PART
I
Item
1. Description of Business
ORGANIZATION
Ozop
Surgical Corp. (the” Company,” “we,” “us” or “our”) was originally incorporated
as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of renting different kind of Segways
and bicycles, dual wheels self-balancing electric scooters and related safety equipment. Following the acquisition of OZOP Surgical,
Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and distributing
innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological
and pain management procedures and specialties.
As
of December 31, 2018, the Company has 290,000,000 shares of $0.001 par value common stock authorized and there are 29,068,202
shares of common stock issued and outstanding, and 10,000,000 shares of $0.001 par value preferred stock and there were no shares
of preferred stock issued and outstanding.
Our
corporate website is located at http://ozopsurgical.com/, and the contents of our website are expressly not incorporated herein.
Reverse
Merger
On
April 13, 2018, we entered into and completed a share exchange agreement (the "Share Exchange Agreement") with OZOP
Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the
then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders
transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of
our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock
pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the
Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group,
owning 96.9% of such shares. Currently, our executive officers and directors, as a group, own 6,374,223 of our shares representing
21.57% of our issued and outstanding shares of common stock. The merger was accounted for as a reverse merger, whereby OZOP was
considered the accounting acquirer and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment
for a “reverse merger” or a “reverse acquisition,” the Company’s historical financial statements
prior to the reverse merger were and will be replaced with the historical financial statements of OZOP prior to the reverse merger,
in all future filings with the U.S. Securities and Exchange Commission (the “SEC”).
In
connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij
for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant
to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company's Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry (who has since resigned
on March 4, 2019) and Eric Siu (who has since resigned on March 5, 2019) were named as directors of the Company.
On
May 8, 2018, we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to
Ozop Surgical Corp. in order to reflect more accurately the name of our core service offering and
operations. The Amendment also increased our authorized shares of capital stock to 300,000,000, of which 290,000,000
has been designated as common stock, par value $0.001, and 10,000,000 shares have been designated as preferred
stock, par value $0.001 (the “Preferred Stock”). The Preferred Stock shall be issuable
in such series, and with such designations, rights and preferences as the Board of Directors may determine from time to time.
Series
B Preferred
On
March 27, 2019, the Company filed a certificate of designation, preferences and rights of Series B preferred stock (the “Certificate”)
with the Secretary of State of the State of Nevada to designate 1,000,000 shares of our previously authorized preferred stock
as Series B preferred stock (the “Series B Preferred”). The Certificate and its filing was approved by our board of
directors on March 27, 2019, without shareholder approval as provided for in our articles of incorporation and under Nevada law.
The
Series B Preferred is not convertible into shares of the Company’s common stock or into any other shares of stock of the
Company. The Series B Preferred shall have 50 votes per share on any matter submitted to the holders of the common stock, of the
Company, or any class thereof, for a vote, and shall vote together with the common stock, or any class thereof, as applicable,
on such matter for as long as the share of Series B Preferred is issued and outstanding, provided, however, that such number of
votes shall be equitably adjusted for any forward or reverse splits of the common stock. The Series B Preferred will not be entitled
to receive dividends. The Series B Preferred will not have any preferences upon any liquidation, dissolution or winding up of
the Company, either voluntarily or involuntarily, a merger or consolidation of the Company wherein the Company is not the surviving
entity, or a sale of all or substantially all of the assets of the Company, the Series B Preferred shall not be entitled to receive
any distribution of any of the assets or surplus funds of the Company.
The
Series B Preferred shall not participate in any distributions or payments to the holders of the common stock or in any distributions
to any other classes of preferred stock of the Company. Further, the Company may not, and shall not, amend the Certificate without
the prior written consent of holders of the Series B Preferred holding a majority of the Series B Preferred then issued and outstanding.
On
March 29, 2019, the Company issued 1,000,000 shares of Series B Preferred to Michael Chermak, the Company’s Chief Executive
Officer and a member of its board of directors, in exchange for Mr. Chermak agreeing to forego $25,000 in accrued compensation
from the Company.
OZOP
OZOP
was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”).
