on our operations; · geo-political events, such as the crisis in Ukraine and Israel, 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; 24 · 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. 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 The global COVID-19 pandemic continues to present uncertainty and unforeseeable risks to the Company’s operations and business plan. The Company has closely monitored recent developments, including the lifting of COVID-19 safety measures, the spread of new strains or variants of the coronavirus (such as the Delta and Omicron variants), and supply chain and labor shortages. Thus, the full impact of the COVID-19 pandemic on the business and operations remains uncertain and will vary depending on the pandemic’s future impact on the third parties with whom the Company does business, as well as any legal or regulatory consequences resulting therefrom. The Company has been following the recommendations of health authorities to minimize exposure risk for its team members and may take further actions that alter our operations, including any required by federal, state or local authorities, or that it determines are in the best interests of its employees and other third parties with whom the Company does business. 25 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. 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 (an entity immaterial to our operations) 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 to the present. 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. 26 Results of Operations for the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 (Unaudited) For the three months ended September 30, 2023, we earned revenues of $19,714 and incurred related cost of sales of $4,871. Our operating expenses were $102,272 which included professional fees of $13,861, payroll costs of $53,825, amortization of intangible assets of $12,477, and general and administrative expenses of $22,109. We recorded net other income of $42,138 consisting of gain of $122,089 due to change in fair market value of derivative liability, interest income on note receivable of $8,205, gain on a derivative of $321 and interest expense of $14,077. We also recorded $17,383 as preferred stock dividend on convertible preferred stock for the three months ended September 30, 2023. As a result, we incurred a net loss of $62,674 for the three months ended September 30, 2023. For the three months ended September 30, 2022, we earned revenues of $23,003 and related cost of sales of $5,140. Our operating expenses were $158,818 which included professional fees paid to consultants of $35,454, payroll costs of $109,595, amortization of intangible assets of $12,477, and general and administrative expenses of $13,770. We recorded net other income of $111,137, consisting of interest expense of $14,913 on notes payable due to amortization of debt discount and interest payable on notes payable, loss on derivates of $5,504, offset by gain on change in the fair market value of derivative liability of $125,568. We also recorded $6,909 as preferred stock dividend on convertible preferred stock for the three months ended September 30, 2022. As a result, we incurred a net loss of $49,204 for the three months ended September 30, 2022. 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. Results of Operations for the Nine months Ended September 30, 2023 Compared to the Nine months Ended September 30, 2022 (Unaudited) For the nine months ended September 30, 2023, we earned revenues of $98,286 and incurred related cost of sales of $30,330. Our operating expenses were $410,757 which included professional fees of $138,027, payroll costs of $194,083, amortization of intangible assets of $37,023, and general and administrative expenses of $41,623. We recorded net other expenses of $131,297 consisting of a loss $34,600 due to change in fair market value of derivative liability, gain on a derivative of $321, interest income on note receivable of $19,983, interest expense of $117,001 on the convertible promissory notes. We also recorded preferred stock dividend on convertible preferred stock of $49,803 for the nine months ended September 30, 2023. As a result, we incurred a net loss of $523,901 for the nine months ended September 30, 2023. For the nine months ended September 30, 2022, we earned revenues of $39,503 and related cost of sales of $5,650. Our operating expenses were $580,472 which included professional fees of $143,193, payroll costs of $350,543, amortization of intangible assets of $37,023, and general and administrative expenses of $49,713. We recorded net other expenses of $196,981, consisting of interest expense of $278,605 on notes payable due to amortization of debt discount and interest payable on notes payable, loss on derivates of $207,447, offset by gain on change in the fair market value of derivative liability of $277,424 and interest income of $11,647 on note receivable. We also recorded $31,617 as preferred stock dividend on convertible preferred stock for the nine months ended September 30, 2022. As a result, we incurred a net loss of $775,217 for the nine months ended September 30, 2022. 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. The first nine months of revenue in 2023 was a substantial improvement over the same period in 2022 (an increase of 149%), and we have already met our commitment for 2023 revenue to exceed that in 2022. We expect revenue to moderate in the fourth quarter of 2023, as our ability to raise funding to fuel sales & marketing efforts has been limited. Potential future revenue growth is possible, pending adequate funding for sales and marketing efforts and building on the strength of the following factors: · Our current DOT Bridge Monitoring Contract and overall Structural Health Monitoring (“ SHM ”) vertical is the foundation of our revenue stream. The current monitoring revenue will continue through the fourth quarter of 2023. Discussions with our main contractor to the DOT for extensions and expansions continue to be favorable. We also continue to believe that prospects with our current DOT state, and DOT contacts in two other northeast states bode well for future business in mid-2024. There is still potential for local municipalities in our current northeast state to contribute revenue in 2024. 