Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended March 31, 2020

 

Or

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from _______________________to___________________________

  

Commission File Number: 000-50773

 

IIOT-OXYS, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada 56-2415252
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
705 Cambridge Street, Cambridge, MA 02141
(Address of principal executive offices) (Zip Code)

 

(401) 307-3092

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of each exchange on which registered
Not applicable   Not applicable   Not applicable

 

Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports).

Yes x No

 

Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days.

Yes x No

 

Indicate by check mark whether the registrant has submitted electronically 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 x No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer Smaller reporting company x
      Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x

 

The number of shares outstanding of the registrant’s common stock on August 18, 2020, was 141,825,630.

 

 

 

     

 

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION 4
   
Item 1. Financial Statements 4
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
   
Item 4. Controls and Procedures 25
   
PART II—OTHER INFORMATION 26
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
   
Item 3. Defaults Upon Senior Securities 26
   
Item 6. Exhibits 26
   
SIGNATURES 27

 

 

 

 

 

 

 

Introductory Comment

 

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.

 

In filing the Quarterly Report on Form 10-Q (the “Quarterly Report”) at this time, we are relying upon the orders (the “Orders”) issued by the Securities and Exchange Commission (the “SEC”) on March 4, 2020 and March 25, 2020 pursuant to Section 36 (Release Nos. 34-88318 and 34-88465) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), extending the time in which certain reports required to be filed pursuant to the Exchange Act are filed, and the Current Report on Form 8-K we filed on March 27, 2020, pursuant to which we reported that we may be unable to file this Quarterly Report on a timely basis because of the impact of COVID-19, which had and would adversely impact the ability of the individuals preparing the Quarterly Report to complete such task on a timely basis. We were unable to file this Quarterly Report on the original due date because (i) of the impact of COVID-19 for the reasons disclosed in the Current Report on Form 8-K filed on March 27, 2020 and (ii) management's devoting significant time and attention to assessing and responding to the impact of COVID-19.

 

 

  2  

 

  

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

IIOT-OXYS, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2020 and December 31, 2019

(unaudited)

 

    March 31, 2020     December 31, 2019  
             
Assets                
Current Assets                
Cash and Cash Equivalents   $ 34,105     $ 24,212  
Accounts Receivable, net     15,600       28,004  
Prepaid Expense     4,081       3,710  
Inventory            
Total Current Assets     53,786       55,926  
                 
Intangible Assets, net     385,151       397,492  
Total Assets   $ 438,937     $ 453,418  
                 
Liabilities and Stockholders' (Deficit)                
Current Liabilities                
Shares Payable to Related Parties   $ 1,283,872     $ 1,102,645  
Salaries Payable to Related Parties     347,205       343,227  
Derivative Liability     146,410        
Accounts Payable     145,728       164,562  
Accrued Liabilities     50,189       54,497  
Deferred Revenue     46,425        
Total Current Liabilities     2,019,829       1,664,931  
                 
Notes Payable, net     858,092       706,508  
Due to Stockholder     1,000       1,000  
Total Liabilities     2,878,921       2,372,439  
                 
Commitments and Contingencies (Note 8)                
                 
Stockholders' (Deficit)                
Preferred stock $0.001 par value, 10,000,000 shares authorized; 0 issued and outstanding            
Common stock $0.001 par value, 190,000,000 shares authorized; 67,063,547 and 43,313,547 shares issued and outstanding, respectively     67,064       43,314  
Additional Paid-in Capital     3,526,326       3,077,972  
Accumulated Deficit     (6,033,374 )     (5,040,307 )
                 
Total Stockholders' Deficit     (2,439,984 )     (1,919,021 )
Total Liabilities and Stockholders' Deficit   $ 438,937     $ 453,418  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  3  

 

 

IIOT-OXYS, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2020 and 2019

(unaudited)

 

    Three Months Ended March 31,  
    2020     2019  
Revenues            
Sales   $ 15,600     $ 42,837  
Cost of Sales     8,634       12,169  
Gross Profit     6,966       30,668  
                 
Expenses                
Demo Parts           63  
Bank Service Charges     1,422       700  
Office Expenses     973       6,871  
Organization Costs     11,147       5,240  
Insurance           6,906  
Professional     187,121       488,806  
Travel           4,816  
Patent License Fee     1,644       1,430  
Amortization of Intangible Assets     12,341       12,206  
Total Expenses     214,648       527,038  
                 
