Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) 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), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes ☒ No ☐ (2) Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically, every Interactive Data File required to be submitted 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
such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one)
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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant as of the last business day of its most recently completed
second fiscal quarter based upon the price at which the common equity was last sold was $1,829,922.
As of March 31, 2021, there were 178,361,108
shares of the registrant’s Common Stock outstanding.
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.
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:
Although the forward-looking statements
in this Annual Report on Form 10-K (the “Annual Report”) are based on our beliefs, assumptions and expectations,
taking into account all information currently available to us, we cannot guarantee future transactions, results, performance, achievements
or outcomes. No assurance can be made by anyone that the expectations reflected in our forward-looking statements will be attained,
or that deviations from them will not be material and adverse. We undertake no obligation, other than as maybe be required by law,
to update this Annual Report or otherwise make public statements updating our forward-looking statements.
Unless otherwise indicated, any reference
to “the Company”, “our company”, “we”, “us”, or “our” refers to IIOT-OXYS,
Inc., a Nevada corporation, and as applicable to its wholly owned subsidiaries, OXYS Corporation, a Nevada corporation, and HereLab,
Inc., a Delaware corporation.
PART I
Item 1. Business
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.
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.
A new management team was put into place
in 2018, which constitutes our current management team sans Mr. Coufal who resigned effective March 31, 2021. On April 1, 2021,
we appointed Chandran Seshagiri as our Interim CTO to replace Mr. Coufal.
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, has continued to realize revenues in 2020, and expects to
realize revenue growth in 2021 due to its business development pipeline.
We develop hardware,
software and algorithms that monitor, measure and predict conditions for energy, structural, agricultural and medical applications.
We use domain-specific Artificial Intelligence to solve industrial and environmental challenges. Our engineered solutions focus
on common sense approaches to machine learning, algorithm development and hardware and software products.
Our customers
have issues and they need improvements. We design a system of hardware and software, assemble, install, monitor data and
apply our algorithms to help provide the customer insights.
We use off the
shelf components, with reconfigurable hardware architecture that adapts to a wide range of customer needs and applications. We
use open-source software tools, while still creating proprietary content for customers, thereby reducing software development time
and cost. The software works with the hardware to collect data from the equipment or structure that is being monitored.
We focus on developing
insights. We develop algorithms that help our customers create insights from vast data streams. The data collected is analyzed
and reports are created for the customer. From these insights, the customer can act to improve their process, product or structure.
OUR SOLUTIONS ACHIEVE TWO OBJECTIVES
ADD VALUE
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We show clear path to improved asset reliability, machine uptime, machine utilization, energy consumption, and quality.
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We provide advanced algorithms and insights as a service.
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RISK MINIMIZATION
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We use simple measurements requiring almost zero integration – minimally invasive.
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We do not interfere with command and control of critical equipment.
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We do not physically touch machine control networks – total isolation of networks.
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HOW WE DO IT
Our location in Cambridge, Massachusetts
is ideal since market-leading Biotech, Medtech, and Pharma multinational firms have offices or R&D centers in Cambridge or
the Greater Boston area, which gives us easier access to potential sales which, in turn, lowers our cost of sales. Additionally,
we continue to add value to structural health monitoring and smart manufacturing customers as well. We, therefore, have a range
of opportunities as we continue to expand our customer base.
Our goal is to help Biotech, Pharma, and
Medical Device companies realize the next wave of performance, productivity, and quality gains for their organizations, and become
Industry 4.0 compliant.
We have a unique value proposition in a
fast-growing worldwide multi-billion USD market, and have positioned our business with strategic partners for accelerated growth.
We are therefore well-poised for growth in 2021 and beyond, as we execute our plans and acquire additional customers.
WHAT MARKETS WE SERVE
SMART MANUFACTURING
We help our customers maintain machine
uptime and maximize operational efficiency. We also enable then to do energy monitoring, predictive maintenance that anticipates
problems before they happen, and improve part and process quality.
BIOTECH, PHARMACEUTICAL, AND MEDICAL
DEVICES
We are on the operations side, not the
patient-facing side. In this market vertical, our customers must provide high-quality products that must also pass rigorous review
by governing bodies such as the FDA. Here again, we focus on machine uptime, operational efficiency, and predictive maintenance
to avoid unplanned downtime.
SMART INFRASTRUCTURE
For bridges and other civil infrastructure,
local, state and federal agencies have limited resources. We help our clients prioritize how to spend limited funds by addressing
those fixes which need to be made first.
OUR UNIQUE VALUE PROPOSITION
EDGE COMPUTING AS A COMPLIMENT TO CLOUD
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. We specialize in edge computing, where the data processing is done locally right where
the data is collected. We also have advanced cloud-based algorithms that implement various machine learning and artificial intelligence
algorithms.
ADVANCED ALGORITHMS
We have sought to differentiate from our
competitors by developing advanced algorithms on our own and in collaboration with strategic partners 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,
we use open-source tools to create proprietary content.
Marketing
Our marketing and sales efforts are divided
into several distinct categories:
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We work with partners to leverage their sales and marketing channels.
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Direct business development and discussions with end use customers by company management; and
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Trade shows and international technical, sales and marketing meetings.
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Competition
We have two principal sources of competition.
The first comes from large companies such as IBM, GE, Amazon, Google, etc., who all have their efforts in IIoT. However, these
large companies are cloud – computing centric and they are trying to move towards edge devices from their present position
of being solely cloud computing based. We will be starting in edge computing from day one as opposed to force-fitting a cloud-based
solution into the limited computational capability and storage space of an edge device. We believe our systems will be more computationally
efficient as compared to a cloud-based solution which requires more computational resources.
The second source of competition is from
startups who are in the edge computing space. The most prominent example is FogHorn Systems Inc. There will be additional startups
that will specifically target the edge computing space as the investor awareness and the technical focus shifts from cloud computing
to edge computing. Whereas other startups focus on development of proprietary tools for edge computing, our solutions will use
open source tools but will still create proprietary algorithms and software content for clients and customers. We feel this methodology
of creating proprietary solutions using open source tools will allow us to rapidly address current and future customer needs.
Government Regulation
At present, we do not require any governmental
approvals of any of our products or services.
Environmental Laws
At present, we are not regulated by any
environmental laws.
Research and Development
We work with our partners and universities
to develop IP; we will further develop this IP in house into products and services.
Other than expenses for legal, accounting,
audit, tax preparation, intellectual property (IP), and other overhead expenses such rent, most of our funds are spent on technology
development, product development, and research and development. We are an emerging growth, early-stage, technology company and,
as such, most of our expenditures are aimed at innovation and product development.
We have a technology maturation model so
that we avoid doing work on technologies that are too early and too new and belong in a pure search environment. When the technology
is ready to leave the lab, we take over the further development. Along the way we expect to file additional IP and otherwise protect
technology by using trademarks, for example.
The efforts in research and development
have already resulted in significant customer interest in various market verticals including industrial, automotive, aerospace,
agricultural, infrastructure, and power generation.
All the present projects that we are working
on internally as research and development projects will go forward, so we do not have any projects in the category of projects
that have incurred significant expense but that will not result in present or future product.
Intellectual Property
On February 5, 2018, we entered into a
Non-Exclusive Patent License Agreement with MIT. The agreement, which was effective February 1, 2018, granted to us a royalty-bearing
non-exclusive license under U.S. Patent Nos. 8344724 (“Non-Intrusive Monitoring of Power and Other Parameters” issued
January 1, 2013), 14/263407 (“Non-Intrusive Monitoring” filed April 28, 2014), and Patent Cooperation Treaty Serial
No. PCT/US2016/057165 (“Noncontact Power Sensing” filed October 14, 2016) during the term of the agreement. The term
of the agreement was from the effective date until the expiration or abandonment of all issued patents and filed patent applications
licensed pursuant to the agreement, unless terminated earlier in accordance with the agreement.
Under the agreement, we were required to
make a first commercial sale of a “LICENSED PRODUCT” and/or a first commercial performance of a “LICENSED PROCESS,”
as defined in the agreement, on or before September 30, 2018. We had negotiated revenue targets with MIT which would determine
annual royalty payments. The 2018 minimum revenue target for the sale of products and services incorporating the MIT technology
was $100,000. This minimum revenue amount would increase in subsequent years.
Within 30 days of invoicing, a non-refundable
license issue fee of $10,000 was paid by us to MIT. Pursuant to the agreement, we were required to pay to MIT additional patent
maintenance fees in years beyond 2018.
Pursuant to the agreement, we were required
to pay to MIT a running royalty of 2% of “NET SALES,” as defined in the agreement made in the calendar years 2018,
2019, and 2020. For “NET SALES” made in the calendar year 2021 and every calendar year thereafter through the term
of the agreement, we were required to pay to MIT a running royalty of 4%.
On October 31, 2018, we sent written notice
of our intent to terminate the agreement with an effective date of termination of April 30, 2019. Since none of the technology
licensed to us by MIT had been used by us in any of our products and we had been investing in the
development of our own intellectual property, we determined the technology that was licensed from MIT wasn’t necessary in
the near term. Due to this, the written notice sent by us expressed a desire by our management to renegotiate the terms
of the agreement with MIT.
MIT declined to renegotiate the terms of
the agreement and, on December 6, 2018, we received a notice of termination from MIT due to non-payment of fees. As of December
6, 2018, the agreement was terminated, fees are no longer accruing, interest is accruing and $76,283.88 in fees owed to MIT are
still owing as of the date of this Annual Report. Despite the termination of the Agreement, we
remain active with MIT as a member of the MIT Startup Exchange (STEX). The purpose of STEX is to promote collaboration
and partnerships between MIT-connected startups and members of MIT’s Industrial Liaison Program. We remain open to future
mutually acceptable agreements with MIT.
We continue to develop
our proprietary algorithms and plan to protect them through a combination of trade secret, copyright, and patents.
Customers
Due to our status of a start-up, at the
moment, we depend on a few major customers. This should change as we implement plans for future growth.
Employees
As of April 1, 2021, we have four employees,
all on W2’s, including the CEO, COO and interim CTO. One employee is full time and the remaining are part time.
At the present time, except for the funding
received from Cambridge MedSpace LLC and Vidhyadhar Mitta in the form of secured notes, there are no conflicts of interest between
the Company and any of our officers and directors. This was determined as follows: i) none of their outside activities are soliciting
business from our customers or business contacts; ii) they are not soliciting our investors to invest in other ventures; and iii)
they are not soliciting our contract employees to leave us and join other efforts. At present, all our business services are provided
by outside contractors.
Item 1A. Risk Factors
Risks Related to Our Business
A pandemic, epidemic or outbreak
of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers could
adversely impact our business.
If a pandemic,
epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-19)
first identified in Wuhan, Hubei Province, China, or other public health crisis were to affect our markets or facilities, our business
could be adversely affected. Consequences of the coronavirus outbreak are resulting in disruptions in or restrictions on our ability
to travel. If such an infectious disease broke out at our office, facilities or work sites, our operations may be affected significantly,
our productivity may be affected, our ability to complete projects in accordance with our contractual obligations may be affected,
and we may incur increased labor and materials costs. If the customers with which we contract are affected by an outbreak of infectious
disease, service work may be delayed or cancelled, and we may incur increased labor and materials costs. If our subcontractors
with whom we work were affected by an outbreak of infectious disease, our labor supply may be affected and we may incur increased
labor costs. In addition, we may experience difficulties with certain suppliers or with vendors in their supply chains, and our
business could be affected if we become unable to procure essential equipment, supplies or services in adequate quantities and
at acceptable prices. Further, infectious outbreak may cause disruption to the U.S. economy, or the local economies of the markets
in which we operate, cause shortages of materials, increase costs associated with obtaining materials, affect job growth and consumer
confidence, or cause economic changes that we cannot anticipate. Overall, the potential impact of a pandemic, epidemic or outbreak
of an infectious disease with respect to our market or our facilities is difficult to predict and could adversely impact our business.
In response to the COVID-19 situation, federal, state and local governments (or other governments or bodies) are considering placing,
or have placed, restrictions on travel and conducting or operating business activities. At this time those restrictions are very
fluid and evolving. We have been and will continue to be impacted by those restrictions. Given that the type, degree and length
of such restrictions are not known at this time, we cannot predict the overall impact of such restrictions on us, our customers,
our subcontractors and supply chain, others that we work with or the overall economic environment. As such, the impact
these restrictions may have on our financial position, operating results and liquidity cannot be reasonably estimated at this time,
but the impact may be material. In addition, due to the speed with which the COVID-19
situation is developing and evolving, there is uncertainty around its ultimate impact on public health, business operations and
the overall economy; therefore, the negative impact on our financial position, operating results and liquidity cannot be reasonably
estimated at this time, but the impact may be material.
Because of our continued losses,
there is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our financial statements as of and for
the years ended December 31, 2019 and 2020 were prepared assuming that we would continue as a going concern. Our significant cumulative
losses from operations as of December 31, 2020, raised substantial doubt about our ability to continue as a going concern. If the
going-concern assumption were not appropriate for our financial statements, then adjustments would be necessary to the carrying
values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. Since December
31, 2020, we have continued to experience losses from operations. We have continued to fund operations primarily through the sale
of equity securities. Nevertheless, we will require additional funding to complete much of our planned operations. Our ability
to continue as a going concern is subject to our ability to generate a profit (i.e. through partnerships such as our current partnership
with Aingura) and/or obtain necessary additional funding from outside sources, including obtaining additional funding from the
sale of our securities. Except for potential proceeds from the sale of equity in offerings by us and minimal revenues, we have
no other source for additional funding. Our continued net operating losses and stockholders’ deficiency increase the difficulty
in meeting such goals and there can be no assurances that such methods will prove successful.
We have debt which is secured by
all our assets. If there is an occurrence of an uncured event of default, the lenders can foreclose on all our assets, which would
make any stock in the Company worthless.
We have entered into several secured loan
transactions with investors (as disclosed herein), pursuant to which the outstanding debt was secured by all our assets. In the
event we are unable to make payments, when due, on our secured debt, the lenders may foreclose on all our assets. In the event
the lenders foreclose on our assets, any stock in the Company would have no value. Our ability to make payments on secured debt,
when due, will depend upon our ability to make profit from operations and to raise additional funds through equity or debt financings.
At the moment, we have no funding commitments that have not been previously disclosed, and we may not obtain any in the future.
Our future success is dependent upon
the success of partnerships with other similarly-situated entities.
Effective March 18, 2020, we entered into
the Collaboration Agreement with Aingura IIoT, S.L. (“Aingura”) pursuant to which Aingura appointed and authorized
us to act as the sales network of Aingura’s services and products. Aingura delivers engineered, high-tech solutions
by implementing Smart Factory Operational Architectures. The agreement has an initial term of one year from the execution date.
Unless terminated prior, the agreement automatically renews for successive annual periods, unless either party notifies the other
in writing of its express intention not to renew the agreement at least two months prior to the date of termination of the agreement.
There are restrictive provisions in the agreement that may prevent us from pursuing other business opportunities during the term
of the agreement. In addition, if we are unable to make sales under the agreement, we will not collect any sales commissions and
our business could fail.
Most of our sales have historically
come from a small number of customers and a reduction in demand or loss of one or more of our significant customers would adversely
affect our business.
Historically, we have been dependent on
a small number of direct customers for most of our business, revenue and results of operations. In the past, we had contracts with
customers in the civil infrastructure sector, and the pharmaceutical sector. Our prior customers constituted a state government
and a large pharmaceutical company. Historically, those customers generated all our revenue. We expect to continue to experience
significant customer concentration in future periods.
This customer concentration increases the
risk of quarterly fluctuations in our operating results and sensitivity to any material, adverse developments experienced by our
significant customers. In the past, although our relationships with our major customers was good, we generally did not have long-term
contracts with any of them, which is typical of our industry. In the future, the loss of, or any substantial reduction in sales
to, any of our major direct or end customers could have a material adverse effect on our business, financial condition and results
of operations.
Our operating subsidiaries have limited
operating history and have generated very limited revenues thus far.
The limited operating history of OXYS and
HereLab in the IIoT field, makes evaluating our business and future prospects difficult. OXYS was incorporated on August 4, 2016
and HereLab was incorporated on February 27, 2017. We have not yet generated substantial income from OXYS or HereLab’s operations
and we only anticipate doing so if we are able to successfully implement our business plan. To date, we have generated approximately
$448,365in sales from business operations, none of which was generated from HereLab in 2019 or 2020 as we focused solely on OXYS
during those years. We intend in the longer term to derive further revenues from partnerships, consulting services, product sales,
and software licensing. Development of our services, products, and software will require significant investment prior to commercial
introduction, and we may never be able to successfully develop or commercialize the services, products, or software in a material
way.
We will require additional funding
to develop and commercialize our services, products, and software. If we are unable to secure additional financing on acceptable
terms, or at all, we may be forced to modify our current business plan or to curtail or cease our planned operations.
