IIOT-OXYS, Inc. - Quarter Report: 2018 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________________to___________________________
Commission File Number: 000-50773
IIOT-OXYS, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 56-2415252 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
705 Cambridge Street, Cambridge, MA | 02141 |
(Address of principal executive offices) | (Zip Code) |
(617) 500-5101
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports).
Yes x No ☐
Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days.
Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | x | |
Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
The number of shares outstanding of the registrant’s common stock on May 21, 2018, was 40,633,328.
TABLE OF CONTENTS
2 |
IIOT-OXYS, Inc. and Subsidiaries
Consolidated Balance Sheets
As of March 31, 2018 and December 31, 2017
As of March 31, 2018 (unaudited) | As of December 31, 2017 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and Cash Equivalents | $ | 381,182 | $ | 60,863 | ||||
Cash - Escrow | – | 1,782 | ||||||
Accounts Receivable, net | 3,001 | 39,800 | ||||||
Unbilled Receivable | 7,380 | – | ||||||
Prepaid Expense | 25,456 | 14,778 | ||||||
Inventory | 828 | – | ||||||
Total Current Assets | 417,847 | 117,223 | ||||||
Other Assets | ||||||||
Other Asset - Licensing Agreement | – | 1,000 | ||||||
Total Other Assets | – | 1,000 | ||||||
Total Assets | $ | 417,847 | $ | 118,223 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Accounts Payable | 27,153 | 38,357 | ||||||
Credit Card Payable | 78 | 203 | ||||||
Accrued Liabilities | 6,767 | – | ||||||
Deferred Revenue | 13,648 | – | ||||||
Income Tax Payable | 3,332 | – | ||||||
Due to Stockholder | 1,000 | 1,000 | ||||||
Total Current Liabilities | 51,978 | 39,560 | ||||||
Long-Term Liabilities | ||||||||
Note Payable, net of discount | 46,575 | – | ||||||
Total Long-Term Liabilities | 46,575 | – | ||||||
Total Liabilities | 98,553 | 39,560 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity (Deficit) | ||||||||
Preferred stock $0.001 par value, 10,000,000 shares authorized; 0 issued and outstanding at March 31, 2018 and December 31, 2017 | – | – | ||||||
Common stock $0.001 par value, 190,000,000 shares authorized; 40,633,327 issued and outstanding at March 31, 2018; 38,983,327 shares issued and outstanding at December 31, 2017 | 40,633 | 38,983 | ||||||
Additional Paid in Capital | 2,078,215 | 1,579,401 | ||||||
Accumulated Deficit | (1,799,554 | ) | (1,539,721 | ) | ||||
Total Stockholders' Equity (Deficit) | 319,294 | 78,663 | ||||||
Total Liabilities and Stockholders' Equity | $ | 417,847 | $ | 118,223 |
See accompanying notes to unaudited consolidated financial statements.
3 |
IIOT-OXYS, Inc. and Subsidiaries
Consolidated Statements of Operations
For the three months ended March 31, 2018 and 2017
(unaudited)
For the three months ended March 31, | ||||||||
2018 | 2017 | |||||||
Revenues | ||||||||
Sales | $ | 13,650 | $ | – | ||||
Cost of Sales | 8,750 | – | ||||||
Gross Profit | 4,900 | – | ||||||
Expenses | ||||||||
Demo Parts | 230 | – | ||||||
Bank Service Charges | 266 | 80 | ||||||
Office Expenses | 7,459 | 828 | ||||||
Organization costs | 8,220 | 2,275 | ||||||
Insurance | 5,708 | – | ||||||
Professional | 142,994 | 26,820 | ||||||
Travel | 2,342 | 1,729 | ||||||
Patent License Fee | 41,076 | – | ||||||
Total Expenses | 208,295 | 31,732 | ||||||
Other Income (Expenses) | ||||||||
Interest Expense | (56,438 | ) | – | |||||
Total Other Income (Expense) | (56,438 | ) | – | |||||
Net (Loss) Before Income Taxes | (259,833 | ) | (31,732 | ) | ||||
Income Tax Benefit (Expense) | – | – | ||||||
Net (Loss) | $ | (259,833 | ) | $ | (31,732 | ) | ||
Loss per Common Share | $ | (0.0067 | ) | $ | (0.0009 | ) | ||
Weighted Average Number of Shares Outstanding - Basic and Diluted | 38,983,327 | 34,213,091 |
See accompanying notes to unaudited consolidated financial statements.