Other Income (Expense)                
Loss on Change in FMV of Derivative Liability     (63,908 )      
Loss on Extinguishment of Debt           (221,232 )
Interest Expense     (518,289 )     (62,436 )
Miscellaneous Income     409        
Total Other Income (Expense)     (581,788 )     (283,668 )
                 
Net Loss   $ (789,470 )   $ (780,038 )
                 
Loss per Common Share   $ (0.02 )   $ (0.02 )
                 
Weighted Average Number of Shares Outstanding - Basic and Diluted     45,245,415       41,175,686  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  4  

 

 

IIOT-OXYS, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders' Equity (Deficit)

For the Three Months Ended March 31, 2020 and 2019

(unaudited)

 

 

      Common Stock     Additional Paid-In     Accumulated     Total Stockholders' Equity  
      Shares     Amount    Capital     Deficit     (Deficit)  
Balance December 31, 2018     40,633,327     $ 40,633     $ 2,572,751     $ (3,153,020 )   $ (539,636 )
                                         
Stock-based compensation     1,176,996       1,177       169,114             170,291  
                                         
Beneficial conversion feature discount on note payable                 38,222             38,222  
                                         
Net loss                       (780,038 )     (780,038 )
                                         
Balance March 31, 2019     41,810,323     $ 41,810     $ 2,780,087     $ (3,933,058 )   $ (1,111,161 )
                                         
Balance December 31, 2019     43,313,547     $ 43,314     $ 3,077,972     $ (5,040,307 )   $ (1,919,021 )
                                         
Common stock issued for conversion of convertible note payable     23,750,000       23,750       3,938             27,688  
                                         
Relief of derivative liabilities                 77,386             77,386  
                                         
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 )      
                                         
Net loss                       (789,470 )     (789,470 )
                                         
Balance March 31, 2020     67,063,547     $ 67,064     $ 3,526,326     $ (6,033,374 )   $ (2,439,984 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  5  

 

 

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2020 and 2019

(unaudited)

   

 

    Three Months Ended March 31,  
    2020     2019  
             
Cash Flows from Operating Activities:                
Net Loss   $ (789,470 )   $ (780,038 )
                 
Adjustments to reconcile net loss to net cash from operating activities:                
Loss on Extinguishment of Debt           221,232  
Stock Based Compensation           290,555  
Amortization of Discount on Notes Payable     24,022       46,028  
Amortization of Intangible Assets     12,341       12,206  
Loss on Issuance of Default Warrants     163,433        
Increase in Principal Due to Penalty Provision     146,250        
Increase in Principal Due to Fees     9,000        
                 
                 
                 
Changes in assets and liabilities:                
(Increase) Decrease in:                
Accounts Receivable     12,404       (9,837 )
Inventory           (190 )
Prepaid Expense     (371 )     (5,622 )
Increase (Decrease) in:                
Shares Payable to Related Parties     181,227        
Salaries Payable to Related Parties     3,978        
Derivative Liability     223,796        
Accounts Payable     (18,834 )     106,686  
Accrued Liabilities     (4,308 )     513  
Deferred Revenue     46,425        
Net Cash Provided by (Used by) Operating Activities     9,893       (118,467 )
                 
Cash Flows from Financing Activities:                
Cash Received from Convertible Note Payable           155,000  
Net Cash Provided by Financing Activities           155,000  
                 
Net Increase in Cash and Cash Equivalents     9,893       36,533  
                 
Cash and Cash Equivalents at Beginning of Period     24,212       39,226  
                 
Cash and Cash Equivalents at End of Period   $ 34,105     $ 75,759  
                 
Supplemental disclosure of cash flow information:                
Interest paid during the period   $     $ 15,074  
Taxes paid during the period   $ 24,295     $  
Supplemental disclosure of non-cash investing and financing activities:                
Discount on notes payable   $     $ 38,222  
Conversion of Convertible Notes Payable and Derivative Liabilities   $ 105,074     $  
Warrant Anti-Dilution Issuance   $ 203,597     $  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

  6  

 

 

IIOT-OXYS, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

March 31, 2020

 

 

1. NATURE OF OPERATIONS

 

The Company was only recently formed and is currently devoting substantially all its efforts in identifying, developing and marketing engineered products, software and services for applications in the Industrial Internet which involves collecting and processing data collected from a wide variety of industrial systems and machines.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Company's financial statements are prepared on the accrual method of accounting. The accounting and reporting policies of the Company conform with generally accepted accounting principles (“GAAP”).

