Notes to Unaudited Consolidated Financial
Statements
September 30, 2018
1. NATURE OF OPERATIONS
On July 28, 2017, IIOT-OXYS, Inc., a Nevada
corporation (the “
Company
”) (previously known as Gotham Capital Holdings, Inc.), executed and closed (the “
Closing
”)
the Securities Exchange Agreement dated effective March 16, 2017, between the Company, OXYS Corporation, a Nevada corporation (“
OXYS
”),
and the shareholders of OXYS and changed its name to “IIOT-OXYS, Inc.” As a result of the Closing, the Company issued
34,687,244 shares on a pro rata basis to the shareholders of OXYS, and OXYS became a wholly owned subsidiary of the Company. In
addition, the Company cancelled 1,500,000 outstanding shares held by principal shareholders of the Company, which resulted in a
total of 38,453,328 shares issued and outstanding upon completion of the Closing.
On December 14, 2017, the Company entered
into a Securities Exchange Agreement dated December 14, 2017, between the Company, OXYS, and HereLab, Inc., a Delaware corporation
(“
HereLab
”), and the shareholders of HereLab. Upon completion of the closing of the Exchange Agreement, on January
11, 2018, the Company issued an aggregate of 1,650,000 shares of its common stock on a pro rata basis to the two shareholders of
HereLab and HereLab became a wholly-owned subsidiary of the Company.
OXYS Corporation was incorporated on August
4, 2016 in Nevada. It maintains its principal office in Massachusetts at 705 Cambridge St., Cambridge, MA 02142.
The Company was only recently formed and
is currently devoting substantially all its efforts in identifying, developing and marketing engineered products, software and
services for applications in the Industrial Internet which involves collecting and processing data collected from a wide variety
of industrial systems and machines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The Company's financial statements are
prepared on the accrual method of accounting. The accounting and reporting policies of the Company conform with generally accepted
accounting principles (“
GAAP
”).
Interim Financial Statements
The accompanying unaudited condensed interim
financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United
States of America (“
U.S. GAAP
”) for interim financial information, and in accordance with the rules and regulations
of the United States Securities and Exchange Commission with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited
interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily
indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the
audited financial statements of the Company for the year ended December 31, 2017.
Principles of Consolidation
The consolidated financial statements for
September 30, 2018 include the accounts of IIOT-OXYS, Inc., OXYS Corporation, and HereLab, Inc. All significant intercompany balances
and transactions have been eliminated.
The consolidated financial statements for
fiscal year 2017 include the accounts of IIOT-OXYS, Inc., and OXYS Corporation. All significant intercompany balances and transactions
have been eliminated.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are carried at
original invoice amount less an estimate made for doubtful accounts. The Company determines the allowance for doubtful accounts
by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts.
Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written
off are recorded as income when received. The allowance for doubtful accounts at September 30, 2018 and December 31, 2017 was $0,
respectively.
Revenue Recognition
The Company’s revenue is derived
primarily from providing services under contractual agreements. The Company recognizes revenue in accordance with ASC Topic No.
606 based on the following criteria:
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Identification of a contract or contracts, with a customer.
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·
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Identification of the performance obligations in the contract.
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·
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Determination of contract price.
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·
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Allocation of transaction price to the performance obligation.
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·
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Recognition of revenue when, or as, performance obligation is satisfied.
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Reclassification
Certain amounts in prior-period financial
statements have been reclassified for comparative purposes to conform to presentation in the current-period financial statements.
Use of Estimates
Management uses estimates and assumptions
in preparing these financial statements in accordance with generally accepted accounting principles. These estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that
were used.
Fair Value of Financial Instruments
Fair Value of Financial Instruments - The
Company accounts for fair value measurements in accordance with accounting standard ASC 820-10-50, Fair Value Measurements. This
guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The three levels are defined as follows:
Level 1 inputs to the valuation methodology
are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to valuation methodology
are unobservable and significant to the fair measurement.
The fair value of certain of our financial
instruments including cash and cash equivalents, cash escrow and due to stockholder approximate their carrying amounts because
of the short-term maturity of these instruments.
Income Taxes
The Company accounts for income taxes in
accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred income taxes for differences between the
basis of assets and liabilities for financial statement and income tax purposes. Deferred taxes are recognized for operating losses
that are available to offset future taxable income. Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.
The Company adopted the provisions of FASB
ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions
taken or expected to be taken in income tax returns. FASB ASC 740-10-25 also provides guidance on de-recognition of income tax
assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and
penalties associated with tax positions. The Company's tax returns are subject to tax examinations by U.S. federal and state authorities
until respective statute of limitation. Currently, the 2016 tax year is open and subject to examination by taxing authorities.