We anticipate incurring significant operating
losses and using significant funds for product development and operating activities. Our existing cash resources are insufficient
to finance even our immediate operations. Accordingly, we will need to secure additional sources of capital to develop our business
and product candidates, as planned. We intend to seek substantial additional financing through public and/or private financing,
which may include equity and/or debt financings, and through other arrangements, including collaborative arrangements. As part
of such efforts, we may seek loans from certain of our executive officers, directors and/or current shareholders.
If we are unable to secure additional financing
in the near term, we may be forced to:
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curtail or abandon our existing business plans;
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default on any debt obligations;
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seek to sell some or all our assets; and/or
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If we are forced to take any of these steps
our Common Stock may be worthless.
Any future financing may result in
ownership dilution to our existing shareholders and may grant rights to investors more favorable than the rights currently held
by our existing shareholders.
If we raise additional capital by issuing
equity, equity-related or convertible securities, the economic, voting and other rights of our existing shareholders may be diluted,
and those newly-issued securities may be issued at prices that are at a significant discount to current and/or then prevailing
market prices. In addition, any such newly issued securities may have rights superior to those of our common stock. If we obtain
additional capital through collaborative arrangements, we may be required to relinquish greater rights to our technologies or product
candidates than we might otherwise have or become subject to restrictive covenants that may affect our business.
Uncertain global economic conditions
could materially adversely affect our business and results of operations.
Our operations and performance are sensitive
to fluctuations in general economic conditions, both in the U.S. and globally. The ongoing uncertainty created by the COVID-19
pandemic, volatile currency markets, the anticipated weakness in all sectors, alone or in combination, may continue to have a material
adverse effect on our net sales and the financial results of our operations. In addition, we remain concerned about the geopolitical
and fiscal instability in the Middle East and some emerging markets as well as the continued volatility of the equity markets.
The recent U.S. election may also create additional domestic and global economic uncertainty. These factors could have a material
adverse effect on the spending patterns of businesses including our current and potential customers which could have a material
adverse effect on our net sales and our results of operations. Other factors that could adversely influence demand for our products
include unemployment, labor and healthcare costs, access to credit, consumer and business confidence, and other macroeconomic factors
that could have a negative impact on capital investment and spending behavior.
We are subject to various risks associated
with international operations and foreign economies.
Our international sales are subject to
inherent risks, including:
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global pandemics such as the COVID-19 pandemic;
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fluctuations in foreign currencies relative to the U.S. dollar;
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unexpected changes to currency policy or currency restrictions in foreign jurisdictions;
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delays in collecting trade receivable balances from customers in developing economies;
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unexpected changes in regulatory requirements;
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difficulties and the high tax costs associated with the repatriation of earnings;
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fluctuations in local economies;
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disparate and changing employment laws in foreign jurisdictions;
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difficulties in staffing and managing foreign operations;
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costs and risks of localizing products for foreign countries;
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unexpected changes in regulatory requirements;
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government actions throughout the world;
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tariffs and other trade barriers; and
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the burdens of complying with a wide variety of foreign laws.
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Moreover, there can be no assurance that
our international sales will continue at existing levels or grow in accordance with our efforts to increase foreign market penetration.
In many foreign countries, particularly
in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable
to us such as the Foreign Corrupt Practices Act. Although we have policies and procedures designed to ensure compliance with these
laws, there can be no assurance that all of our employees, contractors and agents, including those based in or from countries where
practices which violate such U.S. laws may be customary, will not take actions in violation of our policies. Any violation of foreign
or U.S. laws by our employees, contractors or agents, even if such violation is prohibited by our policies, could have a material
adverse effect on our business. We must also comply with various import and export regulations. The application of these various
regulations depends on the classification of our products which can change over time as such regulations are modified or interpreted.
As a result, even if we are currently in compliance with applicable regulations, there can be no assurance that we will not have
to incur additional costs or take additional compliance actions in the future. Failure to comply with these regulations could result
in fines or termination of import and export privileges, which could have a material adverse effect on our operating results. Additionally,
the regulatory environment in some countries is very restrictive as their governments try to protect their local economy and value
of their local currency against the U.S. dollar.
Any future product revenues are dependent
on certain industries, and contractions in these industries could have a material adverse effect on our results of operations.
Sales of our products are dependent on
customers in certain industries. As we have experienced in the past, and as we may continue to experience in the future, downturns
characterized by diminished product demand in any one or more of these industries may result in decreased sales and a material
adverse effect on our operating results. We cannot predict when and to what degree contractions in these industries may occur;
however, any sharp or prolonged contraction in one or more of these industries could have a material adverse effect on our business
and results of operations.
We intend to make significant investments
in new products that may not be successful or achieve expected returns.
We plan to continue to make significant
investments in research, development, and marketing for new and existing products and technologies. These investments involve a
number of risks as the commercial success of such efforts depend on many factors, including our ability to anticipate and respond
to innovation, achieve the desired technological fit, and be effective with our marketing and distribution efforts. If our existing
or potential customers do not perceive our latest product offerings as providing significant new functionality or value, or if
we are late to market with a new product or technology, we may not achieve our expected return on our investments or be able recover
the costs expended to develop new product offerings, which could have a material adverse effect on our operating results. Even
if our new products are profitable, our operating margins for new products may not be as high as the margins we have experienced
historically.
Our success depends on new product
introductions and market acceptance of our products.
The market for our products is characterized
by technological change, evolving industry standards, changes in customer needs and new product introductions, and is therefore
highly dependent upon timely product innovation. Our success is dependent on our ability to successfully develop and introduce
new and enhanced products on a timely basis to replace declining revenues from older products, and on increasing penetration in
domestic and international markets. Any significant delay in releasing new products could have a material adverse effect on the
ultimate success of a product and other related products and could impede continued sales of predecessor products, any of which
could have a material adverse effect on our operating results. There can be no assurance that we will be able to introduce new
products, that our new products will achieve market acceptance or that any such acceptance will be sustained for any significant
period. Failure of our new products to achieve or sustain market acceptance could have a material adverse effect on our operating
results.
Our reported financial results may
be adversely affected by changes in accounting principles generally accepted in the U.S.
We prepare our financial statements in
conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation
by the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (the “SEC”).
A change in these policies or interpretations could have a significant effect on our reported financial results, may retroactively
affect previously reported results, could cause unexpected financial reporting fluctuations, and may require us to make costly
changes to our operational processes and accounting systems.
We operate in intensely competitive
markets.
The markets in which we operate are characterized
by intense competition from numerous competitors, some of which are divisions of large corporations having far greater resources
than we have, and we may face further competition from new market entrants in the future. Some examples of large and small competitors
include, but are not limited to:
|
·
|
General Electric with its GE Predix product for IoT;
|
|
·
|
IBM with its IBM BlueMix and IBM IoT Watson products;
|
|
·
|
Siemens with its MindSphere IoT product;
|
|
·
|
Microsoft with its Microsoft Azure IoT Suite;
|
Our financial results are subject
to fluctuations due to various factors that may adversely affect our business and result of operations.
Our operating results have fluctuated in
the past and may fluctuate significantly in the future due to several factors, including:
|
·
|
global pandemics such as the COVID-19 pandemic;
|
|
·
|
fluctuations in foreign currency exchange rates;
|
|
·
|
changes in global economic conditions;
|
|
·
|
changes in the mix of products sold;
|
|
·
|
the availability and pricing of components from third parties (especially limited sources);
|
|
·
|
the difficulty in maintaining margins, including the higher margins traditionally achieved in international sales;
|
|
·
|
changes in pricing policies by us, our competitors or suppliers;
|
|
·
|
the timing, cost or outcome of any future intellectual property litigation or commercial disputes;
|
|
·
|
delays in product shipments caused by human error or other factors; or
|
|
·
|
disruptions in transportation channels.
|
Any future acquisitions made by us
will be subject to several related costs and challenges that could have a material adverse effect on our business and results of
operations.
We plan to make more acquisitions in the
future. Achieving the anticipated benefits of an acquisition depends upon whether the integration of the acquired business, products
or technology is accomplished efficiently and effectively. In addition, successful acquisitions generally require, among other
things, integration of product offerings, manufacturing operations and coordination of sales and marketing and R&D efforts.
These difficulties can become more challenging due to the need to coordinate geographically separated organizations, the complexities
of the technologies being integrated, and the necessities of integrating personnel with disparate business backgrounds and combining
different corporate cultures. The integration of operations following an acquisition also requires the dedication of management
resources, which may distract attention from our day-to-day business and may disrupt key R&D, marketing or sales efforts. Our
inability to successfully integrate any of our acquisitions could harm our business. The existing products previously sold by entities
we have acquired may be of a lesser quality than our products or could contain errors that produce incorrect results on which users
rely or cause failure or interruption of systems or processes that could subject us to liability claims that could have a material
adverse effect on our operating results or financial position. Furthermore, products acquired in connection with acquisitions may
not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions.
We may experience component shortages
that may adversely affect our business and result of operations.
We have experienced difficulty in securing
certain types of high-power connectors for one of our projects and anticipate that supply shortages of components used in our products,
including limited source components, can result in significant additional costs and inefficiencies in manufacturing. If we are
unsuccessful in resolving any such component shortages in a timely manner, we will experience a significant impact on the timing
of revenue, a possible loss of revenue, or an increase in manufacturing costs, any of which would have a material adverse impact
on our operating results.
We rely on management information
systems. interruptions in our information technology systems or cyber-attacks on our systems could adversely affect our business.
We rely on the efficient and uninterrupted
operation of complex information technology systems and networks to operate our business. We rely on a primary global center for
our management information systems and on multiple systems in branches not covered by our global center. As with any information
system, unforeseen issues may arise that could affect our ability to receive adequate, accurate and timely financial information,
which in turn could inhibit effective and timely decisions. Furthermore, it is possible that our global center for information
systems or our branch operations could experience a complete or partial shutdown. A significant system or network disruption could
be the result of new system implementations, computer viruses, cyber-attacks, security breaches, facility issues or energy blackouts.
Threats to our information technology security can take a variety of forms and individuals or groups of hackers or sophisticated
organizations including state-sponsored organizations, may take steps that pose threats to our customers and our infrastructure.
If we were to experience a shutdown, disruption or attack, it would adversely impact our product shipments and net sales, as order
processing and product distribution are heavily dependent on our management information systems. Such an interruption could also
result in a loss of our intellectual property or the release of sensitive competitive information or partner, customer or employee
personal data. Any loss of such information could harm our competitive position, result in a loss of customer confidence, and cause
us to incur significant costs to remedy the damages caused by the disruptions or security breaches. In addition, changing laws
and regulations governing our responsibility to safeguard private data could result in a significant increase in operating or capital
expenditures needed to comply with these new laws or regulations. Accordingly, our operating results in such periods would be adversely
impacted.
We are continually working to maintain
reliable systems to control costs and improve our ability to deliver our products in our markets worldwide. Our efforts include,
but are not limited to the following: firewalls, antivirus protection, patches, log monitors, routine backups with offsite retention
of storage media, system audits, data partitioning and routine password modifications. Our internal information technology systems
environment continues to evolve and our business policies and internal security controls may not keep pace as new threats emerge.
No assurance can be given that our efforts to continue to enhance our systems will be successful.
We are subject to risks associated
with our website.
We devote resources to maintaining our
website, www.oxyscorp.com, as a key marketing, sales and support tool and expect to continue to do so in the future. Failure to
properly maintain our website may interrupt normal operations, including our ability to run and market our business which would
have a material adverse effect on our results of operations. We host our website internally. Any failure to successfully maintain
our website or any significant downtime or outages affecting our website could have a material adverse impact on our operating
results.
Our products are complex and may
contain bugs or errors.
As has occurred in the past and as may
be expected to occur in the future, our new software products or new operating systems of third parties on which our products are
based often contain bugs or errors that can result in reduced sales or cause our support costs to increase, either of which could
have a material adverse impact on our operating results.
Compliance with sections 302 and
404 of the Sarbanes-Oxley Act of 2002 is costly and challenging.
As required by Section 302 of the Sarbanes-Oxley
Act of 2002, our periodic reports contain our management’s certification of adequate disclosure controls and procedures,
a report by our management on our internal control over financial reporting including an assessment of the effectiveness of our
internal control over financial reporting, and an attestation and report by our external auditors with respect to the effectiveness
of our internal control over financial reporting under Section 404. While these assessments and reports have not revealed any material
weaknesses in our internal control over financial reporting, compliance with Sections 302 and 404 is required for each future fiscal
year end. We expect that the ongoing compliance with Sections 302 and 404 will continue to be both very costly and very challenging
and there can be no assurance that material weaknesses will not be identified in future periods. Any adverse results from such
ongoing compliance efforts could result in a loss of investor confidence in our financial reports and have an adverse effect on
our stock price.
Our business depends on our proprietary
rights and we have been subject to intellectual property litigation.
Our success depends on our ability to obtain
and maintain patents and other proprietary rights relative to the technologies used in our principal products. Despite our efforts
to protect our proprietary rights, unauthorized parties may have in the past infringed or violated certain of our intellectual
property rights. We from time to time may engage in litigation to protect our intellectual property rights. In monitoring and policing
our intellectual property rights, we may be required to spend significant resources. We from time to time may be notified that
we are infringing certain patent or intellectual property rights of others. There can be no assurance that any future intellectual
property dispute or litigation will not result in significant expense, liability, injunction against the sale of some of our products,
and a diversion of management’s attention, any of which may have a material adverse effect on our operating results.
We are subject to the risk of product
liability claims.
Our products are designed to provide information
upon which users may rely. Our products are also used in “real time” applications requiring extremely rapid and continuous
processing and constant feedback. Such applications give rise to the risk that a failure or interruption of the system or application
could result in economic damage, bodily harm or property damage. We attempt to assure the quality and accuracy of the processes
contained in our products, and to limit our product liability exposure through contractual limitations on liability, limited warranties,
express disclaimers and warnings as well as disclaimers contained in our “shrink wrap” and electronically displayed
license agreements with end-users. If our products contain errors that produce incorrect results on which users rely or cause failure
or interruption of systems or processes, customer acceptance of our products could be adversely affected. Further, we could be
subject to liability claims that could have a material adverse effect on our operating results or financial position. Although
we maintain liability insurance for product liability matters, there can be no assurance that such insurance or the contractual
limitations used by us to limit our liability will be sufficient to cover or limit any claims which may occur.
Each of our current product candidates
and services is in an early stage of development and we may never succeed in developing and/or commercializing them. If we are
unable to commercialize our services, products, or software, or if we experience significant delays in doing so, our business may
fail.
We intend to invest a significant portion
of our efforts and financial resources in our software and we will depend heavily on its success. This software is currently in
the beta stage of development. We need to devote significant additional research and development, financial resources and personnel
to develop additional commercially viable products, establish intellectual property rights, if necessary, and establish a sales
and marketing infrastructure. We are likely to encounter hurdles and unexpected issues as we proceed in the development of our
software and our other product candidates. There are many reasons that we may not succeed in our efforts to develop our product
candidates, including the possibility that our product candidates will be deemed undesirable; our product candidates will be too
expensive to develop or market or will not achieve broad market acceptance; others will hold proprietary rights that will prevent
us from marketing our product candidates; or our competitors will market products that are perceived as equivalent or superior.
We depend on third parties to assist
us in the development of our software and other product candidates, and any failure of those parties to fulfill their obligations
could result in costs and delays and prevent us from successfully commercializing our software and product candidates on a timely
basis, if at all.
We may engage consultants and other third
parties to help our software and product candidates. We may face delays in our commercialization efforts if these parties do not
perform their obligations in a timely or competent fashion or if we are forced to change service providers. Any third parties that
we hire may also provide services to our competitors, which could compromise the performance of their obligations to us. If these
third parties do not successfully carry out their duties or meet expected deadlines, the commercialization of our software and
product candidates may be extended, delayed or terminated or may otherwise prove to be unsuccessful. Any delays or failures as
a result of the failure to perform by third parties would cause our development costs to increase, and we may not be able to commercialize
our product candidates. In addition, we may not be able to establish or maintain relationships with these third parties on favorable
terms, if at all. If we need to enter into replacement arrangements because a third party is not performing in accordance with
our expectations, we may not be able to do so without undue delays or considerable expenditures or at all.
The loss of or inability to retain
key personnel could materially adversely affect our operations.
Our management includes a select group
of experienced technology professionals, particularly Clifford Emmons, Karen McNemar, and Chandran Seshagiri, who will be instrumental
in the development of our software and product candidates. The success of our operations will, in part, depend on the successful
continued involvement of these individuals. If these individuals leave the employment of or engagement with us, OXYS, or HereLab,
then our ability to operate will be negatively impacted. Although we have consulting agreements with these individuals, we do not
have any employment agreements with these parties and do not maintain any “key-man” insurance for them.