 

Interim Financial Statements

 

The accompanying unaudited condensed interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2019.

  

Principles of Consolidation

 

The consolidated financial statements for March 31, 2020 and 2019 include the accounts of IIOT-OXYS, Inc., OXYS Corporation, and HereLab, Inc. All significant intercompany balances and transactions have been eliminated.

  

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, using the modified retrospective method, which was elected to apply to all active contracts as of the adoption date. Application of the modified retrospective method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company's method of recognizing revenue under ASC 606 yielded similar results to the method utilized immediately prior to adoption. Accordingly, there was no effect to each financial statement line item as a result of applying the new revenue standard.

 

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.

 

 

 

  7  

 

 

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.

 

Use of Estimates

 

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company was only recently formed, has incurred continuing operating losses, and has an accumulated deficit of $6,033,374 and $5,040,307 as of March 31, 2020 and December 31, 2019, respectively. These factors raise substantial doubt about the ability of the Company 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 issuances 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.

 

Concentration of 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. As of March 31, 2020, and December 31, 2019, the Company had no amounts in excess of the FDIC insurance limit.

 

Cash and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.


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 March 31, 2020 and December 31, 2019.

 

Fair Value of Financial Instruments

 

The fair value of the Company’s financial instruments is determined in accordance with ASC 820, Fair Value Measurements and Disclosures.

 

 

 

  8  

 

 

Income Taxes

 

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes.

 

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.

 

Convertible Debt

 

Convertible debt is accounted for under FASB ASC 470, Debt – Debt with Conversion and Other Options.

 

Basic and Diluted Net Loss Per Common Share

 

The Company computes basic and diluted net loss attributable to common stockholders for the period under ASC 260-10, Earnings Per Share.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

  

ASU 2019-12

 

In December 2019, the FASB issued 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.

 

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.

 

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 and, therefore, remain a liability. According to the remaining three agreements, 1,269,000 shares vested in 2019, 600,000 shares vested during the quarter ended March 31, 2020, 1,800,000 shares of common stock will vest during the remainder of 2020, and 3,600,000 shares of common stock will vest in 2021.

 

 

 

  9  

 

 

According to the agreements with the executive officers the shares vest annually over three years on the anniversary of each agreement.

 

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 accrued $1,283,872 and $1,102,645 in shares payable in conjunction with these agreements as of March 31, 2020 and December 31, 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 March 31, 2020, and December 31, 2019, 560,000 shares had vested, 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%).

 

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.

 

 

 

  10  

 

 

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 March 31, 2020, and December 31, 2019, 409,000 shares 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%).

 

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 March 31, 2020, and December 31, 2019, 900,000 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%).

 

 

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5. STOCKHOLDERS' EQUITY

 

Common Stock

 

The Company has authorized 190,000,000 shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. As of March 31, 2020, and December 31, 2019, the Company had 67,063,547 and 43,313,547 shares of common stock and no shares of preferred stock issued and outstanding, respectively.

 

Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share 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 discussed in Note 4 are issued under the 2017 Stock Incentive Plan and 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.

 

A summary of the status of the Company’s non-vested shares as of March 31, 2019 and 2020 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     (300,000 )     0.30  
Forfeited            
Balance at March 31, 2019     7,169,000     $ 0.30  
                 
Balance at December 31, 2019     6,000,000     $ 0.30  
Awarded            
Vested     (600,000 )     0.30  
Forfeited            
Balance at March 31, 2020     5,400,000     $ 0.30  

 

 

 

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As of March 31, 2020, and December 31, 2019 there was $896,828 and $1,078,055, respectively, of total unrecognized compensation costs related to the non-vested share-based compensation arrangements awarded to consultants. That cost is expected to be recognized over a weighted-average period of 1.2 years and 1.4 years, respectively, as of March 31, 2020 and December 31, 2019. The total fair value of shares recognized during the three months ended March 31, 2020 and 2019 was $181,227 and $152,765, respectively.