However, the Company is not currently under audit nor has the Company been contacted by any of the taxing authorities. The Company
does not have any accruals for uncertain tax positions at September 30, 2018 and December 31, 2017. It is not anticipated that
unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
Cash and Cash Equivalents
For purposes of the statement of cash flows,
the Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Concentration of Risk
Financial instruments that potentially
expose the Company to concentrations of risk consist primarily of cash and cash equivalents and cash-escrow, which are generally
not collateralized. The Company’s policy is to place its cash and cash equivalents with high quality financial institutions,
in order to limit the amount of credit exposure. Accounts at each institution are insured by the Federal Deposit Insurance Corporation
(FDIC), up to $250,000. At September 30, 2018 and December 31, 2017, the Company had approximately $0 and $0 in excess of the FDIC
insurance limit, respectively.
Inventory
Inventory consists primarily of demo equipment
and is recorded at the lower of cost (first-in, first out method) or market.
Convertible Debt
Convertible debt is accounted for under
FASB ASC 470, Debt – Debt with Conversion and Other Options. The Company records a beneficial conversion feature (“
BCF
”)
related to the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when
issued and records the relative fair value of any warrants issued with those instruments. The BCF for the convertible instruments
is recognized and measured by allocating a portion of the proceeds to the warrants and as a reduction to the carrying amount of
the convertible instrument equal to the intrinsic value of the conversion features, both of which are credited to additional paid-in
capital. The Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes
valuation method, using the same assumptions used for valuing stock options.
Under these guidelines, the registrant
allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable
instruments (such as warrants) on a relative fair value basis. The allocated fair value of the BCF and warrants are recorded
as a debt discount and is accreted over the expected term of the convertible debt as interest expense.
The Company accounts for modifications
of its embedded conversion features in accordance with the ASC which requires the modification of a convertible debt instrument
that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated
debt instrument when the modification does not result in a debt extinguishment.
Earnings (Loss) Per Share
The Company computes net earnings (loss)
per share under ASC 260-10, Earnings Per Share, which requires a dual presentation of basic and diluted earnings or loss per share.
Basic earnings or loss per share ("
EPS
") is computed by dividing net income (loss) available to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted earnings per share represent basic earnings
per share adjusted to include the potentially dilutive effect of outstanding stock options and warrants. The diluted earnings per
share were not calculated because we recorded net losses for the three and nine months ended September 30, 2018 and 2017, and the
outstanding stock warrants are anti-dilutive.
Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the
Company was only recently formed, has incurred continuing operating losses and has an accumulated deficit of $2,472,843 and $1,539,721
at September 30, 2018 and December 31, 2017, respectively. These factors raise substantial doubt about the ability of the Company
to continue as a going concern.
Management believes that it will be able
to achieve a satisfactory level of liquidity to meet the Company’s obligations for the next 12 months by generating revenues
and 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.
3. RECENT ACCOUNTING PRONOUNCEMENTS
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842). The new standard establishes a right-of-use ("
ROU
") model that requires a lessee to record
a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will
be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated
income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within
those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital
and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption
of this standard.
ASU 2017-11
In July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments
in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features.
When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value. For freestanding equity classified financial
instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available
to common shareholders in basic EPS.
For public business entities, the amendments
in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2018. Early adoption is permitted including adoption in an interim period. On January 1, 2018, the Company early adopted ASU
2017-11. See Note 7 for the effect early implementation had on 384,615 warrants issued in conjunction with the $500,000 convertible
note issuance. Since the Company did not have any of these type instruments in prior periods there is no effect of early implementation
on prior periods.
Other Accounting standards that have been
issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated
financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact
on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
4. COMMITMENTS AND CONTINGENCIES
The Company entered into a lease agreement
on August 1, 2017 which began on January 1, 2018 and will terminate on December 31, 2018. The Company shall pay the landlord monthly
installments of $2,000 for a total lease payment of $6,000 remaining in 2018.
The Company entered into consulting agreements
with one director, one executive officer, and one engineer of the Company throughout the prior period which include commitments
to issue shares of the Company’s Common Stock from the Company’s Stock Incentive Plan. According to the agreement with
the director, the shares vest in 2018. According to the agreements with the executive officer and engineer, the shares vest on
the one-year anniversary of each agreement. In the event that either 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. One consulting agreement was terminated upon the resignation
of the director on September 20, 2018 and, pursuant to a Settlement Agreement, 104,673 earned shares were vested. According to
the remaining two agreements, shares are scheduled to vest in according to following schedule: 250,000 shares of Common Stock in
2019, 470,000 shares of Common Stock in 2020, and 680,000 shares of Common Stock in 2021. As of September 30, 2018, no shares of
Common Stock have been issued to these three individuals and the Company has accrued $248,188 in shares payable in conjunction
with these agreements.