4 |
IIOT-OXYS, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 2018 and 2017
(unaudited)
For the three months ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net (Loss) | $ | (259,833 | ) | $ | (31,732 | ) | ||
Adjustments to reconcile net loss to net cash (used) by operating activities: | ||||||||
Non-Cash Acquisition of Net Assets | (332 | ) | – | |||||
Non-Cash Amortization of Discount on Note Payable | 46,575 | – | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) Decrease in: | ||||||||
Accounts Receivable | 36,799 | – | ||||||
Unbilled Receivable | (7,380 | ) | – | |||||
Inventory | (828 | ) | (1,338 | ) | ||||
Prepaid Expense | (10,678 | ) | – | |||||
Escrow | 1,782 | (11,700 | ) | |||||
Licensing Agreement | 1,000 | – | ||||||
Increase (Decrease) in: | ||||||||
Accounts Payable | (11,204 | ) | 2,296 | |||||
Credit Card Payable | (125 | ) | – | |||||
Accrued Liabilities | 6,767 | – | ||||||
Deferred Revenue | 13,648 | – | ||||||
Income Tax Payable | 3,332 | – | ||||||
Due to Stockholder | – | – | ||||||
Net Cash (Used) by Operating Activities | (180,477 | ) | (42,474 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Subsidiary Cash Obtained in Acquisition | 119 | – | ||||||
Net Cash (Used) by Investing Activities | 119 | – | ||||||
Cash Flows from Financing Activities: | ||||||||
Cash Paid Related to Securities Exchange Agreement | – | (7,108 | ) | |||||
Change in Owner's Investment, net | 677 | – | ||||||
Cash Received from Convertible Note Payable | 500,000 | – | ||||||
Issuance of Common Stock, Net of Costs | – | 141,500 | ||||||
Net Cash Provided by Financing Activities | 500,677 | 134,392 | ||||||
Net (Decrease) Increase in Cash and Cash Equivalents | 320,319 | 91,918 | ||||||
Cash and Cash Equivalents at Beginning of Period | 60,863 | 481,841 | ||||||
Cash and Cash Equivalents at End of Period | 381,182 | $ | 573,759 | |||||
Supplemental Information: | ||||||||
Interest paid during the period | 9,863 | $ | – | |||||
Taxes paid during the period | – | $ | – | |||||
Supplemental Schedule of Noncash Investing and Financing Activities: | ||||||||
Shares issued in acquisition of subsidiary valued at $1,650 |
See accompanying notes to unaudited consolidated financial statements.
5 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
1. NATURE OF OPERATIONS
On July 28, 2017, IIOT-OXYS, Inc., a Nevada corporation (the “Company”) (previously known as Gotham Capital Holdings, Inc.), the Company executed and closed the Securities Exchange Agreement dated effective March 16, 2017, between the Company, OXYS Corporation, a Nevada corporation (“OXYS”), and the shareholders of OXYS and changed its name to “IIOT-OXYS, Inc.” As a result of the Closing, the Company issued 34,687,244 shares on a pro rata basis to the shareholders of OXYS, and OXYS became a wholly owned subsidiary of the Company. In addition, the Company cancelled 1,500,000 outstanding shares held by principal shareholders of the Company, which resulted in a total of 38,453,328 shares issued and outstanding upon completion of the Closing.
On December 14, 2017, the Company entered into a Securities Exchange Agreement dated December 14, 2017, between the Company, OXYS, and HereLab, Inc., a Delaware corporation (“HereLab”), and the shareholders of HereLab. Upon completion of the closing of the Exchange Agreement, on January 11, 2018, the Company issued an aggregate of 1,650,000 shares of its common stock on a pro rata basis to the two shareholders of HereLab and HereLab became a wholly-owned subsidiary of the Company.
OXYS Corporation was incorporated on August 4, 2016 in Nevada. It maintains its principal office in Massachusetts at 705 Cambridge St., Cambridge, MA 02142.
The Company was only recently formed and is currently devoting substantially all its efforts in identifying, developing and marketing engineered products, software and services for applications in the Industrial Internet which involves collecting and processing data collected from a wide variety of industrial systems and machines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual method of accounting. The accounting and reporting policies of the Company conform with generally accepted accounting principles (GAAP).
Interim Financial Statements
The accompanying unaudited condensed interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2017.
Principles of Consolidation
The consolidated financial statements for March 31, 2018 include the accounts of IIOT-OXYS, Inc., OXYS Corporation, and HereLab, Inc. All significant intercompany balances and transactions have been eliminated.