 

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 March 2020, the holder of the note had converted $18,668 of principle plus fees into 23,750,000 shares of Common Stock amounting to $27,688.

 

Total share-based compensation for the three months ended March 31, 2020 and 2019 was $208,915 and $323,056, respectively.

 

Warrants

 

A summary of the status of the Company’s warrants as of March 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    
Issued     286,667     $0.36    
Exercised              
Expired/Forfeited              
Outstanding at March 31, 2019     671,282     $0.43   5.7 years
                 
Outstanding at December 31, 2019     1,627,532     $0.21   4.5 years
Issued     42,907,532     $0.01    
Exercised              
Expired/Forfeited              
Outstanding at March 31, 2020     44,535,064     $0.00   4.4 years

 

6. EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted net loss per share of common stock for the three months ended March 31, 2020 and 2019:

  

    Three months ended
March 31,
 
    2020     2019  
Net loss attributable to common stockholders (basic)   $ (789,470 )   $ (780,038 )
                 
Shares used to compute net loss per common share, basic and diluted     42,245,415       41,175,686  
                 
Net loss per share attributable to common stockholders, basic and diluted   $ (0.02 )   $ (0.02 )

 

 

 

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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 three months ended March 31, 2020 and 2019 because their inclusion would be anti-dilutive:

 

    March 31,
2020
    March 31,
2019
 
Warrants to purchase common stock     44,535,064       671,282  
Potentially issuable shares related to convertible notes payable     43,338,312       3,084,615  
Potentially issuable vested shares to directors and officers     1,869,000       300,000  
Potentially issuable unvested shares to officers     5,400,000       7,169,000  
Total anti-dilutive common stock equivalents     95,142,376       11,224,897  

 

7. CONVERTIBLE NOTE PAYABLE

 

On January 18, 2018, the Board of Directors of the Company approved a non-public offering of up to $1,000,000 aggregate principal amount 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 mature 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.

 

 

 

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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 March 31, 2020, the Company has accrued interest related to this note of $31,578. For the three months ended March 31, 2020, the Company also amortized to interest expense $2,999 of the discount.

  

The unpaid principal balance of the note is $600,000 as of March 31, 2020, which includes the default penalty noted above, and the remaining unamortized discount is $11,039.

 

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 $3,270, respectively, as of March 31, 2020, and the remaining unamortized discount is $0. For the three months ended March 31, 2020, the Company amortized to interest expense $194 from the amortization of the discount. 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.

 

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.

 

 

 

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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. 

 

As of March 31, 2020, the unpaid principal balance of the notes is $120,000, which includes the default penalty noted above, accrued interest is $6,316 and the balance of the unamortized discount is $0. For the three months ended March 31, 2020, the Company also amortized to interest expense $2,037 from the amortization of the discount. 

 

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.

 

 

 

  16  

 

 

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 March 31, 2020, the unpaid principal balance of the notes is $125,000, the accrued interest is $7,389 and the balance of the unamortized discount is $73,430. For the three months ended December 31, 2019, the Company amortized to interest expense $13,216 from the amortization of the discount. This note is payable to a related party.

 

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 is now 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 issue. 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 due to the default. During the three months ended March 31, 2020, $18,688 in principal and $9,000 in fees were converted into 23,750,000 shares of common stock. 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. During the three months ended March 31, 2020, the Company recorded a loss of $63,908 related to the change of fair value of the derivative liability and recorded $77,386 to additional paid-in capital.

 

Upon issuance and at each conversion and reporting period 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 $0.0028, 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 563% to 574%, risk-free interest rates ranging from 0.11% to 0.39%, and an expected term of 0.25 years.

 

As of March 31, 2020, the unpaid principal balance of the notes including the default penalty is $42,562 and accrued interest is $1,636. For the three months ended March 31, 2020, $5,577 of the note discount has been amortized to interest expense leaving an unamortized balance of $0 as of March 31, 2020.

 

 

 

  17  

 

 

8. RELATED PARTIES

 

As of March 31, 2020, and December 31, 2019 the amount due to stockholders was $1,000. The balance is payable to two stockholders related to opening bank balances.