Risks Related to Our Intellectual Property
Patents acquired by us may not be
valid or enforceable and may be challenged by third parties.
We do not intend to seek a legal opinion
or other independent verification that any patents issued or licensed to us would be held valid by a court or administrative body
or that we would be able to successfully enforce our patents against infringers, including our competitors. The issuance of a patent
is not conclusive as to its validity or enforceability, and the validity and enforceability of a patent is susceptible to challenge
on numerous legal grounds. Challenges raised in patent infringement litigation brought by or against us may result in determinations
that patents that have been issued or licensed to us or any patents that may be issued to us or our licensors in the future are
invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able
to use the discoveries or technologies claimed in these patents without paying licensing fees or royalties to us, which could significantly
diminish the value of our intellectual property and our competitive advantage. Even if our patents are held to be enforceable,
others may be able to design around our patents or develop products similar to our products that are not within the scope of any
of our patents.
In addition, enforcing any patents that
may be issued to us in the future against third parties may require significant expenditures regardless of the outcome of such
efforts. Our inability to enforce our patents against infringers and competitors may impair our ability to be competitive and could
have a material adverse effect on our business.
If we are not able to protect and
control our unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.
We rely on unpatented technology, trade
secrets, confidential information and proprietary know-how to protect our technology and maintain any future competitive position,
especially when we do not believe that patent protection is appropriate or can be obtained. Trade secrets are difficult to protect.
In order to protect proprietary technology and processes, we rely in part on confidentiality and intellectual property assignment
agreements with our employees, consultants and others. These agreements generally provide that the individual must keep confidential
and not disclose to other parties any confidential information developed or learned by the individual during the course of the
individual’s relationship with us except in limited circumstances. These agreements generally also provide that we shall
own all inventions conceived by the individual in the course of rendering services to us. These agreements may not effectively
prevent disclosure of confidential information or result in the effective assignment to us of intellectual property and may not
provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements.
In addition, others may independently discover trade secrets and proprietary information that have been licensed to us or that
we own, and in such case, we could not assert any trade secret rights against such party.
Enforcing a claim that a party illegally
obtained and is using trade secrets that have been licensed to us or that we own is difficult, expensive and time-consuming, and
the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly
and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure
to obtain or maintain trade secret protection could have a material adverse effect on our business. Moreover, some of our academic
institution licensors, collaborators and scientific advisors have rights to publish data and information to which we have rights.
If we cannot maintain the confidentiality of our technologies and other confidential information in connection with our collaborations,
our ability to protect our proprietary information or obtain patent protection in the future may be impaired, which could have
a material adverse effect on our business.
Risks Related to Our Common Stock
The public trading market for our
common stock is volatile and will likely result in higher spreads in stock prices.
Our common stock is trading in the over-the-counter
market and is quoted on the OTC Pink. The over-the-counter market for securities has historically experienced extreme price and
volume fluctuations during certain periods. These broad market fluctuations and other factors, such as our ability to implement
our business plan, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the
market price of our common stock. In addition, the spreads on stock traded through the over-the-counter market are generally unregulated
and higher than on stock exchanges, which means that the difference between the price at which shares could be purchased by investors
on the over-the-counter market compared to the price at which they could be subsequently sold would be greater than on these exchanges.
Significant spreads between the bid and asked prices of the stock could continue during any period in which a sufficient volume
of trading is unavailable or if the stock is quoted by an insignificant number of market makers. We cannot ensure that our trading
volume will be sufficient to significantly reduce this spread, or that we will have sufficient market makers to affect this spread.
These higher spreads could adversely affect investors who purchase the shares at the higher price at which the shares are sold,
but subsequently sell the shares at the lower bid prices quoted by the brokers. Unless the bid price for the stock increases and
exceeds the price paid for the shares by the investor, plus brokerage commissions or charges, shareholders could lose money on
the sale. For higher spreads such as those on over-the-counter stocks, this is likely a much greater percentage of the price of
the stock than for exchange listed stocks. There is no assurance that at the time the shareholder wishes to sell the shares, the
bid price will have sufficiently increased to create a profit on the sale.
Because our shares are designated
as “penny stock”, broker-dealers will be less likely to trade in our stock due to, among other items, the requirements
for broker-dealers to disclose to investors the risks inherent in penny stocks and to make a determination that the investment
is suitable for the purchaser.
Our shares are designated as “penny
stock” as defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and thus may be more illiquid than shares not designated as penny stock. The SEC has adopted rules which regulate
broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks are defined generally as: non-Nasdaq
equity securities with a price of less than $5.00 per share; not traded on a “recognized” national exchange; or in
issuers with net tangible assets less than $2,000,000, if the issuer has been in continuous operation for at least three years,
or $10,000,000, if in continuous operation for less than three years, or with average revenues of less than $6,000,000 for the
last three years. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by
the SEC, to provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer’s
account, to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level
of trading activity, if any, in the secondary market for a stock that is subject to the penny stock rules. Since our securities
are subject to the penny stock rules, investors in the shares may find it more difficult to sell their shares. Many brokers have
decided not to trade in penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers
willing to act as market makers in such securities is limited. The reduction in the number of available market makers and other
broker-dealers willing to trade in penny stocks may limit the ability of purchasers in this offering to sell their stock in any
secondary market. These penny stock regulations, and the restrictions imposed on the resale of penny stocks by these regulations,
could adversely affect our stock price.
Our Board of Directors can, without
shareholder approval, cause preferred stock to be issued on terms that adversely affect common shareholders.
Under our Articles of Incorporation, our
board of directors is authorized to issue up to 10,000,000 shares of preferred stock, of which 26,000 are issued and outstanding
as of the date of this Annual Report. Also, our board of directors, without shareholder approval, may determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those shares. If our board of directors causes any additional
shares of preferred stock to be issued, the rights of the holders of our common stock could be adversely affected. Our board of
directors’ ability to determine the terms of preferred stock and to cause its issuance, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. Additional preferred shares issued by our board of directors
could include voting rights, or even additional super voting rights (above those pertaining to the Series A Super Voting Preferred
Stock), which could shift the ability to control our company to the holders of our preferred stock. Additional preferred shares
could also have conversion rights into shares of our common stock at a discount to the market price of the common stock which could
negatively affect the market for our common stock. In addition, preferred shares would have preference in the event of our liquidation,
which means that the holders of preferred shares would be entitled to receive the net assets of our company distributed in liquidation
before the common stock holders receive any distribution of the liquidated assets.
We have not paid, and do not intend
to pay in the near future, dividends on our common shares and therefore, unless our common stock appreciates in value, our shareholders
may not benefit from holding our common stock.
We have not paid any cash dividends on
our common stock since inception. Therefore, any return on the investment made in our shares of common stock will likely be dependent
initially upon the shareholder’s ability to sell our common shares in the open market, at prices in excess of the amount
paid for our common shares and broker commissions on the sales.
Because we became public by means
of a reverse merger, we may not be able to attract the attention of brokerage firms.
Additional risks may exist because we became
public through a “reverse merger.” Securities analysts of brokerage firms may not provide coverage of our company since
there is little incentive for brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage
firms will want to conduct secondary offerings on our behalf in the future.
Shares of our common stock that have
not been registered under federal securities laws are subject to resale restrictions imposed by Rule 144, including those set forth
in Rule 144(i) which apply to a former “shell company.”
Prior to the closing of the SEA, we were
deemed a “shell company” under applicable SEC rules and regulations because we had no or nominal operations and either
no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash
equivalents and nominal other assets. Pursuant to Rule 144 promulgated under the Securities Act sales of the securities of a former
shell company, such as us, under that rule are not permitted (i) until at least 12 months have elapsed from the date on which Form
10-type information reflecting our status as a non-shell company, is filed with the SEC and (ii) unless at the time of a proposed
sale, we are subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and have filed all reports and other
materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months, other
than Form 8-K reports. Without registration under the Securities Act, our shareholders will be forced to hold their shares of our
common stock for at least that 12-month period after the filing of the report on Form 8-K following the closing of the reverse
merger before they are eligible to sell those shares pursuant to Rule 144, and even after that 12-month period, sales may not be
made under Rule 144 unless we are in compliance with other requirements of Rule 144. Further, it will be more difficult for us
to raise funding to support our operations through the sale of debt or equity securities unless we agree to register such securities
under the Securities Act, which could cause us to expend significant time and cash resources. The lack of liquidity of our securities
as a result of the inability to sell under Rule 144 for a longer period of time than a non-former shell company could negatively
affect the market price of our securities.
We are an “emerging growth
company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging growth companies,”
which could make our common stock less attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for as long as we continue to be an “emerging
growth company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other
public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an
“emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year
in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which
we have issued more than $1 billion in non-convertible debt during the preceding three year period. We cannot predict if investors
will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less
attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock
and our stock price may be more volatile.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We currently do not own any properties.
We entered into a lease agreement for our principal office located in Cambridge, Massachusetts on August 1, 2017 which began on
January 1, 2018 and terminated on December 31, 2018. We entered into a new lease agreement on March 12, 2019, which began on January
1, 2019 and terminated on June 30, 2019. Pursuant to the lease, we are obligated to pay the landlord monthly installments of $2,000
for a total lease payment of $12,000 in 2019. We secured a 2nd lease for July – December 2019 at $2,000/ month
for an additional $12,000 in 2019. As of 2020, we reduced the amount of space required and have renegotiated the lease terms to
$250/ month.
Item 3. Legal Proceedings
We are currently not aware of any such
legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results. From time to time, we may become involved in various lawsuits and legal proceedings,
which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result
in these or other matters may arise from time to time that may harm our business.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the OTC Pink
under the symbol “ITOX.” The table below sets forth for the periods indicated the quarterly high and low bid prices
as reported by OTC Markets. Limited trading volume has occurred during these periods. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
|
|
Quarter
|
|
High
|
|
|
Low
|
|
FISCAL YEAR ENDING DECEMBER 31, 2021
|
|
First
|
|
$
|
0.045
|
|
|
$
|
0.0062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
FISCAL YEAR ENDED DECEMBER 31, 2020
|
|
First
|
|
$
|
0.1169
|
|
|
$
|
0.0022
|
|
|
|
Second
|
|
$
|
0.0266
|
|
|
$
|
0.0028
|
|
|
|
Third
|
|
$
|
0.0130
|
|
|
$
|
0.0095
|
|
|
|
Fourth
|
|
$
|
0.0119
|
|
|
$
|
0.0051
|
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
FISCAL YEAR ENDED DECEMBER 31, 2019
|
|
First
|
|
$
|
0.23
|
|
|
$
|
0.071
|
|
|
|
Second
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
|
Third
|
|
$
|
0.26
|
|
|
$
|
0.0501
|
|
|
|
Fourth
|
|
$
|
0.15
|
|
|
$
|
0.04
|
|
Our common stock is considered to be penny
stock under rules promulgated by the SEC. Under these rules, broker-dealers participating in transactions in these securities must
first deliver a risk disclosure document which describes risks associated with these stocks, broker-dealers’ duties, customers’
rights and remedies, market and other information, and make suitability determinations approving the customers for these stock
transactions based on financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions
in writing, provide monthly account statements to customers, and obtain specific written consent of each customer. With these restrictions,
the likely effect of designation as a penny stock is to decrease the willingness of broker-dealers to make a market for the stock,
to decrease the liquidity of the stock and increase the transaction cost of sales and purchases of these stocks compared to other
securities.
Holders
As of the close of business on March 31,
2021, we had approximately 131 holders of our common stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers,
dealers, and registered clearing agencies. We have appointed Issuer Direct, 1981 East 4800 South, Suite 100, Salt Lake City, UT
84117, to act as transfer agent for the common stock.
Dividends
We have never declared a cash dividend
on our common stock and our Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Any
future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial
condition, operating results, capital requirements, restrictions contained in our agreements and other factors which our Board
of Directors deems relevant.
We are obligated to pay dividends to certain
holders of our preferred stock which we pay out of legally available funds from time to time or reach arrangements with our holders
of preferred stock to convert limited quantities of preferred stock at favorable conversion prices in lieu of dividend payments.
Securities Authorized for Issuance under Equity Compensation
Plans
Equity
Compensation Plan Information
Plan category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
|
Weighted-average exercise price of outstanding options, warrants and rights
|
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Equity compensation plans not approved by security holders
|
|
|
374,221,374
|
|
|
$
|
0.00084
|
|
|
|
2,031,000
|
(1)(2)(3)(4)
|
Total
|
|
|
374,221,374
|
|
|
$
|
0.00084
|
|
|
|
2,031,000
|
|
(1)
|
Effective July 1, 2018, the Company issued to Sam Burke 200,000 unvested shares of the Company’s Common Stock under the 2017 Plan, as defined below. As of December 31, 2020, 50,000 shares were vested and the remaining 150,000 unvested shares were cancelled.
|
(2)
|
Effective April 23, 2018, the Company issued to Antony Coufal 1,800,000 unvested shares of the Company’s Common Stock under the 2017 Plan, as defined below. As of December 31, 2020, 900,000 shares were vested.
|
(3)
|
Effective October 1, 2018, the Company issued to Karen McNemar 2,409,000 unvested shares of the Company’s Common Stock under the 2017 Plan, as defined below. As of December 31, 2020, 1,209,000 shares were vested.
|
(4)
|
Effective June 4, 2018, the Company issued to Clifford Emmons 3,060,000 unvested shares of the Company’s Common Stock under the 2017 Plan, as defined below. As of December 31, 2020, 1,560,000 shares were vested.
|
2017 Stock Incentive Plan
On March 16, 2017, our board of directors
assumed the 2017 Stock Awards Plan adopted by the Company while domiciled in New Jersey. No awards were made under this plan. On
December 14, 2017, the Board of Directors terminated this plan and adopted a new 2017 Stock Incentive Plan (the “2017
Plan”). The purposes of the 2017 Plan are (a) to enhance our ability to attract and retain the services of qualified
employees, officers, directors, consultants, and other service providers upon whose judgment, initiative and efforts the successful
conduct and development of our business largely depends, and (b) to provide additional incentives to such persons or entities to
devote their utmost effort and skill to the advancement and betterment of our company, by providing them an opportunity to participate
in the ownership of our Company and thereby have an interest in the success and increased value of our Company.
There are 4,500,000 shares of common stock
authorized for non-qualified and incentive stock options, restricted stock units, restricted stock grants, and stock appreciation
rights under the 2017 Plan, which are subject to adjustment in the event of stock splits, stock dividends, and other situations.
The 2017 Plan is administered by our board
of directors; however, the board of directors may designate administration of the 2017 Plan to a committee consisting of at least
two independent directors. Only employees of our Company or of an “Affiliated Company”, as defined in the 2017 Plan,
(including members of the board of directors if they are employees of our Company or of an Affiliated Company) are eligible to
receive incentive stock options under the Plan. Employees of our Company or of an Affiliated Company, members of the board of directors
(whether or not employed by our company or an Affiliated Company), and “Service Providers”, as defined in the 2017
Plan, are eligible to receive non-qualified options, restricted stock units, and stock appreciation rights under the 2017 Plan.
All awards are subject to Section 162(m) of the Internal Revenue Code.
No option awards may be exercisable more
than ten years after the date it is granted. In the event of termination of employment for cause, the options terminate on the
date of employment is terminated. In the event of termination of employment for disability or death, the optionee or administrator
of optionee’s estate or transferee has six months following the date of termination to exercise options received at the time
of disability or death. In the event of termination for any other reason other than for cause, disability or death, the optionee
has 30 days to exercise his or her options.
The 2017 Plan will continue in effect until
all the stock available for grant or issuance has been acquired through exercise of options or grants of shares, or until ten years
after its adoption, whichever is earlier. Awards under the 2017 Plan may also be accelerated in the event of certain corporate
transactions such as a merger or consolidation or the sale, transfer or other disposition of all or substantially all our assets.
As of December 31, 2020, the Board had
granted 4,409,000 shares of Common Stock under the 2017 Plan.
2019 Stock Incentive Plan
On March 11, 2019, the Board of Directors
adopted the 2019 Stock Incentive Plan (the “2019 Plan”). The purposes of the 2019 Plan are (a) to enhance our
ability to attract and retain the services of qualified employees, officers, directors, consultants, and other service providers
upon whose judgment, initiative and efforts the successful conduct and development of our business largely depends, and (b) to
provide additional incentives to such persons or entities to devote their utmost effort and skill to the advancement and betterment
of our company, by providing them an opportunity to participate in the ownership of our Company and thereby have an interest in
the success and increased value of our Company.