The consolidated financial statements for fiscal year 2017 include the accounts of IIOT-OXYS, Inc., and OXYS Corporation. All significant intercompany balances and transactions have been eliminated.
6 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. The Company determines the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. The allowance for doubtful accounts at March 31, 2018 and December 31, 2017 was $0, respectively.
Revenue Recognition
The Company’s revenue is derived primarily from providing services under contractual agreements. The Company recognizes revenue in accordance with ASC Topic No. 606 based on the following criteria:
· | Identification of a contract or contracts, with a customer. |
· | Identification of the performance obligations in the contract. |
· | Determination of contract price. |
· | Allocation of transaction price to the performance obligation. |
· | Recognition of revenue when, or as, performance obligation is satisfied. |
Reclassification
Certain amounts in prior-period financial statements have been reclassified for comparative purposes to conform to presentation in the current-period financial statements.
Use of Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.
Fair Value of Financial Instruments
Fair Value of Financial Instruments - The Company accounts for fair value measurements in accordance with accounting standard ASC 820-10-50, Fair Value Measurements. This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The fair value of certain of our financial instruments including cash and cash equivalents, cash escrow and due to stockholder approximate their carrying amounts because of the short-term maturity of these instruments.
7 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred taxes are recognized for operating losses that are available to offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized.
The Company adopted the provisions of FASB ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. The Company's tax returns are subject to tax examinations by U.S. federal and state authorities until respective statute of limitation. Currently, the 2016 tax year is open and subject to examination by taxing authorities. However, the Company is not currently under audit nor has the Company been contacted by any of the taxing authorities. The Company does not have any accruals for uncertain tax positions at March 31, 2018 and December 31, 2017. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations of risk consist primarily of cash and cash equivalents and cash-escrow, which are generally not collateralized. The Company’s policy is to place its cash and cash equivalents with high quality financial institutions, in order to limit the amount of credit exposure. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000. At March 31, 2018 and December 31, 2017, the Company had approximately $138,540 and $0 in excess of the FDIC insurance limit, respectively.
Inventory
Inventory consists primarily of demo equipment and is recorded at the lower of cost (first-in, first out method) or market.
Convertible Debt
Convertible debt is accounted for under FASB ASC 470, Debt – Debt with Conversion and Other Options. The registrant records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued and records the relative fair value of any warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to the warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to additional paid-in capital. The registrant calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing stock options.
8 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Under these guidelines, the registrant allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value of the BCF and warrants are recorded as a debt discount and is accreted over the expected term of the convertible debt as interest expense.
The registrant accounts for modifications of its embedded conversion features in accordance with the ASC which requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
Earnings (Loss) Per Share
The Company computes net earnings (loss) per share under ASC 260-10, Earnings Per Share, which requires a dual presentation of basic and diluted earnings or loss per share. Basic earnings or loss per share ("EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options and warrants. The diluted earnings per share were not calculated because we recorded net losses for the years ended December 31, 2017 and 2016, and the outstanding stock warrants are anti-dilutive.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company was only recently formed, has incurred continuing operating losses and has an accumulated deficit of $1,799,554 and $1,539,721 at March 31, 2018 and December 31, 2017, respectively. These factors raise substantial doubt about the ability of the Company to continue as a going concern.
Management believes that it will be able to achieve a satisfactory level of liquidity to meet the Company’s obligations for the next twelve months by generating revenues and through additional borrowings as needed. However, there can be no assurance that the Company will be able to generate sufficient liquidity to maintain its operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
3. RECENT ACCOUNTING PRONOUNCEMENTS
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption of this standard.
9 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
3. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
ASU 2017-11
In July 2017, ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period. On January 1, 2018, the Company early adopted ASU 2017-11. See Note 7 for the effect early implementation had on 384,615 warrants issued in conjunction with the $500,000 convertible note issuance. Since the Company did not have any of these type instruments in prior periods there is no effect of early implementation on prior periods.
Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
4. COMMITMENTS AND CONTINGENCIES
The Company entered into a lease agreement on August 1, 2017 which began on January 1, 2018 and will terminate on December 31, 2018. The Company shall pay the landlord monthly installments of $2,000 for a total lease payment of $16,000 remaining in 2018.
5. STOCKHOLDERS' EQUITY
Common Stock
The Company has authorized 190,000,000 shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. At March 31, 2018 and December 31, 2017 the Company had 40,633,327 and 38,983,327 shares of common stock and no shares of preferred stock issued and outstanding, respectively.
Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share ratable in dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefore. In the event of liquidation, dissolution, or winding up of the Company, the holders of common stock are entitled to share pro rata in all assets remaining after payment in full of all liabilities. All of the outstanding shares of common stock are fully paid and non-assessable. Holders of common stock have no preemptive rights to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund provisions with respect to the common stock.
10 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
5. STOCKHOLDERS' EQUITY (Continued)
On March 16, 2017, the Board of Directors and a majority of the shareholders approved the IIOT-OXYS, Inc. 2017 Stock Awards Plan, (the “Plan”). The Plan provided for granted incentive stock options, options that do not constitute incentive stock options, stock appreciation rights, restricted stock awards, phantom stock awards, or any combination of the foregoing, as is best suited to the particular circumstances. The Plan was effective upon its adoption by the Board.
The aggregate number of common shares that may be issued under the Plan were 7,000,000 common shares. No further awards were to be granted under the Plan after ten years following the effective date. The Plan was to remain in effect until all awards granted under the Plan had been satisfied or expired. This Plan was terminated and replaced by the 2017 Stock Inventive Plan (the “2017 Plan”) on December 14, 2017 (the “Effective Date”) as approved by the Board of Directors.
Awards may be made under the 2017 Plan for up to 4,500,000 shares of common stock of the Company. All of the Company’s employees, officers and directors, as well as consultants and advisors to the Company are eligible to be granted awards under the 2017 Plan. No awards can be granted under the 2017 Plan after the expiration of 10 years from the Effective Date, but awards previously granted may extend beyond that date. Awards may consist of both incentive and non-statutory options, restricted stock units, stock appreciation rights, and restricted stock awards. With the approval of the 2017 Plan, the Board terminated the 2017 Stock Awards Plan with no awards having been granted thereunder.
On July 28, 2017, the Company executed and closed the Securities Exchange Agreement dated effective March 16, 2017, between the Company, OXYS, and the shareholders of OXYS and changed its name to “IIOT-OXYS, Inc.” As a result of the closing, the Company issued 34,687,244 shares on a pro rata basis to the shareholders of OXYS, and OXYS became a wholly owned subsidiary of the Company. In addition, the Company cancelled 1,500,000 outstanding shares held by principal shareholders of the Company, which resulted in a total of 38,453,328 shares issued and outstanding upon completion of the Closing.
On December 14, 2017, the Company entered into a Securities Exchange Agreement dated December 14, 2017, between the Company, OXYS, and HereLab, Inc., a Delaware corporation (“HereLab”), and the shareholders of HereLab. Upon completion of the closing of the Exchange Agreement on January 11, 2018, the Company issued an aggregate of 1,650,000 shares of its common stock on a pro rata basis to the two shareholders of HereLab and HereLab became a wholly-owned subsidiary of the Company.
6. EARNINGS PER SHARE
The following table sets forth the composition of the weighted average shares (denominator) used in the basic per share computation for the three months ended March 31, 2018 and 2017, respectively.
For the three months ended March 31, 2018 | For the three months ended March 31, 2017 | |||||||
Net Loss | $ | (259,833 | ) | $ | (31,732 | ) | ||
Weighted average share outstanding basic | 38,983,327 | 34,213,091 | ||||||
Basic and diluted loss per share | $ | (0.0067 | ) | $ | (0.0009 | ) |
11 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
7. CONVERTIBLE NOTE PAYABLE
On January 18, 2018, the Board of Directors of the Company approved a non-public offering of up to $1,000,000 aggregate principal amount (the “Offering”) of its 12% Senior Secured Convertible Notes (the “Notes”). The Notes are convertible, in whole or in part, into shares of the Company’s Common Stock, at any time at a rate of $0.65 per share with fractions rounded up to the nearest whole share, unless paid in cash at the Company’s election. The Notes bear interest at a rate of 12% per annum and interest payments will be made on a quarterly basis. The Notes mature January 15, 2020.
The Notes are governed by a Securities Purchase Agreement (the “SPA”) and are secured by all of the assets of the Company pursuant to a Security and Pledge Agreement. In addition to the issuance of the Notes in the Offering, the Company’s Board of Directors approved, as part of the Offering, the issuance of warrants to purchase one share of the Company’s Common Stock for 50% of the number of shares of Common Stock issuable upon conversion of each Note (the “Warrants”). Each Warrant is immediately exercisable at $0.75 per share, contains certain anti-dilution down-round features and expires on January 15, 2023. If the Company ever defaults on the loan the Warrants to be issued will increase from 50% of the number of shares of Common Stock issuable upon conversion to 100%.