 

As of March 31, 2020, and December 31, 2019 accounts payable due to three officers was $347,205 and $343,227, respectively. The majority of the balance is related to deferred salary expenses while the remainder is related to reimbursable expenses.

 

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, 2018. The Company renewed the lease agreement in January 2019 for monthly installments of $2,000 which terminated on June 30, 2019, the Company now rents month to month for $250 per month. For the three months ended March 31, 2020 and 2019, rent expense earned by the stockholder amounted to $750 and $6,000. $15,750 and $15,000 of rent expense is in accounts payable as of March 31, 2020 and December 31, 2019, respectively.

 

For the three months ended March 31, 2020 and 2019 professional expense paid to directors and officers of the Company amounted to $0, respectively. For the three months ended March 31, 2020 and 2019, travel expense paid on behalf of directors and officers of the Company amounted to approximately $0, respectively.

 

9. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and determined that there were the following items to disclose:

 

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. 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.

 

The Company is closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of its business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency. The Company has implemented contingency plans, with office-based employees working remotely where possible. While the COVID-19 pandemic has not had a material adverse impact on the Company’s operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as its customers.

 

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 June 12, 2020, the Company entered into Amendment No. 1 to the 5% Secured Promissory Note with Cambridge Medspace, LLC, a Massachusetts limited liability company, pursuant to which the Note was amended to extend the maturity date to January 22, 2021.

 

 

 

  18  

 

 

On July 29, 2020, the Company entered into a Settlement and Mutual Release Agreement with a 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 (approximately $70,000) and penalties associated with the Convertible Promissory Note dated August 29, 2019 issued to the lender. 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.

 

On July 29, 2020, the Company entered an Equity Financing Agreement and Registration Rights Agreement with GHS Investments LLC (“GHS”), pursuant to which GHS 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 GHS a Convertible Promissory Note in the principal amount of $100,000. 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 GHS, 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 amount 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 amount 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 GHS of all of the Common Stock issued upon the conversion of the $100k Note, the Company is required to issue to GHS an amount 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 GHS from the sale of aggregate Common Stock issued upon the conversion of the $100k Note.

 

In connection with entering into the Equity Financing Agreement, on July 29, 2020, the Company issued to GHS a Convertible Promissory Note in the principal amount of $75,000. 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 GHS, 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 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 amount 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 amount of shares of Common Stock into which the $75k Note is convertible.

 

 

 

 

 

 

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events; are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements

 

Basis of Presentation

 

The financial information presented below and the following Management Discussion and Analysis of the Consolidated Financial Condition, Results of Operations, Stockholders’ Equity and Cash Flow for the quarterly period ended March 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;
  · 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.

 

 

 

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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.

 

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.

 

 

 

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A new management team was put into place in 2018, which constitutes our current management team.

 

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, continued to realize revenues during 2018 and 2019, has realized revenues during the first quarter of 2020, and expects to continue to realize revenue growth in 2020 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

 

  · We show clear path to improved asset reliability, machine uptime, machine utilization, energy consumption, and quality.

 

  · We provide advanced algorithms and insights as a service.

 

RISK MINIMIZATION

 

  · We use simple measurements requiring almost zero integration – minimally invasive.

 

  · We do not interfere with command and control of critical equipment.

 

  · We do not physically touch machine control networks – total isolation of networks.

 

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.

 

 

 

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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 2020 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.

 

Results of Operations for the Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019

 

For the three months ended March 31, 2020, the Company earned revenues of $15,600 and incurred related cost of sales of $8,634. The Company incurred professional fees of $187,121, interest fees of $518,285, a loss on change in FMV of derivative liability of 63,908, and other general and administrative expenses of $27,527. The Company generated $409 in miscellaneous income. As a result, the Company incurred a net loss of $789,470 for the three months ended March 31, 2020.

 

 

 

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Comparatively, for the three months ended March 31, 2019, we earned revenues of $42,837 and incurred related cost of sales of $12,169. We incurred professional fees of $488,806 and other general and administrative expenses of $38,232. We incurred interest fees of $62,436 and a loss on extinguishment of debt of $221,232. As a result, we incurred a net loss of $780,038 for the three months ended March 31, 2019.