The 2019 Plan is administered by our board
of directors; however, the board of directors may designate administration of the 2019 Plan to a committee consisting of at least
two independent directors. Only employees of our Company or of an “Affiliated Company”, as defined in the 2019 Plan,
(including members of the board of directors if they are employees of our Company or of an Affiliated Company) are eligible to
receive incentive stock options under the 2019 Plan. Employees of our Company or of an Affiliated Company, members of the board
of directors (whether or not employed by our company or an Affiliated Company), and “Service Providers”, as defined
in the 2019 Plan, are eligible to receive non-qualified options, restricted stock units, and stock appreciation rights under the
2019 Plan. All awards are subject to Section 162(m) of the Internal Revenue Code.
No option awards may be exercisable more
than ten years after the date it is granted. In the event of termination of employment for cause, the options terminate on the
date of employment is terminated. In the event of termination of employment for disability or death, the optionee or administrator
of optionee’s estate or transferee has six months following the date of termination to exercise options received at the time
of disability or death. In the event of termination for any other reason other than for cause, disability or death, the optionee
has 30 days to exercise his or her options.
The 2019 Plan will continue in effect until
all the stock available for grant or issuance has been acquired through exercise of options or grants of shares, or until ten years
after its adoption, whichever is earlier. Awards under the 2019 Plan may also be accelerated in the event of certain corporate
transactions such as a merger or consolidation or the sale, transfer or other disposition of all or substantially all our assets.
As of December 31, 2020, the Board had
granted 3,060,000 shares Common Stock under the 2019 Plan.
Stock Options
We currently have no outstanding stock
options.
Recent Sales of Unregistered Securities
The Company had no unreported sales of
unregistered securities in the fourth quarter of 2020.
Item 6. Selected Financial Data
As a Smaller Reporting Company, we are
not required to furnish information under this Item 6.
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
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, 2019 and 2020 gives effect to our acquisition of OXYS Corporation (“OXYS”)
on July 28, 2017. In accordance with the accounting reporting requirements for the recapitalization related to the “reverse
merger” of OXYS, the financial statements for OXYS have been adjusted to reflect the change in the shares outstanding and
the par value of the common stock of OXYS. Additionally, all intercompany transactions between the Company and OXYS have been eliminated.
Forward-Looking Statements
Statements in this management’s discussion
and analysis of financial condition and results of operations contain certain forward-looking statements. To the extent that such
statements are not recitations of historical fact, such statements constitute forward looking statements which, by definition involve
risks and uncertainties. Where in any forward-looking statements, if we express an expectation or belief as to future results or
events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or accomplished.
Factors that may cause differences between
actual results and those contemplated by forward-looking statements include those discussed in “Risk Factors” 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;
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|
·
|
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.
|
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.
Under the terms of the OXYS SEA we acquired
100% of the issued voting shares of OXYS in exchange for 34,687,244 shares of our Common Stock. We also cancelled 1,500,000 outstanding
shares of our Common Stock and changed our management to Mr. DiBiase who also served in management of OXYS. Also, one of our principal
shareholders entered into a consulting agreement with OXYS to provide consulting services during the transition. The OXYS SEA was
effective on July 28, 2017, and our name was changed to “IIOT-OXYS, Inc.” at that time. Effective October 26, 2017,
our domicile was changed from New Jersey to Nevada.
On December 14, 2017, we entered into a
Share Exchange Agreement (the “HereLab SEA”) with HereLab, Inc., a Delaware corporation (“HereLab”),
and HereLab’s two shareholders pursuant to which we would acquire all the issued and outstanding shares of HereLab in exchange
for the issuance of 1,650,000 shares of our Common Stock, on a pro rata basis, to HereLab’s two shareholders. The closing
of the transaction occurred on January 11, 2018 and HereLab became our wholly-owned subsidiary.
A new management team was put into place
in 2018, which constitutes our current management team sans Mr. Coufal who resigned effective March 31, 2021. On April 1, 2021,
we appointed Chandran Seshagiri as our Interim CTO to replace Mr. Coufal.
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, has continued to realize revenues in 2020, and expects to
realize revenue growth in 2021 due to its business development pipeline.
We develop hardware,
software and algorithms that monitor, measure and predict conditions for energy, structural, agricultural and medical applications.
We use domain-specific Artificial Intelligence to solve industrial and environmental challenges. Our engineered solutions focus
on common sense approaches to machine learning, algorithm development and hardware and software products.
Our customers
have issues and they need improvements. We design a system of hardware and software, assemble, install, monitor data and
apply our algorithms to help provide the customer insights.
We use off the
shelf components, with reconfigurable hardware architecture that adapts to a wide range of customer needs and applications. We
use open source software tools, while still creating proprietary content for customers, thereby reducing software development time
and cost. The software works with the hardware to collect data from the equipment or structure that is being monitored.
We focus on developing
insights. We develop algorithms that help our customers create insights from vast data streams. The data collected is analyzed
and reports are created for the customer. From these insights, the customer can act to improve their process, product or structure.
Liquidity and Capital Resources for
the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
At December 31, 2020, we had a cash balance of
$103,074, which represents a $78,862 increase from the $24,212 cash balance at December 31, 2019. This increase was primarily as a result
of cash received from the sale of Series B Preferred Stock, cash received from convertible notes payable, and cash received from the
Payroll Protection Program loans (“PPP”) received by the Company during 2020. Our working capital at December 31,
2020 was negative $2,665,436, as compared to a December 31, 2019 working capital of negative $1,609,005.
For the year ended December 31, 2020, we incurred
a net loss of $2,236,774. Net cash flows used in operating activities was $117,138 for the year ended December 31, 2020.
For the year ended December 31, 2019, we incurred
a net loss of $1,887,287. Net cash flows used in operating activities was $325,014 for the year ended December 31, 2019.
For the year ended December 31, 2020, net cash
flows provided by financing activities were $196,000, consisting of cash received from the issuance of Convertible Notes payable of $129,300,
cash proceeds from sale of Series B Preferred Stock of $130,000, cash payments on notes payable of $100,000, and cash received from the
PPP of $36,700.
For the year ended December 31, 2019, financing
activities consisted of $310,000 of cash received from the issuance of Convertible Notes payable.
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 losses from operations of $2,236,774 for the year ended December 31, 2020, and $1,887,287 for the year ended December
31, 2019, and has an accumulated deficit of $7,480,678 as of December 31, 2020, which raises substantial doubt about our ability
to continue as a going concern.
Results of Operations for the Year
Ended December 31, 2020 compared to the year ended December 31, 2019
For the year ended December 31, 2020, we
earned revenues of $36,771 and incurred related cost of sales of $15,044. We incurred professional fees of $802,135, payroll costs
of $137,220, and other general and administrative expenses of $109,016. We incurred other expenses of $1,208,467, net of other
income of $5,000, primarily due to the loss on change in the fair market value of derivative liability of $220,325, interest expense
of $737,541 on notes payable due to amortization of debt discount and interest payable on notes payable, loss on the derivatives
and loss on extinguishment of debt for the year ended December 31, 2020. We also recorded $1,663 as preferred stock dividend on
convertible preferred stock for the year ended December 31, 2020. As a result, we incurred a net loss of $2,236,774 for the year
ended December 31, 2020.
Comparatively, for the year ended December
31, 2019, we earned revenues of $147,151 and incurred related cost of sales of $38,960. We incurred professional fees of $1,807,286
and other general and administrative expenses of $164,501. We incurred other expenses net of income of $23,690. As a result, we
incurred a net loss of $1,887,287 for the year ended December 31, 2019.
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 was less in
2020 than 2019. This was due to several reasons, including: the negative business impacts of the Coronavirus pandemic and longer
than anticipated customer acquisition times. These two factors led to cash flow issues, which in turn led to additional and aging
AP. All this resulted in a difficult fourth quarter 2020, and thus the negative YoY revenue growth. Our Quarterly Report on Form
10-Q for the period ended September 30, 2020 disclosed risks of ongoing concerns, and those concerns still exist. Despite cash
flow issues, cost cutting and capital infusions allowed us to weather a difficult year in 2020. Despite these headwinds, our achievements
in 2020 were significant: We completed a successful pilot program for our Fortune 500 Pharma customer in first quarter, and also
successfully completed a full year of data collection and analysis on our pilot structural health monitoring program for a New
England state’s DOT in the second quarter. The result of these two successful pilots, in two of our key target industry verticals
is the following: We now have data and algorithms to build strong use cases and marketing collateral that can be leveraged to extend
contracts with current customers and win additional contracts with new customers in all targeted industry segments. Also, the strength
of the Aingura IIoT, S.G. collaboration agreement has bolstered financial stability, added talent breadth and depth, and provides
complimentary industry segment experience. Furthermore, recent 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 2021 YoY revenue
growth will meet or exceed that of 2020. This is due to these aforementioned reasons: the strength of the Aingura IIoT, S.G. collaboration,
two successful pilots in 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 (specifically Biotech, Pharma, and Medical Device Operations), have yielded numerous prospects for future growth.
Furthermore, the strength of our target market, the Industrial Internet of Things (IIoT), continues: Market research shows the
worldwide IIoT market in 2017 was $92 billion and is projected to be $227 billion by 2021 (25% CAGR). Our strengths in these markets
will yield breakthroughs in new contracts with current customers, as well as new customers in all targeted industry segments. By
combining the resulting organic growth with inorganic growth, we believe these revenue goals are achievable.
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.
In August 2020, the FASB issued 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, which simplifies
accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain
settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted
earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning
after December 15, 2023, although early adoption is permitted. The Company is in the process of evaluating the impact of this new
guidance on its financial statements.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.
Emerging Growth Company
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Certain specified reduced reporting and other regulatory
requirements that are available to public companies that are emerging growth companies. These provisions include:
|
1.
|
an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002;
|
|
2.
|
an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;
|
|
3.
|
an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about our audit and our financial statements; and
|
|
4.
|
reduced disclosure about our executive compensation arrangements.
|
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 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.
Item 9A. 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 and Interim Chief Financial Officer, Clifford Emmons, who serves as our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Mr. Emmons, evaluated
the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of December 31,
2020. Based on his evaluation, Mr. Emmons concluded that, due to a material weakness in our internal control over financial reporting
as described below, our disclosure controls and procedures were not effective as of December 31, 2020. In light of the material
weakness in internal control over financial reporting, we completed substantive procedures, including validating the completeness
and accuracy of the underlying data used for accounting prior to filing this Annual Report.
These additional procedures have allowed
us to conclude that, notwithstanding the material weakness in our internal control over financial reporting, the consolidated financial
statements included in this report fairly present, in all material respects, our financial position, results of operations and
cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Management’s Report on Internal
Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2020 based upon Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
During its evaluation, management noted
certain matters involving internal control and its operation that we consider to be significant deficiencies or material weaknesses
under standards of the Public Company Accounting Oversight Board (“PCAOB”). A control deficiency exists when
the design or operation of a control does not allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis.
A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely
basis.
We noted deficiencies involving lack of
segregation of duties, lack of governance/oversight, and lack of internal control documentation that we believe to be material
weaknesses.
Because of this material weaknesses, management
concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020, based on criteria
described in Internal Control – Integrated Framework (2013) issued by COSO.
Remediation of the Material Weakness
We are evaluating the material weaknesses
and developing a plan of remediation to strengthen our overall internal control over financial reporting. The remediation plan
will include the following actions:
|
·
|
Separation of corporate responsibilities, e.g. CEO, CFO, Secretary, etc. to different key management individuals; and
|
|
·
|
Creation and adoption of a formal policy manual specifically dealing with financial controls.
|
Due to a material weakness as disclosed
in the 2019 Annual Report on Form 10-K, we committed to the same remediation plan, as disclosed above, and were able to separate
some of the intended corporate responsibilities through the appointment of a Chief Operating Officer, in addition to a Chief Executive
Officer; however, due to lack of resources, we were unable to execute the complete remediation plan. If we are unable to increase
our workforce, we may never be able to implement the remediation plan proposed above.
We are committed to maintaining a strong
internal control environment and we believe that these remediation efforts will represent significant improvements in our controls.
We have started to implement these steps, as disclosed above; however, some of these steps will take time to be fully integrated
and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps
set forth above are fully implemented and tested, the material weakness described above will continue to exist.
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
December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
IIOT-OXYS, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2020 and 2019
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional Paid-In
|
|
|
Accumulated
|
|
|
Total Stockholders' Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance - December 31, 2018
|
|
|
–
|
|
|
$
|
–
|
|
|
|
40,633,327
|
|
|
$
|
40,634
|
|
|
$
|
2,572,751
|
|
|
$
|
(3,153,020
|
)
|
|
$
|
(539,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
2,680,220
|
|
|
|
2,680
|
|
|
|
351,680
|
|
|
|
–
|
|
|
|
354,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on Notes Payable
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
153,541
|
|
|
|
–
|
|
|
|
153,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,887,287
|
)
|
|
|
(1,887,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
|
–
|
|
|
|
–
|
|
|
|
43,313,547
|
|
|
|
43,314
|
|
|
|
3,077,972
|
|
|
|
(5,040,307
|
)
|
|
|
(1,919,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Issued in Exchange of Shares Exchange
|
|
|
25,845
|
|
|
|
26
|
|
|
|
–
|
|
|
|
–
|
|
|
|
424,092
|
|
|
|
–
|
|
|
|
424,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued for Conversion of Convertible Note Payable
|
|
|
–
|
|
|
|
–
|
|
|
|
51,950,000
|
|
|
|
51,950
|
|
|
|
10,686
|
|
|
|
–
|
|
|
|
62,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for Conversion of Detachable Warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
40,802,082
|
|
|
|
40,802
|
|
|
|
(40,802
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relief of Derivative Liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
235,393
|
|
|
|
–
|
|
|
|
235,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issued for Default of Convertible Note Payables
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
163,433
|
|
|
|
–
|
|
|
|
163,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in FMV of Warrants Related to Convertible Note Payables
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
203,597
|
|
|
|
(203,597
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Conversion Feature Discount on Note Payable
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
26,833
|
|
|
|
–
|
|
|
|
26,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued for Extinguishment of Debt
|
|
|
–
|
|
|
|
–
|
|
|
|
6,760,000
|
|
|
|
6,760
|
|
|
|
9,991
|
|
|
|
–
|
|
|
|
16,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued to Officers for Services
|
|
|
–
|
|
|
|
–
|
|
|
|
2,284,500
|
|
|
|
2,285
|
|
|
|
683,066
|
|
|
|
–
|
|
|
|
685,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,236,774
|
)
|
|
|
(2,236,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2020
|
|
|
25,845
|
|
|
$
|
26
|
|
|
|
145,110,129
|
|
|
$
|
145,111
|
|
|
$
|
4,794,261
|
|
|
$
|
(7,480,678
|
)
|
|
$
|
(2,541,280
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
IIOT-OXYS, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
For The Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,236,774
|
)
|
|
$
|
(1,887,287
|
)
|
Adjustments to Reconcile Net Loss to Net Cash (Used) By Operating Activities
|
|
|
|
|
|
|
|
|
Loss on Extinguishment of Debt
|
|
|
16,205
|
|
|
|
221,232
|
|
Loss on Issuance of Default Warrants
|
|
|
163,433
|
|
|
|
–
|
|
Loss due to Change in Fair Market Value of Derivative Liability
|
|
|
220,325
|
|
|
|
–
|
|
Loss on Derivative Liability
|
|
|
239,396
|
|
|
|
–
|
|
Preferred Stock Issued for Services
|
|
|
8,794
|
|
|
|
–
|
|
Penalty and Fees Incurred due to Default Increase in Notes Payable
|
|
|
162,976
|
|
|
|
–
|
|
Stock Based Compensation Expense
|
|
|
–
|
|
|
|
354,360
|
|
Amortization of Discount on Notes Payable
|
|
|
106,388
|
|
|
|
93,886
|
|
Amortization of Intangible Assets
|
|
|
49,636
|
|
|
|
49,500
|
|
Amortization of Series B Preferred Stock to redemption
|
|
|
186,000
|
|
|
|
–
|
|
Forgiveness of Salaries Payable to Related Parties
|
|
|
–
|
|
|
|
(370,725
|
)
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
(Increase) Decrease in:
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
28,004
|
|
|
|
4,996
|
|
Inventory
|
|
|
–
|
|
|
|
317
|
|
Prepaid Expense
|
|
|
1,283
|
|
|
|
742
|
|
Increase (Decrease) in:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
5,352
|
|
|
|
18,274
|
|
Accrued Liabilities
|
|
|
92,483
|
|
|
|
54,497
|
|
Deferred Revenue
|
|
|
46,425
|
|
|
|
–
|
|
Shares Payable to Related Parties
|
|
|
728,892
|
|
|
|
652,916
|
|
Salaries Payable to Related Parties
|
|
|
64,044
|
|
|
|
482,278
|
|
Net Cash Used by Operating Activities
|
|
|
(117,138
|
)
|
|
|
(325,014
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Cash Received from Convertible Note Payable
|
|
|
129,300
|
|
|
|
310,000
|
|
Cash Payments of Notes Payable
|
|
|
(100,000
|
)
|
|
|
–
|
|
Proceeds from sale of Series B Preferred Stock
|
|
|
130,000
|
|
|
|
–
|
|
Proceeds from PPP Loan
|
|
|
36,700
|
|
|
|
–
|
|
Net Cash Provided By Financing Activities
|
|
|
196,000
|
|
|
|
310,000
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash and Cash Equivalents
|
|
|
78,862
|
|
|
|
(15,014
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - Beginning of Period
|
|
|
24,212
|
|
|
|
39,226
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period
|
|
$
|
103,074
|
|
|
$
|
24,212
|
|
|
|
|
|
|
|
|
|
|
Supplement Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Interest Paid During the Period
|
|
$
|
–
|
|
|
$
|
53,367
|
|
Income Taxes Paid During the Period
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Discount on Notes Payable
|
|
$
|
26,833
|
|
|
$
|
153,541
|
|
Conversion of Convertible Notes Payable and Derivative Liabilities
|
|
$
|
288,029
|
|
|
$
|
–
|
|
Warrant Anti-Dilution Issuance
|
|
$
|
203,597
|
|
|
$
|
–
|
|
Discount on Series B Preferred Stock
|
|
$
|
186,000
|
|
|
$
|
–
|
|
The accompanying notes are an integral part of these consolidated financial statements.