27 · Our Smart Manufacturing vertical is benefiting from the progress on our CNC SaaS contract that commenced in June 2023, and will continue through the fourth quarter of 2023. Initial public endorsements and promotional videos have been released and additional videos are planned for release in the fourth quarter of 2023. These endorsements and promotional videos along with grass-roots sales & marketing efforts have generated additional sales leads for potential paid CNC POCs and additional SaaS contracts, which may contribute to revenue in the fourth quarter of 2023 and beyond. It is also expected these endorsements will also strengthen our position to secure additional POCs for other discrete manufacturing processes, including metal stamping, plastic injection molding, plastic extrusion, and automated assembly and test. · Our strategic partnership development continues to be a “force multiplier” for us. The strength of our Aingura IIoT, S.L. partnership provides supplemental expertise, equipment and software, which ensures we continue to bring value to our customers. We will also continue to develop our other previously announced partnerships. Despite these strengths, we continue to face significant headwinds and we have not been able to raise material funds for ongoing operations through our existing financing agreements due to market conditions. Our CEO and COO have not received any compensation since mid-April (their salaries have accrued), and the lack of funds has severely limited sales and marketing efforts. Our management is working to secure funding from our lead investor to pay for ongoing expenses and the leadership team is considering many options for both the short and long term. These options depend largely upon our ability to continue to raise funds and implement a marketing and sales plan. In the event we are unable to raise adequate funds, management may need to consider other options such as pursuing suitable companies to merge with or acquire us. We believe that our business development in these industries has potential for success, due to the strength of their size and growth. The global smart manufacturing (also known as Industry 4.0) was $97.6 billion in 2022 and will reach $228.3 billion by 2027 (CAGR 18.5%) 1 , and the worldwide SHM industry was $2.0 billion in 2021 and will reach $4.0 billion by 2027 (CAGR of 14.6%). 2 Given the valuable real-world data we have collected, our Artificial Intelligence (“AI”) Machine Learning algorithms we have developed, compelling use cases and marketing collateral developed from our data and algorithms, combined with our experienced leadership, savvy technological talent, and operational execution excellence, we believe continued annual revenue growth is possible, if adequate funding for sales and marketing efforts can be secured. Liquidity and Capital Resources for the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 (Unaudited) At September 30, 2023, we reported a cash balance of $17,790 as a result of decrease of $15,546 from the $33,336 cash balance at December 31, 2022. This decrease was primarily as a result of net cash used in operating activities of $129,417 and net cash provided by financing activities of $113,871. Operating Activities Net cash flows used in operating activities for the nine months ended September 30, 2023 was $129,417, primarily attributed to the net loss of $523,901, stock compensation expense of $825, discount received on note receivable of $2,805, amortization of debt discount on notes payable and preferred stock of $12,400, and amortization of intangible assets of $37,023. The Company recorded changes in operating assets and liabilities of $347,041 primarily attributable to decrease in accounts receivable of $18,021, increase in prepaid expenses and other current assets of $10,028, decrease in accounts payable of $38,108, increase in accrued liabilities of $125,434, increase in derivative liabilities of $96,279, decrease in unearned interest of $5,151, increase in shares payable to related parties of $3,870, and increase in salaries payable to related parties of $156,724. Net cash flows used in operating activities for the nine months ended September 30, 2022 was $471,561, primarily attributable to net loss of $775,217, stock compensation expense of $900, discount on note receivable of $5,661, amortization of debt discount on notes payable and preferred stock of $37,400, and amortization of intangible assets of $37,023. The Company recorded a net change in operating assets and liabilities of $222,672 attributable to net increase in accounts receivable of $5,100, decrease in accounts payable of $1,588, net increase in accrued liabilities of $80,398, net increase in derivative liabilities of $116,023, increase in unearned interest of $10,192, and net increase in shares payable to related parties of $12,221, and a net increase in salaries payable to related parties of $10,526. _______________________ 1 https://www.marketsandmarkets.com/Market-Reports/industry-4-market-102536746.html 2 https://www.marketsandmarkets.com/Market-Reports/structural-health-monitoring-market-101431220.html 28 Investing Activities Net cash used in investing activities for the nine months ended September 30, 2023 was $0. Net cash used in investing activities for the nine months ended September 30, 2022 resulted due to cash advanced for a promissory note receivable totaling $200,000. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2023 was $113,871 primarily due to sales of our common stock of $54,195, Series B convertible preferred stock of $62,000 and paid $2,324 in costs for raising capital. Cash provided by financing activities for the nine months ended September 30, 2022 was $659,024 primarily due to cash received from sale of common stock of $481,657 and paid $9,633 in costs for raising capital, and cash received from sale of Series B convertible preferred stock of $187,000. As a result of the above activities, the Company recorded a decrease in cash of $15,546 for the nine months ended September 30, 2023, and a decrease in cash of $12,537 for the same comparable period ended September 30, 2022, respectively. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has suffered continuing operating losses, has a working capital deficit of $1,958,290, used cash flows in operating activities of $129,417, and has an accumulated deficit of $9,831,038 as of September 30, 2023. These factors, among others, raise a substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to obtain adequate capital, it could be forced to cease operations. 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 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.