 

During the current and prior period, the Company did not record an income tax benefit due to the uncertainty associated with the Company’s ability to utilize the deferred tax assets.

 

Liquidity and Capital Resources

 

At March 31, 2020, the Company had a cash balance of $34,105, which represents a $9,893 increase from the $24,212 balance at December 31, 2019. This increase was the result of cash provided by operating activities. The Company’s working capital at March 31, 2020 was a deficit of $(1,966,043), as compared to a December 31, 2019 working capital deficit of $(1,609,005).

 

For the three months ended March 31, 2020, the Company incurred a net loss of $789,470.

 

For the three months ended March 31, 2019, the Company incurred a net loss of $780,038.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has incurred losses from operations of $789,470 and $780,038 for the three months ended March 31, 2020 and 2019, respectively, and has an accumulated deficiency which raises substantial doubt about the Company’s ability to continue as a going concern.

 

Management believes the Company will continue to incur losses and negative cash flows from operating activities for the foreseeable future and will need additional equity or debt financing to sustain its operations until it can achieve profitability and positive cash flows, if ever. Management plans to seek additional debt and/or equity financing for the Company but cannot assure that such financing will be available on acceptable terms. At the Company’s current rate of expenditure, the Company anticipates being able to maintain current operations for three months; however, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of equity securities. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations.

 

The Company’s continuation as a going concern is dependent upon its ability to ultimately attain profitable operations, generate sufficient cash flow to meet its obligations, and obtain additional financing as may be required. Our auditors have included a going concern qualification in their auditors’ report dated June 22, 2020. Such a going concern qualification may make it more difficult for us to raise funds when needed. The outcome of this uncertainty cannot be assured.

 

The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that management will be successful in implementing its business plan or that the successful implementation of such business plan will actually improve the Company’s operating results.

 

Recently Issued Accounting Standards

 

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.

 

 

 

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Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Certain specified reduced reporting and other regulatory requirements that are available to public companies that are emerging growth companies. These provisions include:

 

  1. an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002;

 

  2. an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

  3. an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about our audit and our financial statements; and

 

  4. reduced disclosure about our executive compensation arrangements.

 

We have elected to take advantage of the exemption from the adoption of new or revised financial accounting standards until they would apply to private companies. As a result of this election, our financial statements may not be comparable to public companies required to adopt these new requirements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, the Company has elected not to provide the disclosure required by this item.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company has 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 the Company’s Chief Executive Officer, Clifford L. 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 the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of March 31, 2020. Based on his evaluation, Mr. Emmons concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2020.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during the Company’s quarter ended March 31, 2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

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PART II—OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Convertible Note Conversions and Warrant Exercises

 

Pursuant to the Convertible Promissory Note issued on August 29, 2019 to a third-party lender (the “Lender”) in the principal amount of $35,000, during the quarterly period ended March 31, 2020, the Lender converted $18,668 in principal into an aggregate of 23,750,000 shares of the Company’s Common Stock at conversion prices ranging from $0.003 to $0.001.

 

The securities were issued without registration under the Securities Act of 1933, as amended, by reason of the exemption from registration afforded by the provisions of Section 4(a)(2) thereof, and Rule 506(b) promulgated thereunder, as a transaction by an issuer not involving any public offering. No selling commissions were paid in connection with the issuance of the securities.

 

Item 3. Defaults Upon Senior Securities

 

Convertible Note Default

 

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%. In addition to the adjustments to the note, the amount and exercise price of the warrants issued pursuant to the note, were also adjusted. As of the date of this Quarterly Report, the note has been extinguished.

 

Item 6. Exhibits

 

SEC Ref. No. Title of Document
10.1* Collaboration Agreement effective March 18, 2020 with Aingura IIoT, S.L.
31.1* Rule 13a-14(a) Certification by Principal Executive and Financial Officer
32.1** Section 1350 Certification of Principal Executive and Financial Officer
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed with this Report.

**Furnished with this Report.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  IIOT-OXYS, Inc.
     
     
Date: August 19, 2020 By /s/ Clifford L. Emmons
    Clifford L. Emmons, Chief Executive Officer and Interim Chief Financial Officer
    (Principal Executive Officer and Principal
    Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

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