IIOT-OXYS, Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
December 31, 2020 and 2019
NOTE 1 - NATURE OF OPERATIONS, BASIS
OF PRESENTATION AND GOING CONCERN
Unless otherwise indicated, any reference
to “the Company”, “our company”, “we”, “us”, or “our” refers to IIOT-OXYS,
Inc., a Nevada corporation, and as applicable to its wholly-owned subsidiaries, OXYS Corporation, a Nevada corporation, and HereLab,
Inc., a Delaware corporation.
IIOT-OXYS, Inc., a Nevada corporation (the
“Company”) was originally established for the purpose of designing, building, testing, and selling Edge Computing Systems
for the Industrial Internet. The Company 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.
We were incorporated in the state of New
Jersey on October 1, 2003 under the name of Creative Beauty Supply Corporation and commenced operations 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. On
May 18, 2015, we changed our name to Gotham Capital Holdings. From January 1, 2009 until July 28, 2017, we had no operations. On
March 16, 2017, our Board of Directors approved to change our name to “IIOT-OXYS, Inc.” and authorized a change of
domicile from New Jersey to Nevada.
Impact of COVID-19
During the year ended December 31, 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.
Basis of Presentation
The accompanying financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and include the accounts of the Company. The financial statements and accompanying notes are the representations of the Company’s
management, who is responsible for their integrity and objectivity. In the opinion of the Company’s management, the financial
statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
Principles of Consolidation
The consolidated financial statements for
the years ended December 31, 2020 and 2019, respectively, include the accounts of Company, and its wholly-owned subsidiaries OXYS
Corporation and HereLab, Inc. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the valuation of
accounts payable, accrued liabilities and payable to related party. The Company bases its estimates and assumptions on current
facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses
that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely
from the Company’s estimates. To the extent there are material differences between the estimates and the actual results,
future results of operations will be affected.
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 has suffered continuing operating losses, used cash flows in operating activities of $117,138 and has an accumulated deficit
of $7,480,678 as of December 31, 2020. 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. The
accompanying financial statements do not include any adjustments to reflect the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management believes that the Company will
be able to achieve a satisfactory level of liquidity to meet the Company’s obligations for the next 12 months by generating
cash through additional borrowings and/or sale of equity securities, 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The following summary of significant accounting
policies of the Company is presented to assist in the understanding of the Company’s financial statements. These accounting
policies conform to GAAP in all material respects and have been consistently applied in preparing the accompanying financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid
instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company reported a cash balance
of $103,074 and $24,212 as of December 31, 2020 and 2019, respectively.
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. There was no allowance for doubtful accounts as of December 31, 2020 and December 31,
2019, respectively.
Long-Lived Assets
The Company regularly reviews the carrying
value and estimated lives of its long-lived assets to determine whether indicators of impairment may exist that warrant adjustments
to the carrying value or estimated useful lives. The determinants used for this evaluation include management’s estimate
of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the
strategic significance of the assets to the Company’s business objectives.
Definite-lived intangible assets are amortized
on a straight-line basis over the estimated periods benefited and are reviewed when appropriate for possible impairment.
Basic and Diluted Earnings (Loss) Per Common Share
The Company computes earnings (loss) per
share in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”), ASC 260, “Earnings
per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face
of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the
weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential
common shares outstanding during the period using the treasury stock method and convertible note and preferred stock using the
if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their
effect is anti-dilutive.
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, Revenue from Contracts with Customers (“ASC 606”) which was adopted on January 1, 2018.
According to ASC 606, the Company recognizes
revenue 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.
|
The Company used a practical expedient
available under ASC 606-10-65-1(f)4 that permits it to consider the aggregate effect of all contract modifications that occurred
before the beginning of the earliest period presented when identifying satisfied and unsatisfied performance obligations, transaction
price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
The Company has elected to treat shipping
and handling activities as cost of sales. Additionally, the Company has elected to record revenue net of sales and other similar
taxes.
Concentration of Credit Risk
Financial instruments that potentially
expose the Company to concentrations of risk consist primarily of cash and cash equivalents 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 December 31, 2020 and December 31, 2019, the Company had no amounts in excess of the FDIC insurance limit.
Fair Value of Financial Instruments
and Fair Value Measurements
ASC 820, “Fair Value Measurements
and Disclosures”, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding
the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon
the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that
may be used to measure fair value:
Level 1 applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities
for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar
assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can
be derived principally from, or corroborated by, observable market data. If the asset or liability has a specified (contractual)
term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
The Company’s consolidated financial
instruments consist principally of cash, prepaid expenses, accounts payable, accrued liabilities, notes payable and related parties
payable. The Company believes that the recorded values of all the financial instruments approximate their current fair values because
of their nature and respective maturity dates or durations.
Income Taxes
The Company accounts for income taxes using
the asset and liability method in accordance with ASC 740, “Income Taxes”. The asset and liability method provide
that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between
the financial reporting and tax basis of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using the currently enacted tax rates and laws. The Company records a valuation allowance
to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company follows the provisions of ASC
740-10, “Accounting for Uncertain Income Tax Positions.” When tax returns are filed, it is highly certain that
some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance
of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be sustained upon examination, including
the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for
unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.
Convertible Debt and Convertible Preferred
Stock
When the Company issues convertible debt
or convertible preferred stock, it first evaluates the balance sheet classification of the convertible instrument in its entirety
to determine whether the instrument should be classified as a liability under ASC 480, Distinguishing Liabilities from Equity,
and second whether the conversion feature should be accounted for separately from the host instrument. A conversion feature of
a convertible debt instrument or certain convertible preferred stock would be separated from the convertible instrument and classified
as a derivative liability if the conversion feature, were it a standalone instrument, meets the definition of an “embedded
derivative” in ASC 815, Derivatives and Hedging. Generally, characteristics that require derivative treatment include,
among others, when the conversion feature is not indexed to the Company’s equity, as defined in ASC 815-40, or when it must
be settled either in cash or by issuing stock that is readily convertible to cash. When a conversion feature meets the definition
of an embedded derivative, it would be separated from the host instrument and classified as a derivative liability carried on the
consolidated balance sheet at fair value, with any changes in its fair value recognized currently in the consolidated statements
of operations.
If a conversion feature does not meet the
conditions to be separated and accounted for as an embedded derivative liability, the Company then determines whether the conversion
feature is “beneficial”. A conversion feature would be considered beneficial if the conversion feature is “in
the money” when the host instrument is issued or, under certain circumstances, later. If convertible debt contains a beneficial
conversion feature (“BCF”), the amount of the amount of the proceeds allocated to the BCF reduces the balance of the
convertible debt, creating a discount which is amortized over the debt’s term to interest expense in the consolidated statements
of operations.
When a convertible preferred stock contains
a BCF, after allocating the proceeds to the BCF, the resulting discount is either amortized over the period beginning when the
convertible preferred stock is issued up to the earliest date the conversion feature may be exercised, or if the convertible preferred
stock is immediately exercisable, the discount is fully amortized at the date of issuance. The amortization is recorded similar
to a dividend.
Convertible debt is accounted for under
the ASC 470-20, Debt – Debt with Conversion and Other Options.
Recent Accounting Pronouncements
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.
In August 2020, the FASB issued 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, which simplifies
accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain
settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted
earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning
after December 15, 2023, although early adoption is permitted. The Company is in the process of evaluating the impact of this new
guidance on its financial statements.
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. 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.
NOTE 3 - INTANGIBLE ASSETS
The Company’s intangible assets comprise
of intellectual property revolving around their field tests, sensor integrations, and board designs. Intangible assets, net of
amortization at December 31, 2020 and 2019 amounted to $347,856 and $397,492, respectively.
|
|
December 31,2020
|
|
|
December 31,2019
|
|
Intangible Assets
|
|
$
|
495,000
|
|
|
$
|
495,000
|
|
Accumulated amortization
|
|
|
(147,144
|
)
|
|
|
(97,508
|
)
|
Intangible Assets, net
|
|
$
|
347,856
|
|
|
$
|
397,492
|
|
At December 31, 2020 and 2019, respectively,
the Company determined that none of its intangible assets were impaired. Amortizable intangible assets are amortized using the
straight-line method over their estimated useful lives of ten years. Amortization expense of finite-lived intangibles was $49,636
and $49,500 for the years ended December 31, 2020 and 2019, respectively.
The following table summarizes the Company’s
estimated future amortization expense of intangible assets with finite lives as of December 31, 2020:
|
|
Amortization expense
|
|
2021
|
|
$
|
49,500
|
|
2022
|
|
|
49,500
|
|
2023
|
|
|
49,500
|
|
2024
|
|
|
49,500
|
|
Thereafter
|
|
|
149,856
|
|
Total
|
|
$
|
347,856
|
|
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In prior years, the Company entered into
consulting agreements with one director, three executive officers, and one engineer of the Company, which include commitments to
issue shares of the Company’s common stock from the Company’s Stock Incentive Plans. Two agreements have been terminated
and shares have been issued in conjunction with the related separation agreements, but the vested shares related to the remaining
consulting agreements with the three executive officers have not yet been issued in full, and therefore, remain a liability. According
to the remaining three agreements, 1,319,000 shares vested in 2019, 2,400,000 shares vested in 2020, and 3,600,000 shares of common
stock will vest in 2021.
In the event that the agreement is terminated
by either party pursuant to the terms of the agreement, all unvested shares which have been earned shall vest on a pro-rata basis
as of the effective date of the termination of the agreement and all unearned, unvested shares shall be terminated.
The value of the shares was assigned at
fair market value on the effective date of the agreement and the pro-rata number of shares earned was calculated and amortized
at the end of each reporting period. The Company has accrued $730,836 and $1,102,645 in shares payable in conjunction with these
agreements as of December 31, 2020 and 2019, respectively. A summary of these agreements is as follows.
On March 11, 2019, the Company’s
Board of Directors approved the Consulting Agreement dated effective June 4, 2018 with its CEO. The term of the agreement is for
three years beginning as of the effective date, unless terminated earlier pursuant to the agreement and is automatically renewable
for one-year terms upon the consent of the parties. The services to be provided by the CEO pursuant to the agreement are those
customary for the position in which the CEO is serving. As of the effective date, the Company shall issue to the CEO an aggregate
of 3,060,000 shares of the Company’s common stock which vest as follows:
1.
560,000 shares on the first-year anniversary of the effective date;
2.
1,000,000 shares on the second-year anniversary of the effective date; and
3.
1,500,000 shares on the third-year anniversary of the effective date.
The shares are issued under the 2019 Stock
Incentive Plan. Vesting of the shares is subject to acceleration of vesting upon the occurrence of certain events such as a Change
of Control (as defined in the agreement) or the listing of the Company’s common stock on a senior exchange. As of December
31, 2020 and 2019, 0 shares and 560,000 shares had vested, respectively, but were not yet issued.
As part of the Consulting Agreement dated
June 4, 2018 the CEO shall also receive a monthly fee of $15,000 which accrues unless converted into shares of common stock of
the Company at a conversion rate specified in the agreement. Until the Company closes a minimum $500,000 capital raise, the monthly
fee accrues and, upon the closing of such a capital raise, $5,000 of the monthly fee will be paid to the CEO in cash and the remainder
will continue to accrue. Upon the closing of a capital raise of at least $2,000,000, the entire monthly fee will be paid to the
CEO in cash and all accrued and unpaid monthly fees will be paid by the Company within one year of the closing of such a capital
raise.
On June 11, 2020, the Company entered into
a Debt Forgiveness Agreement with the CEO, pursuant to which the CEO forgave $185,000 of accrued and unpaid consulting fees owed
to him pursuant to his consulting agreement with the Company. On June 12, 2020, the Company entered into an amendment effective
January 1, 2020 to the Consulting Agreement with the CEO. The amendment stated that from January 1, 2020 until April 23, 2020,
the Consultant shall be paid an hourly wage of $12.75 per hour for services performed. From April 24, 2020 onward, the Consultant
shall be paid an hourly wage of $48.08 an hour for services performed. Fees may accrue at the discretion of management. At any
time, the Consultant shall have the right to convert any accrued and unpaid fees into shares of Common Stock of the Company. The
conversion price shall equal 90% multiplied by the market price (representing a discount rate of 10%). As of December 31, 2020
and 2019, the Company recorded $138,602 and $117,001 is in salaries payable to related parties due and payable to the CEO, respectively.
On March 11, 2019, the Company’s
Board of Directors approved the Consulting Agreement dated effective October 1, 2018 with its COO. The term of the agreement is
for three years beginning as of the effective date, unless terminated earlier pursuant to the agreement and is automatically renewable
for one-year terms upon the consent of the parties. The services to be provided by the COO pursuant to the agreement are those
customary for the position in which the COO is serving. As of the effective date, the Company shall issue to the COO an aggregate
of 2,409,000 shares of the Company’s common stock which vest as follows:
|
1.
|
409,000 shares on the first-year anniversary of the effective
date;
|
|
2.
|
800,000 shares on the second-year anniversary of the effective
date; and
|
|
3.
|
1,200,000 shares on the third-year anniversary of the effective
date.
|
The shares are issued under the 2017 Stock
Incentive Plan. Vesting of the shares is subject to acceleration of vesting upon the occurrence of certain events such as a Change
of Control (as defined in the agreement) or the listing of the Company’s common stock on a senior exchange. As of December
31, 2020 and 2019, 0 shares and 409,000 shares, respectively, had vested, but were not yet issued.
As part of the Consulting Agreement dated
October 1, 2018 the COO shall receive a monthly fee of $12,750 which accrues unless converted into shares of common stock of the
Company at a conversion rate specified in the agreement. Until the Company closes a minimum $500,000 capital raise, the monthly
fee accrues and, upon the closing of such a capital raise, $4,250 of the monthly fee will be paid to the COO in cash and the remainder
will continue to accrue. Upon the closing of a capital raise of at least $2,000,000, the entire monthly fee will be paid to the
COO in cash and all accrued and unpaid monthly fees will be paid by the Company within one year of the closing of such a capital
raise.
On June 11, 2020, the Company entered into
a Debt Forgiveness Agreement with the COO, pursuant to which the COO forgave $103,250 of accrued and unpaid consulting fees owed
to her pursuant to her consulting agreement with the Company. On June 12, 2020, the Company entered into an amendment effective
January 1, 2020 to the Consulting Agreement with the COO. The amendment stated that from January 1, 2020 until April 23, 2020,
the Consultant shall be paid an hourly wage of $12.75 per hour for services performed. From April 24, 2020 onward, the Consultant
shall be paid an hourly wage of $48.08 an hour for services performed. Fees may accrue at the discretion of management. At any
time, the Consultant shall have the right to convert any accrued and unpaid fees into shares of Common Stock of the Company. The
conversion price shall equal 90% multiplied by the market price (representing a discount rate of 10%). As of December 31, 2020
and 2019, the Company recorded $139,078 and $118,000 is in salaries payable to related parties due and payable to the COO, respectively.
On March 11, 2019, the Company’s
Board of Directors approved the Amended and Restated Consulting Agreement dated effective April 23, 2018 with its CTO. The term
of the agreement is for three years beginning as of the effective date, unless terminated earlier pursuant to the agreement and
is automatically renewable for one-year terms upon the consent of the parties. The services to be provided by the CTO pursuant
to the agreement are those customary for the position in which the CTO is serving. As of the effective date, the Company shall
issue to the CTO an aggregate of 1,800,000 shares of the Company’s common stock which vest as follows:
|
1.
|
300,000 shares on the first-year anniversary of the effective
date;
|
|
2.
|
600,000 shares on the second-year anniversary of the effective
date; and
|
|
3.
|
900,000 shares on the third-year anniversary of the effective
date.
|
As of December 31, 2020 and 2019, 0 shares
and 300,000 shares had vested, respectively, but were not yet issued.