5. STOCKHOLDERS' EQUITY
Common Stock
The Company has authorized 190,000,000
shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. At September 30, 2018 and December
31, 2017 the Company had 40,633,327 and 38,983,327 shares of common stock and no shares of preferred stock issued and outstanding,
respectively.
Holders of shares of common stock are entitled
to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting
rights. Holders of common stock are entitled to share ratable in dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefore. In the event of liquidation, dissolution, or winding
up of the Company, the holders of common stock are entitled to share pro rata in all assets remaining after payment in full of
all liabilities. All of the outstanding shares of common stock are fully paid and non-assessable. Holders of common stock have
no preemptive rights to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund
provisions with respect to the common stock.
On March 16, 2017, the Board of Directors
and a majority of the shareholders approved the IIOT-OXYS, Inc. 2017 Stock Awards Plan, (the “
Plan
”). The Plan
provided for granted incentive stock options, options that do not constitute incentive stock options, stock appreciation rights,
restricted stock awards, phantom stock awards, or any combination of the foregoing, as is best suited to the particular circumstances.
The Plan was effective upon its adoption by the Board.
The aggregate number of common shares that
may be issued under the Plan were 7,000,000 common shares. No further awards were to be granted under the Plan after ten years
following the effective date. The Plan was to remain in effect until all awards granted under the Plan had been satisfied or expired.
This Plan was terminated and replaced by the 2017 Stock Inventive Plan (the “
2017 Plan
”) on December 14, 2017
(the “
Effective Date
”) as approved by the Board of Directors.
Awards may be made under the 2017 Plan
for up to 4,500,000 shares of common stock of the Company. All of the Company’s employees, officers and directors, as well
as consultants and advisors to the Company are eligible to be granted awards under the 2017 Plan. No awards can be granted under
the 2017 Plan after the expiration of 10 years from the Effective Date, but awards previously granted may extend beyond that date.
Awards may consist of both incentive and non-statutory options, restricted stock units, stock appreciation rights, and restricted
stock awards. With the approval of the 2017 Plan, the Board terminated the 2017 Stock Awards Plan with no awards having been granted
thereunder.
On July 28, 2017, the Company executed
and closed the Securities Exchange Agreement dated effective March 16, 2017, between the Company, OXYS, and the shareholders of
OXYS and changed its name to “IIOT-OXYS, Inc.” As a result of the closing, the Company issued 34,687,244 shares on
a pro rata basis to the shareholders of OXYS, and OXYS became a wholly owned subsidiary of the Company. In addition, the Company
cancelled 1,500,000 outstanding shares held by principal shareholders of the Company, which resulted in a total of 38,453,328 shares
issued and outstanding upon completion of the Closing.
On December 14, 2017, the Company entered
into a Securities Exchange Agreement dated December 14, 2017, between the Company, OXYS, and HereLab, and the shareholders of HereLab.
Upon completion of the closing of the Exchange Agreement on January 11, 2018, the Company issued an aggregate of 1,650,000 shares
of its common stock on a pro rata basis to the two shareholders of HereLab and HereLab became a wholly-owned subsidiary of the
Company.
6. EARNINGS PER SHARE
The following table sets forth the composition
of the weighted average shares (denominator) used in the basic per share computation:
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For the three months ended
September 30,
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For the nine months ended
September 30,
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2018
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2017
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2018
|
|
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2017
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Net Loss
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$
|
(243,457
|
)
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|
$
|
(177,770
|
)
|
|
$
|
(933,121
|
)
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$
|
(332,770
|
)
|
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|
|
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Weighted average share outstanding basic
|
|
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40,633,327
|
|
|
|
28,352,862
|
|
|
|
40,569,515
|
|
|
|
13,046,244
|
|
|
|
|
|
|
|
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Basic and diluted loss per share
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$
|
(0.0060
|
)
|
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$
|
(0.0063
|
)
|
|
$
|
(0.0230
|
)
|
|
$
|
(0.0255
|
)
|
7. CONVERTIBLE NOTE PAYABLE
On January 18, 2018, the Board of Directors
of the Company approved a non-public offering of up to $1,000,000 aggregate principal amount (the “
Offering
”)
of its 12% Senior Secured Convertible Notes (the “
Notes
”). The Notes are convertible, in whole or in part, into
shares of the Company’s Common Stock, at any time at a rate of $0.65 per share with fractions rounded up to the nearest whole
share, unless paid in cash at the Company’s election. The Notes bear interest at a rate of 12% per annum and interest payments
will be made on a quarterly basis. The Notes mature January 15, 2020.