On July 19, 2016, Mr. Eric Siu (“Siu”), one of our former directors purchased 100% of the outstanding capital stock
of Perma and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled
as a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, OZOP formed as the sole member, Ozop Surgical,
LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, OZOP acquired 100% of Ozop Surgical Limited
(“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong
Kong.
On
February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas
limited liability company (“Spinus
”
), from RWO Medical Consulting LLC (“RWO”), a Texas limited
liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000
shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant
to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt is secured by
Spinus’s assets and was due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a
minimum of a $3,000,000 equity raise. OZOP acquired Spinus to gain control of a license rights agreement for exclusive rights
to intellectual property related to minimally invasive spine surgery techniques. The Assumed Debt of $250,000 was paid in November
2018.
Overview
Our
Principal Products and Services
We
are engaged in the business of inventing, designing, developing, manufacturing and distributing innovative endoscopic instruments,
surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and pain management procedures
and specialties.
Our
principal products and services include a full line of implants which can be used in +80% of all surgical spine cases, including:
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Anterior
cervical spine cases (ACP, CIB).
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Posterior
lumbar Interbody Fusion (PLIF).
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Transforaminal
Interbody Fusion (TLIF).
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Anterior
Lumbar Interbody Fusion (ALIF).
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Lateral
Lumbar Interbody Fusion (LLIF).
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Lateral
Buttress Plate.
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Open
and MIS Pedicle Screws.
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Sales
and marketing
OZOP’s
sales and marketing strategy is based on our market experience and an extensive network of personal relationships built over the
careers of our founders and officers. These relationships include surgeons, institutional buyers, and a vast network of surgical
product distributors throughout the US. The Company plans to sponsor ‘hands on’ clinical workshops for surgeons in
the US to train practitioners in the new techniques and products. The overriding objective of this business approach is to generate
steadily increasing revenue and build a customer base that will embrace the Company’s current and future products. This
has the two-fold benefit of lowering the company’s capital requirements and decreasing new product adoption curve. It is
important to note that the customers of the current product offering are the same buyers that we hope will adopt future products.
The same physician customers and distribution partners are all prospects for the new products in development. In fact, in many
cases, OZOP plans to use the attraction of early access to these new products as an inducement to secure their immediate business.
We primarily plan to sell our products to
hospitals and surgical facilities by (i) employees and contracted sales representatives, and (ii) commission-paid distributors.
Our representatives and commission-paid distributors use their business contacts to expand and establish relationships to build
our target medical facility customer base. We also plan to execute and maintain stocking distribution agreements providing distributors
exclusive or non- exclusive distribution rights in certain geographic areas for the sale and promotion of the products we offer.
We believe our IP and exclusive distribution agreements can provide us with important competitive advantages by increasing our
brand awareness and ensuring that we use the latest design and manufacturing technology for our products that are perceived to
be important to our customers.
We plan to develop and expand our customer
portfolio by building relationships with key medical professionals. We will provide on-going product training and support to our
sales representatives and independent contractors along with product marketing materials to ensure customer satisfaction with
the products we offer. We believe focusing on these key areas is essential to growing our customer base and revenues.
We
have significant concentration in and dependence on a small number of customers. In 2018, two (2) customers represented one hundred
percent (100%) of our consolidated net revenues. If we lose either customer relationship, without replacing them, it could adversely
impact our business, future operating results, and financial condition.
Manufacturing
We contract primarily with small and medium-sized
manufacturers that are subject to FDA compliance and approval standards. These manufacturers are highly innovative and cost effective
because of their streamlined sales infrastructures. All of our manufacturing partners will be qualified to manufacture under the
FDA’s Quality System Regulations/ISO 13485 standards. The Company intends to retain in-house the quality assurance function
so that we can approve all products prior to their release to market. We also intend to utilize high quality software in an effort
to assure that our products remain compliant throughout all operations. The Company believes that there are no significant issues
with availability of needed materials that would prevent us from meeting the projected market demand for our initial products
in a timely manner. Packaging design and manufacturing will be outsourced to one or more experienced medical device packaging
companies. The Company believes that this will allow for accelerated time to market and optimizing the shelf life of those products
that are pre-packaged sterile.