As part of the Amended and Restated Consulting
Agreement dated effective April 23, 2018 the CTO shall receive a monthly fee of $9,375 which accrues unless converted into shares
of common stock of the Company at a conversion rate specified in the agreement. Until the Company closes a minimum $500,000 capital
raise, the monthly fee accrues and, upon the closing of such a capital raise, $3,125 of the monthly fee will be paid to the CTO
in cash and the remainder will continue to accrue. Upon the closing of a capital raise of at least $2,000,000, the entire monthly
fee will be paid to the CTO in cash and all accrued and unpaid monthly fees will be paid by the Company within one year of the
closing of such a capital raise.
On June 11, 2020, the Company entered into
a Debt Forgiveness Agreement with the CTO pursuant to which the CTO forgave $82,475 of accrued and unpaid consulting fees owed
to him pursuant to his consulting agreement with the Company. On June 12, 2020, the Company entered into an amendment effective
January 1, 2020 to the Consulting Agreement with the CTO. The amendment stated that from January 1, 2020 until April 23, 2020,
the Consultant shall be paid an hourly wage of $12.75 per hour for services performed. From April 24, 2020 onward, the Consultant
shall be paid an hourly wage of $48.08 an hour for services performed. Fees may accrue at the discretion of management. At any
time, the Consultant shall have the right to convert any accrued and unpaid fees into shares of Common Stock of the Company. The
conversion price shall equal 90% multiplied by the market price (representing a discount rate of 10%). As of December 31, 2020
and 2019, the Company recorded $129,590 and $108,226 in salaries payable to related parties due and payable to the CTO, respectively.
NOTE 5 -
CONVERTIBLE NOTES PAYABLE
The following table summarizes the outstanding
balance of convertible notes payable, interest and conversion rates as of December 31, 2020 and December 31, 2019, respectively.
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
A. Convertible note payable to an investor with interest at 12% per annum, convertible at any time into shares of common stock at $0.10 per share. Interest is payable quarterly with the balance of principal and interest due on maturity on March 1, 2021. The note is secured by substantially all the assets of the Company.
|
|
$
|
600,000
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
|
|
|
B. Convertible note payable to an investor with interest at 5% per annum, convertible at any time into shares of common stock at $0.00084 per share. Interest is payable annually with the balance of principal and interest due on maturity on March 1, 2021. The note is secured by substantially all the assets of the Company.
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
C. Convertible note payable to an investor with interest at 12% per annum. $10,000 of the principal is currently convertible into shares of common stock at $0.01 per share, with remaining principal and interest convertible into shares of common stock at $0.10 per share. Interest is payable quarterly with the balance of principal and interest due on maturity on March 1, 2021. The note is secured by substantially all the assets of the Company.
|
|
|
60,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
D. Convertible note payable to an investor with interest at 12% per annum. $10,000 of the principal is currently convertible into shares of common stock at $0.01 per share, with remaining principal and interest convertible into shares of common stock at $0.10 per share. Interest is payable quarterly with the balance of principal and interest due on maturity on March 1, 2021. The note is secured by substantially all the assets of the Company.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
E. Convertible note payable to a related party with interest at 12% per annum, convertible at any time into shares of common stock at $0.00084 per share. Interest is payable quarterly with the balance of principal and interest due on maturity on August 2, 2021. The note is secured by substantially all the assets of the Company.
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
F. Convertible note payable to an investor with interest at 10% per annum, convertible after 180 days from issuance into shares of common stock at $0.20 per share, or 60% of the lowest market price in the preceding 25 days upon an event of default. Principal and interest due on maturity on March 6, 2020.
|
|
|
–
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
G. Convertible note payable to an investor with interest at 10% per annum, convertible at any time into shares of common stock at $0.01 per share. Principal and interest due on maturity on April 29, 2021.
|
|
|
100,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
H.
Convertible note payable to an investor with interest at 10% per annum, convertible at any time into shares of common stock
at $0.0099 per share. Note was issued as payment for future fees to be incurred under the related Equity Financing Agreement.
Principal and interest due on maturity on April 29, 2021.
|
|
|
75,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,065,000
|
|
|
|
815,000
|
|
Less unamortized discount
|
|
|
(111,781
|
)
|
|
|
(108,492
|
)
|
Net balance
|
|
|
953,219
|
|
|
|
706,508
|
|
Less current portion
|
|
|
(953,219
|
)
|
|
|
(706,508
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
A.
|
January 18, 2018 Convertible Note and Warrants
|
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 of its 12% Senior Secured Convertible
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 matured on January
15, 2020.
The notes are governed by a Securities
Purchase Agreement and are secured by all 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. 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
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 was limited to the proceeds received of $500,000 and was amortized to interest expense
using the effective interest method over the term of the note.
On March 7, 2019, the Board of Directors
of the Company approved Amendment No. 1 to the 12% Senior Secured Convertible Promissory Note and the Warrant Agreement, each issued
January 22, 2018, respectively, to the note holder. The amendments (i) extend the maturity date of the note to March 1, 2021 and
extend the term of the warrants to March 6, 2024, (ii) lower the conversion price of the note and the exercise price of the warrants
to $0.20 and $0.30, respectively, and (iii) add an adjustment to the conversion and exercise price of the note and warrants, respectively,
in the event the Company does not achieve certain milestones during calendar 2019. The fair value of the warrants is $25,162 determined
using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free interest rate of
2.6%; and volatility of 127%. The effective conversion rate resulted in a discount of $23,956 and is amortized to interest expense
using the effective interest method over the term of the note. The Company recognized a loss on extinguishment of debt of $221,232
related to the decrease in conversion price.
On January 1, 2020, the Company failed
to achieve certain milestones during calendar 2019 and, as such, the conversion/exercise prices of the note and warrants were adjusted
to $0.10 and $0.15, respectively. This resulted in an adjustment to retained earnings of $201 based on the change in fair value.
Effective January 15, 2020, the Company
went into technical default of the note agreement as a result of not making the December 31, 2019 interest payment within the required
period. As a result, the principal was increased by 20%, or $100,000, and the Company was required to issue an additional 384,615
warrants at the then effective exercise price of $0.15 per share. The fair value of the warrants was $44,297, determined using
the Black-Scholes valuation model with the following assumptions: expected term of 4.14 years; risk free interest rate of 1.6%;
and volatility of 243%. Due to the default, this value was immediately expensed.
As of March 31, 2020, the exercise price
of the warrants was further adjusted to $0.00084 as a result of the down-round features being triggered. This resulted in an adjustment
to retained earnings of $71 based on the change in fair value.
As of December 31, 2020, the Company has
accrued interest related to this note of $85,824. The Company amortized the discount to interest expense $12,060 and $9,918 for
the years ended December 31, 2020 and 2019, respectively. The Company recorded interest expense of $70,701 and $15,123 for the
years ended December 31, 2020 and 2019, respectively. The unpaid principal balance of the note is $600,000 as of December 31, 2020,
which includes the default penalty noted above, and the remaining unamortized discount is $1,978. The conversion shares totaled
6,858,244 shares of common stock, upon conversion of the total principal and accrued interest of $685,824, as of December 31, 2020.
On January 8, 2021, the noteholder agreed
to extend the maturity date of the Senior Secured Convertible Promissory Note to March 1, 2022 in exchange for the reduction of
the conversion price to $0.01 per share, and all prior Events of Default (as defined in the Notes) including penalties, were waived,
and all future Events of Default (as defined in the Notes) pertaining to the future payment of interest were waived through maturity
(Note 11).
|
B.
|
January 2019 Convertible Note and Warrants
|
On January 22, 2019, the Company entered
into a Securities Purchase Agreement and Security and Pledge Agreement with a single investor and issued a Secured Convertible
Promissory Note to the investor in the principal amount of $55,000. In addition to the note, the Company issued to the investor
36,667 warrants. Each warrant is immediately exercisable at $0.75 per share, contains certain anti-dilution down-round features
and expires on January 22, 2024. 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%. The warrants are considered equity instruments based on
the Company’s 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
$3,217 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 2.6%; and volatility of 128%. The effective conversion rate resulted in a discount of $3,039 and is amortized
to interest expense using the effective interest method over the term of the note.
As of March 31, 2020, the exercise price
of the warrants was adjusted to $0.00084 as a result of the down-round features being triggered. This resulted in an adjustment
to retained earnings of $7 based on the change in fair value.
The unpaid principal balance of the note
and accrued interest is $55,000 and $5,342, respectively, as of December 31, 2020, and the remaining unamortized discount is $0.
The Company recorded interest expense of $2,758 and $2,584 for the years ended December 31, 2020 and 2019, respectively. The Company
amortized the discount to interest expense $194 and $2,845 for the year ended December 31, 2020 and 2019, respectively. This note
and accrued interest is due to a related party. On June 12, 2020, this note was amended to extend the maturity date to March 1,
2021, and all events of default were waived. The conversion shares totaled 75,426,918 shares of common stock upon the conversion
of the total principal and accrued interest of $60,342 as of December 31, 2020.
On February 4, 2021, the Secured Convertible
Promissory Noteholder – B, converted the principal balance of the Secured Convertible Promissory Note of $50,000 into 5,000,000
shares of common stock of the Company (Note 11).
C and D. March 2019 Convertible
Note and Warrants On March 7, 2019, the Board of Directors of the Company approved a non-public offering of up to $500,000
aggregate principal amount of its 12% Senior Secured Convertible 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 $0.20 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 March 1, 2021. The conversion price of the notes is also subject to adjustments
if the Company does not achieve certain milestones during the calendar year 2019.
The notes are governed by a Securities
Purchase Agreement and are secured by all the assets of the Company pursuant to a Security and Pledge Agreement. Funding is subject
to the occurrence of certain milestones, as stated in the SPA. 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. Each warrant is immediately exercisable
at $0.30 per share and expires five years from the issuance date. The exercise price of the warrants is also subject to adjustments
if the Company does not achieve certain milestones during the calendar year 2019.
On March 6, 2019, the Company entered into
SPAs and Security and Pledge Agreements with its first two investors in the offering and issued notes to the investors in the aggregate
principal amount of $100,000. Subscription funds were received by the Company from the investors on March 6, 2019. In addition
to the notes, the Company issued to the investors an aggregate of 250,000 warrants. Each warrant is immediately exercisable at
$0.30 per share, contains certain anti-dilution down-round features and expires on March 6, 2024. 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%. The warrants are considered equity instruments based on the Company’s adoption of ASU 2017-11.
The proceeds received upon issuing the
notes and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$12,646 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 2.5%; and volatility of 127%. The effective conversion rate resulted in a discount of $11,226 and is amortized
to interest expense using the effective interest method over the term of the notes.
On January 1, 2020, the Company failed
to achieve certain milestones during calendar 2019 and, as such, the conversion/exercise prices of the note and warrants were adjusted
to $0.10 and $0.15, respectively. This resulted in an adjustment to retained earnings of $131 based on the change in fair value.
Effective January 15, 2020, the Company
went into technical default of the note agreement as a result of not making the December 31, 2019 interest payment within the required
period. As a result, the principal was increased by 20%, or $20,000, in aggregate, and the Company was required to issue an additional
250,000 warrants at the then effective exercise price of $0.15 per share. The fair value of the warrants was $28,793, determined
using the Black-Scholes valuation model with the following assumptions: expected term of 4.14 years; risk free interest rate of
1.6%; and volatility of 243%. Due to the default, this value was immediately expensed.
As of March 31, 2020, the exercise price
of the warrants was further adjusted to $0.00084 as a result of the down-round features being triggered. This resulted in an adjustment
to retained earnings of $46 based on the change in fair value.
On September 21, 2020, these notes were
amended to reduce the conversion price of an aggregate of $20,000 of the total outstanding principal value of $120,000 from $0.10
to $0.01 per share. The remaining aggregate principal of $100,000 remains convertible at $0.10 per share. This modification to
the notes was considered substantial (i. e. the change in fair value of the conversion feature was greater than 10% of the carrying
value of the debt). As a result, the modification was accounted for as an extinguishment of debt, resulting in the recognition
of an extinguishment loss of $18,360 for the year ended December 31, 2020.
On October 15, 2020, one of the two investors
converted $10,000 of the principal note amount into 1,000,000 shares of common stock.
As of December 31, 2020, the unpaid principal
balance of the notes is $110,000, which includes the default penalty noted above, accrued interest is $14,632 and the balance of
the unamortized discount is $0. The Company recorded interest expense of $9,828 and $4,096 for the years ended December 31, 2020
and 2019, respectively. The Company amortized discount to interest expense of $2,037 and $9,188 for the years ended December 31,
2020 and 2019, respectively. The conversion shares totaled 2,149,015 shares of common stock upon conversion of the total principal
and accrued interest of $124,632 as of December 31, 2020.
On January 22, 2018, the Company issued
Convertible Promissory Notes and Warrants in the principal amounts of $50,000 to a Convertible Promissory Noteholder – C,
and $50,000 to a Convertible Promissory Noteholder - D, respectively, amending to reduce the conversion price for all principal
and accrued interest to $0.01 per share. In exchange for the reduction of the conversion price, both the Convertible Promissory
Noteholders agreed to amend the maturity dates to March 1, 2022, and all prior Events of Default (as defined in the Notes) including
penalties, were waived, and all future Events of Default (as defined in the Notes) pertaining to the future payment of interest
were waived through maturity (Note 11).
On February 3, 2021, the Convertible Promissory
Noteholder – C, converted the principal balance of its convertible promissory note of $40,000 and accrued interest of $6,510
into 4,650,978 shares of common stock of the Company (Note 11).
|
E.
|
August 2019 Convertible Note and Warrants
|
On August 2, 2019, the Company entered
into a Securities Purchase Agreement with an investor for the purchase of a 12% Secured Convertible Note in the principal amount
of up to $125,000. The note is convertible, in whole or in part, into shares of the Company’s common stock, at any time at
a rate of $0.08 per share with fractions rounded up to the nearest whole share, unless paid in cash at the Company’s election.
The note bears interest at a rate of 12% per annum and interest payments will be made on a quarterly basis. The note matures August
2, 2021. $75,000, $25,000, and $25,000 subscription funds were received by the Company from the investor on August 2, 2019, September
6, 2019, and October 16, 2019, respectively. In addition to the note, the Company issued to the investor an aggregate of 781,250
warrants. The warrants are considered equity instruments based on the Company’s 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
$71,035 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 1.6%; and volatility of 132%. The effective conversion rate resulted in a discount of $104,941 and is amortized
to interest expense using the effective interest method over the term of the note.
Effective January 30, 2020, the Company
went into technical default of the note agreement as a result of not making the December 31, 2019 interest payment within the required
period. As a result, the Company was required to issue an additional 781,250 warrants at the then effective exercise price of $0.12
per share. The fair value of the warrants was $90,342, determined using the Black-Scholes valuation model with the following assumptions:
expected term of 4.76 years; risk free interest rate of 1.6%; and volatility of 233%. Due to the default, this value was immediately
expensed.
As of March 31, 2020, the exercise price
of the warrants was adjusted to $0.00084 as a result of the down-round features being triggered. This resulted in an adjustment
to retained earnings of $70 based on the change in fair value.
As of December 31, 2020, the unpaid principal
balance of the notes was $125,000, the accrued interest is $18,690 and the balance of the unamortized discount is $34,104. The
Company recorded interest expense of $15,041 and $3,740 for the years ended December 31, 2020 and 2019, respectively. The Company
amortized the debt discount to interest expense of $52,539 and $18,295 for the years ended December 31, 2020 and 2019, respectively. This
note is payable to a related party. The conversion shares totaled 171,059,638 shares of common stock upon conversion of the total
principal and accrued interest of $143,690 as of December 31, 2020.
|
F.
|
August 29, 2019 Convertible Note and Warrants
|
On August 29, 2019, the Company entered
into a Securities Purchase Agreement with an investor for the purchase of a Convertible Promissory Note in the principal amount
of up to $105,000. The Note is not convertible within 180 days of receipt of funds for the first closing and is then convertible,
in whole or in part, into shares of the Company’s Common Stock at a rate of $0.20 per share. Upon an “Event of Default,”
as defined in the note, the conversion price becomes the “Variable Conversion Price” which is defined in the note as
“60% multiplied by the Marked Price.” “Market Price” is defined in the note as “the lowest one (1)
Trading Price (as defined in the note) for the common stock during the twenty-five (25) Trading Day period ending on the last complete
Trading Day prior to the Conversion Date.” The note bears interest at a rate of 10% per annum with principal and accrued
and unpaid interest payable six months from the receipt of funds for each tranche under the note. Subscription funds of $30,000
were received by the Company from the investor on September 6, 2019 for which the Company paid a purchase price of $35,000. In
addition to the notes, the Company issued to the investor an aggregate of 175,000 warrants. The warrants are considered equity
instruments based on the Company’s adoption of ASU 2017-11.