On January 22, 2018, the Company entered into a SPA and Security and Pledge Agreement with its first investor in the Offering and issued a Note to the investor in the principal amount of $500,000. Subscription funds were received by the Company from the investor on February 7, 2018. In addition to the Note, the Company issued to the investor 384,615 Warrants. The Warrants are considered equity instruments based on the Company’s early adoption of ASU 2017-11.
The proceeds received upon issuing the Note and Warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the Warrants was $838,404 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free interest rate of 2.1%; and volatility of 142%. The effective conversion rate resulted in a Beneficial Conversion Feature greater than the proceeds received. Thus, the discount is limited to the proceeds received of $500,000 and is amortized to interest expense using the effective interest method over the term of the Note.
For the three months ended March 31, 2018 and 2017, interest expense paid to the investor amounted to $9,863 and $0, respectively. The Company also amortized to interest expense $46,575 from the amortization of the discount. The unpaid principal balance of the Note is $500,000 at March 31, 2018 and the remaining unamortized discount is $453,425.
8. RELATED PARTIES
At March 31, 2018 and December 31, 2017 the amount due to stockholders was $1,000. The balance is payable to two stockholders related to opening bank balances.
In August 2017 the Company entered into a lease agreement with a stockholder of the Company and paid monthly installments of $2,000 between August and December 2017. For the three months ended March 31, 2018 and 2017, rent expense paid to the stockholder amounted to $6,000 and $0, respectively.
The Company entered into a verbal arrangement with a company controlled by a shareholder to provide administrative services. Total payments to the related party for administrative services amounted to approximately $21,000 and $0, for the three months ended March 31, 2018 and 2017, respectively.
For the three months ended March 31, 2018 and 2017, professional expense paid to directors and officers of the Company amounted to $43,000 and $0, respectively. For the three months ended March 31, 2018 and 2017, travel expense reimbursed to directors and officers of the Company amounted to approximately $0 and $1,300, respectively.
12 |
IIOT-OXYS, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2018
9. SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and determined there are the following items to disclose:
On May 2, 2018, the Board of Directors of IIOT-OXYS, Inc., (the “Company”), through unanimous written consent, approved a Consulting Agreement with Antony Coufal dated April 23, 2018. Pursuant to the Agreement, Mr. Coufal was appointed as Chief Technology Officer of the Company effective as of April 23, 2018. The Consulting Agreement will terminate upon the completion of the services to be provided by Mr. Coufal pursuant to the Consulting Agreement, subject to earlier termination (30 days’ written notice to be provided by either party). For the first three months of the Consulting Agreement, the Company shall pay to Mr. Coufal a monthly consulting fee of $3,600, which will rise to $6,300 per month after the first three months. In addition, Mr. Coufal will be eligible to participate in the Company’s 2018 Stock Incentive Plan and receive 200,000 of shares of Common Stock in 2018, 400,000 shares of Common Stock in 2019, and 600,000 shares of Common Stock in 2020, subject to coming to a mutually-agreed upon vesting schedule to be determined at a later date.
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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 our Annual Report on Form 10-K for the year ended December 31, 2017. 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. This section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, and our interim financial statements and accompanying notes to these financial statements. All amounts are in U.S. dollars.
Forward-Looking Statements
The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning possible or assumed future operations, business strategies, need for financing, competitive position, potential growth opportunities, ability to retain and recruit personnel, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ materially are the following:
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:
· | 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 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; and |
· | government actions throughout the world. |
Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.
There may also be other risks and uncertainties that we are unable to identify and/or predict at this time or that we do not now expect to have a material adverse impact on our business.
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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 the Company’s report on Form 8-K filed with the Commission on August 3, 2017. Following the closing, the business of the Company has been that of OXYS, Inc. and HereLab, Inc., our wholly owned subsidiaries. The operations of the Company have varied significantly following the closing since prior to that time, the Company was an inactive shell company.
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 our 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. The Company received its first revenues in the last quarter of 2017, and expects considerable revenue due to its business development pipeline for 2018 including first 2018 revenues, which were mostly realized in the first quarter of 2018.
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Our unique value proposition is as follows:
Edge Computing
Within the Internet of Things (“IoT”) and Industrial Internet of Things (“IIoT”), most companies right now are adopting an approach which sends all sensor data to the cloud for processing. OXYS specializes in edge computing, where the data processing is done locally right where the data is collected.