Competition
The global spinal surgery market is characterized
by strong competition. The worldwide spinal implant market currently includes over 220 manufacturers, but not all active competitors
offer interbody spinal fusion devices in the United States. According to the 2018 Orthoworld, Inc., Orthopedic Industry Annual
Report, the top ten companies account for approximately 80% of the overall market. The FDA's reclassification of spinal fusion
devices from Class III to Class II in 2007 has attracted, and will continue to attract, new entrants in the market. The Company
has recently seen a series of product launches and an increased focus on research and development activities, and it anticipates
that intense competition between the new entrants and existing companies may lead to pricing pressure on all companies in the
future.
According to the Orthoworld report, Medtronic
Inc. dominates the global market for spinal surgery devices, with a market share of approximately 27%. The Company believes that
this is due, in large part, to its broad portfolio of spinal fusion devices. DePuy Synthes ranks second at 16%. Other leading
players with market shares of approximately 10% and 8%, respectively include NuVasive Inc. and Stryker Corporation.
We believe the competition in our industry
is primarily caused by continued mergers and acquisitions of smaller companies by larger, vertically-integrated companies that
produce, market and distribute medical devices and surgical implants. Our vertically-integrated competitors benefit from their
ability to control costs for the devices they manufacture and distribute. Moreover, the market in which we operate is sensitive
to changes in third-party and government reimbursements and, to a lesser degree, competitive discount pricing. We believe that
our industry will continue to see increased mergers and acquisitions because the market is significantly fragmented with numerous
medical device distributors and specialized suppliers offering similar product portfolios throughout the United States.
Intellectual Property
We own and license an expansive and formidable
intellectual property (“IP”) portfolio. On February 1, 2018, Spinus entered into an Intellectual Property Licensing
Agreement (the “Licensing Agreement”). Pursuant to the Spinus acquisition, the Company assumed the obligations under
the Licensing Agreement and pledged the assets of Spinus as security. In consideration of $250,000 Spinus has the exclusive rights
to certain patents and the non-exclusive rights to other patents. The patents surround mechanical or inflatable expandable interbody
implant products. The $250,000 was due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing
a minimum of a $3,000,000 equity raise. The Company paid the $250,000 on November 20, 2018. The Company also will pay a royalty
of 7% of net sales on any product sold utilizing any of the patents. There have not been any sales of the licensed products and
accordingly, no royalties have been incurred.
The Company is in the process of expanding
this portfolio and developing and bringing these products/procedures to market. Some of these products have short pathways to
US regulatory approval, while others require a more resource intensive effort. We plan to pursue additional strategic alliances
and partnerships through IP license agreements, and secure agreements from engineering firms and suppliers to build upon and to
bring to market our portfolio of IP products.
Regulatory
Issues
Our
business is subject to highly complex United States federal and state regulations that may impact our ability to fully implement
our strategic plans and initiatives. We are required to obtain and hold licenses and permits and to comply with the regulatory
requirements of various governmental agencies. If we fail to comply with such regulatory requirements or if allegations are made
that we fail to comply with such regulations, the economic viability of our Company may be adversely affected.
FDA
Regulations
The manufacturers and suppliers of the products
we market are subject to extensive regulation by the FDA, other federal governmental agencies, and state authorities. These laws
and regulations govern the approval of, clearance of, or license to commercialize medical devices (such as implants). This includes
compliance with the standards and requirements related to the design, testing, manufacture, labeling, promotion, and sales of
the products, record keeping requirements, tracking of devices, reporting of potential product defects and adverse events, conduct
of corrections, and recalls and other matters. As a distributor, marketer and repackager/relabeler of such FDA-regulated products,
we are subject to independent requirements to register and list certain products. We may be required to obtain state licensure
or certifications and we may be subject to inspections, in addition to complying with requirements that apply to the manufacturers
of the products we market. Failure to comply with those applicable requirements could result in a wide variety of enforcement
actions, ranging from warning letters to more severe sanctions such as fines, civil penalties, operating restrictions, injunctions,
and criminal prosecutions.
Healthcare Laws and Regulations
We
are required to comply with federal and state healthcare laws and regulations. Such healthcare fraud and abuse laws apply to the
relationships that we or our distributors have with healthcare professionals and entities, such as physicians and hospitals. U.S.
federal health care laws including laws related to false claims, health care fraud and abuse, physician self-referrals, and anti-kickbacks
apply when we or our customers submit claims for items or services that are reimbursed under federally-funded health care programs
(such as Medicare or Medicaid). State health care laws of a similar nature apply to state-funded health care programs and may
also apply with private third-party payors. The requirements of these laws are complex and subject to varying interpretations.