The proceeds received upon issuing the
notes and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$15,868 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 1.4%; and volatility of 132%. The effective conversion rate resulted in a discount of $10,378 and is amortized
to interest expense using the effective interest method over the term of the notes.
As of March 31, 2020, the exercise price
of the warrants was adjusted to $0.00084 and the number of warrants was increased to 41,666,667 as a result of the down-round features
being triggered. This resulted in an adjustment to retained earnings of $203,002 based on the change in fair value.
During the three months ended March 31,
2020, the note went into default upon passing its maturity date. As a result, a default penalty of $26,250 was recorded and added
to the principal balance. In addition, the conversion price became the “Variable Conversion Price” as defined above.
This note became convertible into a variable number of shares of common stock for which there is no floor to the number of shares
that might be required to be issued. Based on the requirements of ASC 815, Derivatives and Hedging, the conversion feature represents
an embedded derivative that is required to be bifurcated and accounted for as a separate derivative liability. The derivative liability
is originally recorded at its estimated fair value and is required to be revalued at each conversion event and reporting period.
Changes in the derivative liability fair value are reported in operating results each reporting period.
The
Company valued the conversion feature on the date of default resulting in initial liability of $159,888, which was immediately
expensed as loss on derivative. At each conversion date, the Company recalculated the value of the derivative liability associated
with the convertible note recording a gain (loss) in connection with the change in fair market value. In addition, the pro-rata
portion of the derivative liability as compared to the portion of the convertible note converted was reclassed to additional paid-in
capital. For the year ended December 31, 2020, the Company recorded a loss of $114,051 related to the change of fair value of
the derivative liability to additional paid-in capital.
Upon issuance and at each conversion, reporting
period date, and extinguishment date, the Company valued the conversion feature using the Black-Scholes option pricing model with
the following assumptions: conversion prices ranging from $0.0008 to $0.0073, the closing stock price of the Company's common stock
on the date of valuation ranging from $0.0022 to $0.021, an expected dividend yield of 0%, expected volatility ranging from 459%
to 574%, risk-free interest rates ranging from 0.11% to 0.39%, and an expected term of 0.25 years.
On May 20, 2020, the second closing of
the Convertible Promissory Note occurred pursuant to which the Company paid a purchase price of $35,000 and received gross proceeds
of $29,300. In addition to the issuance of the note, the Company issued to the holder warrants to purchase one share of the Company’s
Common Stock for 100% of the number of shares of Common Stock issuable upon conversion of the funds received in the second closing.
Each warrant is immediately exercisable at $0.20 per share, unless adjusted, and expires on May 20, 2025.
On July 29, 2020, the Company entered into
a Settlement and Mutual Release Agreement with the lender pursuant to which the Company paid $100,000 to the lender in exchange
for the full extinguishment of the remaining principal amount and all accrued and unpaid interest and penalties associated with
the Convertible Promissory Note dated August 29, 2019 issued to the lender (approximately $62,000). All remaining unexercised warrants
to purchase the Company’s Common Stock issued to the lender were also extinguished pursuant to the Settlement Agreement.
Upon receipt of the Settlement Amount by the lender, the lender agreed to release all reserved shares of the Company’s Common
Stock. The Settlement Agreement also provides for a full mutual release of the parties. The settlement payment was allocated to
the extinguished debt and warrants based on their relative fair values. The difference in the settlement amount allocated to the
debt components, including the related derivative liability, and the actual value of the debt components of $2,155 was recorded
as a gain on extinguishment for the year ended December 31, 2020. The settlement amount allocated to the warrants of $1,609 was
recorded as a reduction to additional paid-in capital. In addition, the remaining unamortized discount was fully amortized to interest
expense upon the settlement.
The Company recorded amortization of debt
to interest expense of $39,572 and $25,484 for the years ended December 31, 2020 and 2019, leaving an unamortized debt balance
of $0 and $5,577 at December 31, 2020 and 2019, respectively. The Company recorded interest expense of $742 and $1,112 for the
years ended December 31, 2020 and 2019, respectively.
G
and H. July 2020 Equity Financing Arrangement
On July 29, 2020, the Company entered an
Equity Financing Agreement and Registration Rights Agreement with an investor, pursuant to which the investor agreed to purchase
up to $5,000,000 in shares of the Company’s Common Stock, from time to time over the course of 36 months after effectiveness
of a registration statement on Form S-1 of the underlying shares of Common Stock.
In connection with entering into the Equity
Financing Agreement, on July 29, 2020, the Company issued to the investor a Convertible Promissory Note in the principal amount
of $100,000 (the “$100k Note”). The $100k Note matures on April 29, 2021 upon which time all accrued and unpaid interest
will be due and payable. Interest accrues on the $100k Note at 10% per annum based on a 360-day year. The $100k Note is convertible
at any time, upon the election of the investor, into shares of the Company’s Common Stock at $0.01 per share. The $100k Note
is subject to various “Events of Default,” which are disclosed in the $100k Note. Upon the occurrence of an uncured
“Event of Default,” the $100k Note will become immediately due and payable and will be subject to penalties and adjustments
to the conversion price (the lesser of: (a) $0.01 or (b) 70% multiplied by the Market Price (as defined in the $100k Note) (representing
a discount rate of 30%). Upon the issuance of the $100k Note, the Company has agreed to reserve one times the number of shares
of Common Stock into which the $100k Note is convertible and, 101 days from the issuance of the $100k Note, the Company will reserve
two-and-a-half times the number of shares of Common Stock into which the $100k Note is convertible. Within three Trading Days (as
defined in the $100k Note) of the sale by the investor of all of the Common Stock issued upon the conversion of the $100k Note,
the Company is required to issue to investor a number of shares of Common Stock priced at the lowest traded price for the relevant
Trading Day, which represents the difference between $130,000 and the net proceeds to the investor from the sale of aggregate Common
Stock issued upon the conversion of the $100k Note.
Also, in connection with entering into
the Equity Financing Agreement, on July 29, 2020, the Company issued to the investor a Convertible Promissory Note in the principal
amount of $75,000 (the “$75k Note”). No proceeds were received for this note as it was issued to offset future
transaction costs related to any future issuances of equity under the agreement. As a result, the amount has been capitalized as
deferred offering costs in the accompanying balance sheet and will be offset against any future proceeds received under the agreement.
The $75k Note matures on April 29, 2021 upon which time all accrued and unpaid interest will be due and payable. Interest accrues
on the $75k Note at 10% per annum based on a 360-day year. The $75k Note is convertible at any time, upon the election of the investor,
into shares of the Company’s Common Stock at $0.0099 per share. The $75k Note is subject to various “Events of Default,”
which are disclosed in the $75k Note. Upon the occurrence of an uncured “Event of Default,” the $75k Note will become
immediately due and payable (multiplied by 130% of the unpaid principal and accrued and unpaid interest) and will be subject to
penalties and adjustments to the conversion price (the lesser of: (a) $0.01 or (b) 70% multiplied by the Market Price (as defined
in the $75k Note) (representing a discount rate of 30%). Upon the issuance of the $75k Note, the Company has agreed to reserve
one times the number of shares of Common Stock into which the $75k Note is convertible and, 101 days from the issuance of the $75k
Note, the Company will reserve two-and-a-half times the number of shares of Common Stock into which the $75k Note is convertible.
As of December 31, 2020, the unpaid principal
balance of these notes is $175,000, and the accrued interest is $5,226. The Company recorded interest expense of $5,226 for the
year ended December 31, 2020. The conversion shares totaled 18,100,623 shares of common stock upon conversion of the total principal
and accrued interest of $180,226 as of December 31, 2020.
On February 1, 2021, the Convertible Promissory
Noteholder – G, converted its principal balance of a convertible promissory note of $66,833 and accrued interest of $5,177,
into 7,200,000 shares of common stock of the Company (Note 11).
NOTE 6 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation
of basic and diluted net loss per share of common stock for the three and nine months ended December 31, 2020 and 2019:
|
|
Year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to common stockholders (basic)
|
|
$
|
(2,236,774
|
)
|
|
$
|
(1,887,287
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per common share, basic and diluted
|
|
|
110,119,684
|
|
|
|
42,334,210
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders, basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
Basic net loss per share is calculated
by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share
is computed by dividing net loss by the weighted-average number of common shares and common share equivalents outstanding for the
period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities
which include stock options, convertible debt, convertible preferred stock and common stock warrants have been excluded from the
computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in
the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.
The following outstanding common stock
equivalents have been excluded from diluted net loss per common share for the years ended December 31, 2020 and 2019, respectively,
because their inclusion would be anti-dilutive:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants to purchase common stock
|
|
|
2,868,397
|
|
|
|
1,627,532
|
|
Potentially issuable shares related to convertible notes payable
|
|
|
273,594,437
|
|
|
|
4,787,447
|
|
Potentially issuable vested shares to directors and officers
|
|
|
2,400,000
|
|
|
|
1,269,000
|
|
Potentially issuable unvested shares to officers
|
|
|
3,600,000
|
|
|
|
6,000,000
|
|
Total anti-dilutive common stock equivalents
|
|
|
282,462,834
|
|
|
|
13,683,979
|
|
NOTE 7 - PAYCHECK PROTECTION PROGRAM
LOAN
The Company applied for and received funding
from the Payroll Protection Program (the “PPP Loan”) in the amount of $36,700. under the Coronavirus Aid, Relief
and Economic Security Act (the “CARES Act”). The PPP Loan matures on April 23, 2022 and bears interest
at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred for six months after the date of disbursement (subject
to further deferral pursuant to the terms of the Paycheck Protection Flexibility Act of 2020). The Promissory Note contains events
of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the use of PPP
Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements
set forth in the CARES Act.
NOTE 8 - RELATED PARTIES
At December 31, 2020 and 2019, the amount
due to two stockholders was $1,000 relating to depositing funds for opening bank accounts for the Company.
In January 2018, the Company entered into
a lease agreement with a stockholder of the Company and paid monthly installments of $2,000 which terminated on December 31, 2019.
The Company leases its current office facility on a month-to-month basis at a monthly rent of $250 starting January 1, 2020. For
the year ended December 31, 2020 and 2019, rent expense earned by the stockholder amounted to $3,000 and $24,000, respectively.
The Company has recorded $18,000 and $15,000 of rent payable to the stockholder in accounts payable as of December 31, 2020 and
2019, respectively.
The Company recorded professional fees
paid to officers and a director amounting to $7,182 and $0 for the year ended December 31, 2020 and 2019, respectively.
The Company awarded shares payable to officers
and a director valued at $728,892 and $726,900 for the years ended December 31, 2020 and 2019, respectively, pursuant to the terms
of an exchange agreement (Note 4). The officers and a director converted shares payable valued at $685,350 into 2,284,500 shares
of common stock, and shares payable valued at $415,350 into 15,845 shares of Series A Supervoting Convertible Preferred Stock during
the year ended December 31, 2020. No shares payable compensation was converted into shares of common stock or preferred stock during
the year ended December 31, 2019.
NOTE 9 - 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. The Company had 145,110,129
shares and 43,313,547 shares of common stock, and 25,845 shares and 0 shares of preferred stock, issued and outstanding as of December
31, 2020 and 2019, 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 ratably 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.
On December 14, 2017 (the “Effective
Date”), the Board of Directors of the Company approved the 2017 Stock Inventive Plan (the “2017 Plan”). 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.
On March 11, 2019 (the “Effective
Date”) the Board of Directors of the Company approved the 2019 Stock Incentive Plan (the “Plan”). Awards may
be made under the Plan for up to 5,000,000 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 Plan. No awards can
be granted under the 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.
Shares earned and issued related to the
consulting agreements are issued under the 2017 Stock Incentive Plan and the 2019 Stock Incentive Plan (Note 4). Vesting of the
shares is subject to acceleration of vesting upon the occurrence of certain events such as a Change of Control (as defined in the
agreement) or the listing of the Company’s common stock on a senior exchange.
A summary of the status of the Company’s
non-vested shares as December 31, 2020 and 2019 and changes during the year then ended, is presented below:
|
|
Non-vested Shares of Common Stock
|
|
|
Weighted Average Fair Value
|
|
Balance at December 31, 2018
|
|
|
7,469,000
|
|
|
$
|
0.30
|
|
Awarded
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(1,319,000
|
)
|
|
$
|
0.30
|
|
Forfeited
|
|
|
(150,000
|
)
|
|
|
–
|
|
Balance at December 31, 2019
|
|
|
6,000,000
|
|
|
$
|
0.30
|
|
Awarded
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(2,400,000
|
)
|
|
$
|
0.30
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Balance at December 31, 2020
|
|
|
3,600,000
|
|
|
$
|
0.30
|
|
On March 6, 2020, six months from receipt
of the first tranche of $35,000 under the Convertible Promissory Note issued on August 29, 2019, the Company failed to pay the
accrued and unpaid interest, which is considered an “Event of Default” under the note. As a result, the conversion
price became a “Variable Conversion Price.” Also, as a result of the occurrence of the “Event of Default,”
all amounts owing under the note became immediately due and payable and the Company became obligated to pay to the holder 175%
of the then outstanding balance of the note and all unpaid principal and unpaid interest accrued interest at 15%. During the year
ended December 31, 2020, the holder of the note had converted $35,000 of principal, $1,636 of interest, plus fees of $16,000 into
50,950,000 shares of Common Stock amounting to $52,636. Furthermore, the holder of the note exercised $35,000 worth of warrants
and $726 worth of fees into 40,802,082 shares of common stock.
On March 6, 2019, the Company executed
a Convertible Promissory Note of $50,000 payable to an investor, with interest at 12% per annum, and maturing on March 1, 2021.
On October 5, 2020, the investor converted $10,000 of the principal of the Convertible Promissory Note into 1,000,000 shares of
common stock at $0.01 per share, with remaining principal and interest convertible into shares of common stock at $0.10 per share.
Preferred
Stock
Series A Supervoting Convertible
Preferred Stock
On July 2, 2020, the Board of Directors
of the Corporation had authorized issuance of 15,600 shares of preferred stock, $0.001 par value per share, designated as Series
A Supervoting Preferred Stock.
Dividends: Initially, there will
be no dividends due or payable on the Series A Supervoting Preferred Stock. Any future terms with respect to dividends shall be
determined by the Board consistent with the Corporation’s Articles of Incorporation.
Liquidation and Redemption Rights:
Upon the occurrence of a Liquidation Event (as defined below), the holders of Series A Supervoting Preferred Stock are entitled
to receive net assets on a pro-rata basis. Each holder of Series A Supervoting Preferred Stock is entitled to receive ratably
any dividends declared by the Board, if any, out of funds legally available for the payment of dividends. Liquidation Event means
(i) the liquidation, dissolution or winding-up, whether voluntary or involuntary, of the corporation, (ii) the purchase or redemption
by the corporation of the shares of any class of stock or the merger or consolidation of the corporation with or into any other
corporation or corporations, or (iii) the sale, license or lease of all or substantially all, or any material part of, the Corporation’s
assets.
Conversion: Each holder of Series
A Supervoting Preferred Stock may voluntarily convert its shares into shares of common stock of the Corporation at a rate of 1:100
(as may be adjusted for any combinations or splits with respect to such shares).
Rank: All shares of the Series
A Supervoting Preferred Stock shall rank senior to the Corporation’s (A) common stock, par value $0.001 per share, and any
other class or series of capital stock of the Corporation hereafter created.
Voting Rights:
|
A.
|
If at least one share of Series A Super Voting Preferred Stock is issued
and outstanding, then the total aggregate issued shares of Series A Super Voting Preferred Stock at any given time, regardless
of their number, shall have voting rights equal to 20 times the sum of: i) the total number of shares of Common stock which are
issued and outstanding at the time of voting, plus ii) the total number of shares of all Series of Preferred stocks which are issued
and outstanding at the time of voting.
|
|
B.
|
Each individual share of Series A Super Voting Preferred Stock shall have
the voting rights equal to:
|
[twenty
times the sum of: {all shares of Common stock issued and outstanding at the time of voting + all shares of Series A and any newly
designated Preferred stock issued and outstanding at the time of voting}]
Divided by:
[the number
of shares of Series A Super Voting Preferred Stock issued and outstanding at the time of voting]
With
respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent,
the holders of the outstanding shares of Series A Super Voting Preferred Stock shall vote together
with the holders of Common Stock without regard to class, except as to those matters on which separate class voting is required
by applicable law or the Articles of Incorporation or Bylaws.
On November 9, 2020, the Company awarded
a director for services rendered, 1,000,000 shares of common stock valued at its fair value on the date of issuance of $8,600 and
concurrently, exchanged the common stock for Series A Supervoting Convertible Preferred Stock, and accrued interest of $168 relating
to the outstanding convertible note which was convertible into common stock, was converted into Series A Supervoting Convertible
Preferred Stock. The Company issued 12,000 shares of Series A Supervoting Convertible Preferred Stock in exchange of $8,768 of
services rendered and accrued interest for the year ended December 31, 2020.