The Notes are governed by a Securities
Purchase Agreement (the “
SPA
”) and are secured by all of the assets of the Company pursuant to a Security and
Pledge Agreement. In addition to the issuance of the Notes in the Offering, the Company’s Board of Directors approved, as
part of the Offering, the issuance of warrants to purchase one share of the Company’s Common Stock for 50% of the number
of shares of Common Stock issuable upon conversion of each Note (the “
Warrants
”). Each Warrant is immediately
exercisable at $0.75 per share, contains certain anti-dilution down-round features and expires on January 15, 2023. If the Company
ever defaults on the loan the Warrants to be issued will increase from 50% of the number of shares of Common Stock issuable upon
conversion to 100%.
On January 22, 2018, the Company entered
into a SPA and Security and Pledge Agreement with its first investor in the Offering and issued a Note to the investor in the principal
amount of $500,000. Subscription funds were received by the Company from the investor on February 7, 2018. In addition to the Note,
the Company issued to the investor 384,615 Warrants. The Warrants are considered equity instruments based on the Company’s
early adoption of ASU 2017-11.
The proceeds received upon issuing the
Note and Warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the Warrants was
$838,404 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 2.1%; and volatility of 142%. The effective conversion rate resulted in a Beneficial Conversion Feature greater
than the proceeds received. Thus, the discount is limited to the proceeds received of $500,000 and is amortized to interest expense
using the effective interest method over the term of the Note.
For the three months ended September 30,
2018 and 2017, interest expense paid to the investor amounted to $15,123 and $0, respectively. For the three months ended September
30, 2018 the Company also amortized to interest expense $63,014 from the amortization of the discount.
For the nine months ended September 30,
2018 and 2017, interest expense paid to the investor amounted to $41,260 and $0, respectively. The Company also amortized to interest
expense $171,918 from the amortization of the discount.
The unpaid principal balance of the Note
is $500,000 at September 30, 2018 and the remaining unamortized discount is $328,082.
8. RELATED PARTIES
At September 30, 2018 and December 31,
2017 the amount due to stockholders was $1,000. The balance is payable to two stockholders related to opening bank balances.
At September 30, 2018 and December 31,
2017 accounts payable due to two officers was $20,196 and $0, respectively. The majority of the balance is related to consulting
expenses while the remainder is related to reimbursable expenses that were incurred throughout the quarter.
In August 2017 the Company entered into
a lease agreement with a stockholder of the Company and paid monthly installments of $2,000 between August and December 2017. The
Company entered into a second lease agreement which began on January 1, 2018 and will terminate on December 31, 2018. The Company
shall pay the landlord monthly installments of $2,000. For the three months ended September 30, 2018 and 2017, rent expense paid
to the stockholder amounted to $6,000 and $4,000, respectively. For the nine months ended September 30, 2018 and 2017, rent expense
paid to the stockholder amounted to $18,000 and $4,000, respectively.
The Company entered into a verbal arrangement
with a company controlled by a shareholder to provide administrative services. Total payments to the related party for administrative
services amounted to $0 and approximately $7,500, for the three months ended September 30, 2018 and 2017, respectively. Total
payments to the related party for administrative services amounted to approximately $26,000 and approximately $10,000, for the
nine months ended September 30, 2018 and 2017, respectively.
For the three months ended September 30,
2018 and 2017, professional expense paid to directors and officers of the Company amounted to $15,400 and $28,800, respectively.
For the three months ended September 30, 2018 and 2017, travel expense reimbursed to directors and officers of the Company amounted
to approximately $0.
For the nine months ended September 30,
2018 and 2017, professional expense paid to directors and officers of the Company amounted to $77,500 and $33,800, respectively.
For the nine months ended September 30, 2018 and 2017, travel expense reimbursed to directors and officers of the Company amounted
to approximately $1,500 and $7,600, 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 to disclose the following:
On October 5, 2018 the Company entered
into Amendment No. 1 to the Consulting Agreement with the Chief Operating Officer (“
COO
”). Pursuant to the amendment,
the obligation of the Company to provide the COO with equity compensation was eliminated.
On October 9, 2018 the Company entered
into Amendment No. 1 to the Consulting Agreement with the Chief Technology Officer (“
CTO
”). Pursuant to the
amendment, the vesting schedule of the equity compensation awarded to the CTO was clarified and also provided for acceleration
of vesting upon the occurrence of a “change in control”.
On October 9, 2018 the Company entered
into Amendment No. 2 to the Consulting Agreement with a consultant. Pursuant to the amendment, accrued and unpaid compensation
under the agreement was allowed to be either deferred or converted into shares of Common Stock of the Company.
On October 18, 2018 the Company entered
into Amendment No. 3 to the Consulting Agreement with a consultant. Pursuant to the amendment, the vesting schedule of the equity
compensation awarded to the engineer was clarified and also provided for acceleration of vesting upon the occurrence of a “change
in control.”
On November 5, 2018, the Company entered
into the Settlement Agreement with its former director pursuant to which it agreed to issue 104,673 shares of the Company’s
Common Stock on January 1, 2019 as full settlement of the Company (and its subsidiaries’ obligations to the former director.