Advanced Algorithms
OXYS has sought to differentiate itself by licensing advanced algorithms from world-leading research institutions such as the Massachusetts Institute of Technology (“MIT”). These algorithms are an essential part of the edge computing strategy that convert raw data into actionable knowledge right where the data is collected without having to send the data to the cloud first.
Reconfigurable Hardware and Software
Instead of focusing on creating tools, OXYS uses open source tools to create proprietary content. More specifically, OXYS uses hardware manufactured by companies such as HARTING (www.harting-usa.com) as well as others. This hardware is reconfigurable and flexible.
Liquidity and Capital Resources
At March 31, 2018, the Company had a cash balance of $381,182, which represents a $320,319 increase from the $60,863 balance at December 31, 2017. This increase was primarily the result of cash provided by the issuance of a convertible note in the amount of $500,000 offset by cash used to satisfy the requirements of a reporting company and due to acceleration in product development activities. The Company’s working capital at March 31, 2018 was $365,869, as compared to a December 31, 2017 working capital of $77,663.
For the three months ended March 31, 2018, we incurred a net loss of $259,833. Net cash used in operating activities was $180,477 for the three months ended March 31, 2018.
For the three months ended March 31, 2017, we incurred a net loss of $31,732. Net cash used by operating activities was $42,474 for the three months ended March 31, 2017.
For the three months ended March 31, 2018, investing activities consisted of $119 of cash primarily received in conjunction with the acquisition of a subsidiary. During the same period, financing activities consisted of cash received totaling $500,677 from an infusion of owner’s capital and proceeds from a convertible note payable.
For the three months ended March 31, 2017, investing activities consisted of $0. During the same period, financing activities consisted of cash received totaling $134,392 primarily related to issuance of common stock net of costs.
The Company presently owns no real property and at this time has no intention of acquiring any such property. The Company’s expenses are associated with professional fees as well as product development expenses and activities.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has incurred losses from operations of $259,833 for the three months ended March 31, 2018, and $31,732 for the three months ended March 31, 2017 and has an accumulated deficiency which raises substantial doubt about the Company’s ability to continue as a going concern.
Management believes the Company 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 it can achieve profitability and positive cash flows, if ever. Management plans to seek additional debt and/or equity financing for the Company, but cannot assure that such financing will be available on acceptable terms. At our current rate of expenditure, we anticipate being able to maintain current operations for five 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 the Company will be successful in raising this additional capital or in achieving profitable operations..
The Company’s continuation as a going concern is dependent upon its ability to ultimately attain profitable operations, generate sufficient cash flow to meet its obligations, and obtain additional financing as may be required. Our auditors have included a going concern qualification in their auditors’ report dated April 17, 2018. 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.
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The accompanying 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 the Company’s operating results.
Results of Operations for the Three Months Ended March 31, 2018 compared to the Three Months Ended March 31, 2017
For the three months ended March 31, 2018, we earned revenues of $13,650 and incurred related cost of sales of $8,750. We incurred professional fees of $142,994 and other general and administrative expenses of $65,301. As a result, we incurred a net loss of $259,833 for the three months ended March 31, 2018.
Comparatively, for the three months ended March 31, 2017, we did not earn any revenues. We incurred professional fees of $26,820 other general and administrative expenses of $4,912 As a result, we incurred a net loss of $31,732 for the three months ended March 31, 2017.
During the current and prior period, the Company did not record an income tax benefit due to the uncertainty associated with the Company’s ability to utilize the deferred tax assets.
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.
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. |
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, we have elected not to provide the disclosure required by this item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and, as such, is accumulated and communicated to our Chief Executive Officer, Nevan Hanumara, who serves as our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Mr. Hanumara, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of March 31, 2018. Based on his evaluation, Mr. Hanumara concluded that, due to a material weakness in our internal control over financial reporting as described in our Annual Report on Form 10-K for the year ended December 31, 2017, our disclosure controls and procedures were not effective as of March 31, 2018.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter ended March 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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SEC Ref. No. | Title of Document |
31.1 | Rule 13a-14(a) Certification by Principal Executive and Financial Officer |
32.1 | Section 1350 Certification of Principal Executive and Financial Officer |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
IIOT-OXYS, Inc. | ||
Date: May 21, 2018 | By | /s/ Nevan C. Hanumara |
Nevan C. Hanumara, Chief Executive Officer and Interim Chief Financial Officer | ||
(Principal Executive Officer and Principal | ||
Financial Officer) |
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