On December 31, 2020, the officers and
a director converted $685,350 of their vested shares payable compensation costs into 2,284,500 shares of the Company’s common
stock and $415,350 of their unrecognized compensation costs into 13,845 shares of the Company’s Series A Convertible Preferred
Stock. As a result, total unrecognized compensation costs related to the non-vested share-based compensation arrangements awarded
to employees were $730,836 and $1,102,645 as of December 31, 2020 and 2019, respectively. That cost is expected to be recognized
over a weighted-average period of 0.5 years and 1.4 years as of December 31, 2020 and December 31, 2019, respectively. The total
fair value of shares compensation recognized during the year ended December 31, 2020 and 2019, was $728,892 and $685,416, respectively.
Series B Convertible Preferred Stock
Equity Financing
On November 16, 2020, the Board of Directors
of the Corporation had authorized issuance of up to 600 shares of preferred stock, $0.001 par value per share, designated as Series
B Convertible Preferred Stock. Each share of Preferred Stock shall have a par value
of $0.001 per share and a stated value of $1,200, subject to increase set forth in the Certificate of Designation.
Dividends: Each share of Series
B Convertible Preferred Stock shall be entitled to receive, and the Corporation shall pay, cumulative dividends of 12% per annum,
payable quarterly, beginning on the Original Issuance Date and ending on the date that such share of Series B Convertible Preferred
Share has been converted or redeemed (the “Dividend End Date”). Dividends may be paid in cash or in shares of Series
B Convertible Preferred Stock. From and after the initial Closing Date, in addition to the payment of dividends pursuant to Section
2(a), each Holder shall be entitled to receive, and the Corporation shall pay, dividends on shares of Series B Convertible Preferred
Stock equal to (on an as-if-converted-to-Common-Stock basis) and in the same form as dividends actually paid on shares of the common
stock when, as and if such dividends are paid on shares of the common stock. The Corporation shall pay no dividends on shares of
the common stock unless it simultaneously complies with the previous sentence.
Voting Rights: The Series B Convertible
Preferred Stock will vote together with the common stock on an as converted basis subject to the Beneficial Ownership Limitations
(not in excess of 4.99% conversion limitation). However, as long as any shares of Series B Convertible Preferred Stock are outstanding,
the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series
B Convertible Preferred Stock directly and/or indirectly (a) alter or change adversely the powers, preferences or rights given
to the Series b Convertible Preferred Stock or alter or amend this Certificate of Designation, (b) authorize or create any class
of stock ranking as to redemption or distribution of assets upon a Liquidation (as defined in Section 5) senior to, or otherwise
pari passu with, the Series b Convertible Preferred Stock or, authorize or create any class of stock ranking as to dividends senior
to, or otherwise pari passu with, the Series b Convertible Preferred Stock, (c) amend its Articles of Incorporation or other charter
documents in any manner that adversely affects any rights of the Holders, (d) increase the number of authorized shares of Series
B Convertible Preferred Stock, or (e) enter into any agreement with respect to any of the foregoing.
Liquidation: Upon any liquidation,
dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall
be entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to the Stated Value,
plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under this Certificate
of Designation, for each share of Series B Convertible Preferred Stock before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the Holders shall be ratably distributed among the Holders in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were paid in full.
Conversion: Each share of Series
B Convertible Preferred Stock shall be convertible, at any time and from time to time from and after the Original Issue Date at
the option of the Holder thereof, into that number of shares of common stock (subject to the limitations) determined by dividing
the Stated Value of such share of Series B Convertible Preferred Stock by the Conversion Price. The Conversion Price for the Series
b Convertible Preferred Stock shall be the amount equal to the lowest traded price for the Company’s common stock for the
fifteen (15) Trading Days immediately preceding the date of such conversion. All such foregoing determinations will be appropriately
adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately
decreases or increases the common stock during such measuring period. Following an event of default, the Conversion price shall
equal the lower of : (a) the then applicable Conversion Price; or (b) a price per share equaling 80% of the lowest traded price
for the Company’s common stock during the ten (10) trading days preceding the relevant Conversion.
Redemption: The Series B Convertible
Preferred Stock may be redeemed by payment of the stated value thereof, with the following premiums based on the time of the redemption.
|
·
|
115% of the stated value if the redemption
takes place within 90 days of issuance;
|
|
·
|
120% of the stated value if the redemption
takes place after 90 days and within 120 days of issuance
|
|
·
|
125% of the stated value if the redemption
takes place after 120 days and within 180 days of issuance; and
|
|
·
|
each share of Preferred Stock is redeemed
one year from the day of issuance
|
On November 19, 2020, pursuant to the terms
of a Securities Purchase Agreement dated November 16, 2020 (the “SPA”), the Company entered into a new preferred equity
financing agreement with GHS Investments, LLC (“GHS”) in the amount of up to $600,000. The SPA provides for GHS’s
purchase, from time to time, of up to 600 shares of the newly-designated Series B Convertible Preferred Stock. The initial closing
under the SPA consisted of 45 shares of Series B Convertible Preferred Stock, stated value $1,200 per share, issued to GHS for
an initial purchase price of $45,000, or $1,000 per share. At the Company’s option, and subject to the terms of the SPA and
the Certificate of Designation for the Series B Convertible Preferred Stock (the “COD”), additional closings in the
amount of 40 shares of Series B Convertible Preferred Stock for a total purchase price of $40,000 may take place at a rate of up
to once every 30 days. In connection with the initial closing in the amount of 45 shares of Series B Convertible Preferred Stock,
the Company issued an additional 25 shares of Series B Convertible Preferred Stock to GHS as a service fee.
The Company’s ability to conduct
additional closings under the SPA is subject to certain conditions, including the following:
|
·
|
The Company’s continued compliance with all covenants and agreements under the SPA and the COD, with no uncured defaults under the Company’s agreements with GHS;
|
|
·
|
The continued quotation of the Company’s common stock on the over-the-counter market or another trading market or exchange;
|
|
·
|
The average daily dollar trading volume for the Company’s common stock for the 30 trading days preceding each additional closing must be at least $10,000 per day; and
|
|
·
|
The closing market price for the Company’s common stock must be at least $0.01 for each of the 30 trading days preceding each additional closing.
|
No additional closings may take place
after the two-year anniversary of the SPA, or once the entire $600,000 amount has been funded. If the average daily dollar trading
volume for the Company’s common stock for the 30 trading days preceding a particular additional closing is at least $50,000
per day, the Company may, at its option, increase the amount of that additional closing to 75 shares of Series B Convertible Preferred
Stock ($75,000).
The Series B Convertible Preferred Stock is classified
as temporary equity, as it is convertible upon issuance at an amount equal to the lowest traded price for the Company’s common
stock for the fifteen trading days immediately preceding the date of conversion.
Based on the requirements of ASC 815, Derivatives
and Hedging, the conversion feature represents an embedded derivative that is required to be bifurcated and accounted for as
a separate derivative liability. The derivative liability is originally recorded at its estimated fair value and is required to
be revalued at each conversion event and reporting period. Changes in the derivative liability fair value are reported in operating
results each reporting period.
On November 19, 2020 (the date of receipt
of cash proceeds of $45,000 issuance), the Company valued the conversion feature of the derivative and recorded an initial derivative
liability of $103,267, $58,267 as day one loss on the derivative, $39,000 as interest expense, and $39,000 as Series B Convertible
Preferred Stock mezzanine liability, and $84,000 as amortization. At December 31, 2020, the Company recalculated the value of the
derivative liability associated with the convertible note recording a loss of $39,266 in connection with the change in fair market
value of the derivative liability. In addition, the Company recorded $900 as sales commission to complete this financing and $1,160
as preferred stock dividend payable to GHS as of December 31, 2020.
On November 19, 2020 and at December 31,
2020, the Company valued the conversion feature using the Black-Scholes option pricing model with the following assumptions: conversion
exercise prices ranging from $0.0067 to $0.0051, the closing stock price of the Company's common stock on the date of valuation
ranging from $0.0083 to $0.0087, an expected dividend yield of 0%, expected volatility ranging from 430.28% to 440.99%, risk-free
interest rates ranging from 0.39% to 0.38%, and an expected term of 1.50 to 1.38 years.
On December 16, 2020, pursuant to the terms
of the SPA, GHS purchased an additional 85 shares of Series B Convertible Preferred Stock for gross proceeds of $85,000. The Company
paid $1,700 in selling commissions to complete this financing.
On December 16, 2020 (the date of receipt
of cash proceeds of $85,000 issuance), the Company valued the conversion feature of the derivative and recorded an initial derivative
liability of $106,241, $1,700 as interest expense, $102,000 as Series B Convertible Preferred Stock a mezzanine liability, and $102,000
as amortization. At December 31, 2020, the Company recalculated the value of the derivative liability associated with the convertible
note recording a loss of $67,008 in connection with the change in fair market value of the derivative liability. In addition, the
Company recorded $503 as preferred stock dividend payable to GHS as of December 31, 2020.
On December 16, 2020 and at December 31,
2020, the Company valued the conversion feature using the Black-Scholes option pricing model with the following assumptions: conversion
exercise prices ranging from $0.0060 to $0.0051, the closing stock price of the Company's common stock on the date of valuation
ranging from $0.0063 to $0.0087, an expected dividend yield of 0%, expected volatility ranging from 431.65% to 437.59%, risk-free
interest rates ranging from 0.39% to 0.38%, and an expected term of 1.50 to 1.46 years.
As a result of receipt of cash proceeds relating to Series B
Convertible Preferred Stock, the Company recorded derivative liability of $315,782 and Series B Convertible Preferred Stock liability
of $186,000 at December 31, 2020.
Warrants
A summary of the status of the Company’s
warrants as of December 31, 2020 and 2019 and changes during the three months then ended, is presented below:
|
|
Shares Under Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
Outstanding at December 31, 2018
|
|
|
384,615
|
|
|
$
|
0.75
|
|
|
4.1 Years
|
Issued
|
|
|
1,242,917
|
|
|
$
|
0.19
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
Expired/Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,627,532
|
|
|
$
|
0.21
|
|
|
4.5 Years
|
Issued
|
|
|
43,082,532
|
|
|
$
|
0.00
|
|
|
4.1 Years
|
Exercised
|
|
|
(41,666,667
|
)
|
|
$
|
0.00
|
|
|
|
Expired/Forfeited
|
|
|
(175,000
|
)
|
|
$
|
0.20
|
|
|
|
Outstanding at December 31, 2020
|
|
|
2,868,397
|
|
|
$
|
0.00
|
|
|
3.4 Years
|
NOTE 10 - INCOME TAXES
Income tax expense for the year ended December
31, 2020 and 2019 is summarized as follows.
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(469,723
|
)
|
|
$
|
(396,457
|
)
|
State
|
|
|
(108,484
|
)
|
|
|
(91,563
|
)
|
Change in valuation allowance
|
|
|
578,206
|
|
|
|
488,020
|
|
Income tax expense (benefit)
|
|
$
|
–
|
|
|
$
|
–
|
|
The following is a reconciliation of the
provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Tax at statutory tax rate
|
|
|
21.00%
|
|
|
|
21.00%
|
|
State taxes
|
|
|
4.85%
|
|
|
|
4.85%
|
|
Other permanent items
|
|
|
–
|
|
|
|
–
|
|
Valuation allowance
|
|
|
-25.85%
|
|
|
|
-25.85%
|
|
Income tax expense
|
|
|
–
|
|
|
|
–
|
|
The tax effects of temporary differences
that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
1,287,319
|
|
|
$
|
911,541
|
|
Total gross deferred tax assets
|
|
|
1,287,319
|
|
|
|
911,541
|
|
Less: valuation allowance
|
|
|
(1,287,319
|
)
|
|
|
(911,541
|
)
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred income taxes are provided for
the tax effects of transactions reported in the financial statements and consist of deferred taxes related primarily to differences
between the bases of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax
return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered
or settled.
On December 22, 2017, the 2017 Tax Cuts
and Jobs Act (the “Tax Reform Act”) was enacted into law and the new legislation contains several key tax provisions
that impact the Company, including a reduction of the corporate income tax rate to 21% effective for tax years beginning after
December 31, 2017 and the Transition Tax, among others. The staff of the US Securities and Exchange Commission (SEC) has recognized
the complexity of reflecting the impacts of the Tax Reform Act, and issued guidance in Staff Accounting Bulletin 118 (“SAB
118”) in December 2017, which clarifies accounting for income taxes under ASC 740 if information is not yet available or
complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period).
Adjustments to incomplete and unknown amounts will be recorded and disclosed prospectively during the measurement period. The
Company has completed the required analysis and accounting for substantially all the effects. Except for the reduction
of the income tax rate from 34% to 21%, there were no material impact on the Company’s financial statements.
At December 31, 2020 and 2019, the Company
had accumulated net operating losses of approximately $7,481,000 and $5,040,000, respectively, for U.S. federal and Massachusetts
income tax purposes available to offset future taxable incomes. The net operating losses generated in tax years prior to December
31, 2017, can be carry forward for twenty years, whereas the net operating losses generated after December 31, 2017 can be carry
forward indefinitely. Management determined that it was unlikely that the Company’s deferred tax assets would be realized
and have provided for a full valuation allowance associated with the net deferred tax assets.
At December 31,
2020 and 2019, the Company’s deferred income tax assets and valuation allowance were $1,287,319 and $911,541, respectively.
In the ordinary course of business, the
Company’s income tax returns are subject to examination by various taxing authorities. Such examinations may result in future
tax and interest assessment by these taxing authorities. Accordingly, the Company believes that it is more likely than not that
it will realize the benefits of tax positions it has taken in its tax returns or for the amount of any tax benefit that exceeds
the cumulative probability threshold in accordance with FASB ASC 740. Differences between the estimated and actual amounts determined
upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s
financial position. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the
Company has not recorded a liability for unrecognized tax benefits. As of December 31, 2020, tax years 2019, 2018, and 2017 remain
open for examination by the Internal Revenue Service and the Massachusetts Division of Revenue. The Company has received no notice
of audit from the Internal Revenue Service or the Massachusetts Division of Revenue for any of the open tax years.
NOTE 11 - SUBSEQUENT EVENTS
On
January 19, 2021, pursuant to the authorization and approval previously provided by the stockholders, the Company filed a Certificate
of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to increase its authorized shares of common
stock, $0.001 par value per share, from 190,000,000 shares to 1,000,000,000 shares, which filing became effective on January 18,
2021.
On January
22, 2018, the Company issued Senior Secured Convertible Promissory Notes in the principal amounts of $500,000 to Convertible Promissory
Note holder - A, $50,000 to a Convertible Promissory Noteholder – C, and $50,000 to a Convertible Promissory Note holder
- D, respectively, amending to reduce the conversion price for all principal and accrued interest to $0.01 per share. In exchange
for the reduction of the conversion price, each of the three Convertible Promissory Note holders agreed to amend the maturity dates
to March 1, 2022, and all prior Events of Default (as defined in the Notes) including penalties, were waived, and all future Events
of Default (as defined in the Notes) pertaining to the future payment of interest were waived through maturity (Note 5).
On February 1, 2021, a Convertible Promissory
Noteholder – G, converted a principal balance of its convertible promissory note of $66,833 and accrued interest of $5,177,
into 7,200,000 shares of common stock of the Company (Note 5).
On February
3, 2021, a Convertible Promissory Noteholder – C, converted the principal balance of its convertible promissory note of $40,000
and accrued interest of $6,510 into 4,650,978 shares of common stock of the Company (Note 5).
On February 4, 2021, a Convertible Promissory
Noteholder – B, converted the principal balance of its convertible promissory note of $50,000 into 5,000,000 shares of common
stock of the Company (Note 5).
On February 24, 2021, the Company entered
into a Common Stock Purchase Agreement with an investor pursuant to which the investor agreed to purchase up to $5,000,000 of the
Company’s registered Common Stock at $0.015 per share. Pursuant to the Agreement, purchases may be made by the Company during
the Commitment Period (as defined in the Agreement) through the submission of a purchase notice to the investor no sooner than
ten business days after the preceding closing. No purchase notice can be made in an amount less than $10,000 or greater than $500,000
or greater than two times the average of the daily trading dollar volume for the Company’s Common Stock during the ten business
days preceding the purchase date. Each purchase notice is limited to the investor beneficially owning no more than 4.99% of the
total outstanding Common Stock of the Company at any given time. There are certain conditions precedent to each purchase including,
among others, an effective registration statement in place and the VWAP of the closing price of the Company’s Common Stock
greater than $0.0175 for the Company's Common Stock during the five business days prior to the closing. On February 26, 2021 and
March 16, 2021, the investor purchased 8,000,000 shares and 8,400,000 shares of common stock for a cash consideration of $120,000
and $126,000, respectively.
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