If we fail to comply with these laws, we could be subject to federal or state government investigations, substantial fines, exclusion
from future participation in government healthcare programs, and civil or criminal sanctions. Such sanctions and damages could
adversely affect the economic viability of our Company.
Employees
Other than our officers and directors, we
currently do not have any employees. We plan on adding support staff for sales, marketing, distribution and administrative services
in the second quarter of 2019.
ITEM
1A. RISK FACTORS
Our
business and an investment in our securities are subject to a variety of risks. The following Risk Factors describe some of the
most significant events, facts, and circumstances that could have a material adverse effect upon our business, financial condition,
results of operations, ability to implement our strategies and business plans, and the market price for our securities. Many of
these events are outside of our control. If any of these events actually occur, our business, financial condition, or results
of operations may be materially adversely affected, the trading price of our Common Stock could decline and investors in our Common
Stock could lose all or part of their investments. We believe our Common Stock continues to be low volume traded and therefore,
subject to significant volatility.
Risks
Related to Our Business
Our
limited operating history makes it difficult to evaluate our current business and future prospects and may increase the risk associated
with your investment.
We
have a limited operating history in our surgical device and technology business and to date, we have generated a small amount
of sales and revenues in this line of business. Consequently, these aspects of our operations are subject to all the risks inherent
in the establishment of an early stage business enterprise. We have encountered and will continue to encounter risks and difficulties
frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this annual
report on Form 10-K. If we do not address these risks successfully, our business, financial condition, results of operations and
prospects will be adversely affected, and the market price of our common stock could decline. Further, we have limited historic
financial data, and we operate in a rapidly evolving market. As such, any predictions about our future revenue and expenses may
not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.
If we do not obtain additional financing,
our business will fail.
We anticipate that additional
funding will be needed for debt service, general administrative expenses and marketing costs. However, there is no guarantee that
we will be able to raise the required cash and because of this our business may fail. We do not currently generate sufficient
revenue from operations to pay our debt service requirements or any of our monthly expenses. We do not currently have any arrangements
for financing. Obtaining additional funding will be subject to a number of factors, including general market conditions, investor
acceptance of our business plan and initial results from our business operations. These factors may impact the timing, amount,
terms or conditions of additional financing available to us.
Our
business may not generate sufficient cash flows from operations or future borrowings may not be available to us in amounts sufficient
to enable us to repay our indebtedness or to fund our other liquidity needs, including working capital needs and expansion costs.
We
cannot guarantee that we will be able to generate sufficient revenue or obtain enough capital to service our debt, fund our planned
working capital needs and execute on our business expansion strategy. We may be more vulnerable to adverse economic conditions
than less leveraged competitors and thus less able to withstand competitive pressures. Any of these events could reduce our ability
to generate cash available for investment or debt repayment or to make improvements or respond to events that would enhance profitability.
If we are unable to service or repay our debt when it becomes due, our lenders could seek to accelerate payment of all unpaid
principal and foreclose on our assets, and we may have to take actions such as selling assets, seeking additional equity investments
or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Additionally, we may not be able
to take these types of actions, if necessary, on commercially reasonable terms, or at all. The occurrence of any of these events
would have a material adverse effect on our business, results of operations and financial condition.
Our
commercial success depends upon attaining market acceptance of our products by physicians, patients and healthcare payers.
The
medical device industry is highly competitive and subject to rapid technological change. Our success depends, in part, upon physicians
continuing to perform a significant number of procedures and our ability to achieve and maintain a competitive position in the
development of technologies and products in the orthopedic field. If physicians, patients, or other healthcare providers opt to
use our competitors' products, or healthcare payers do not accept our products, our commercial opportunity will be reduced and
our potential revenues will suffer.
The
FDA regulates the manufacturers and suppliers of the products that we sell, market, manufacture, and distribute, and regulatory
compliance is costly and could contribute to delays in the availability of our products.
Under
FDA regulations, we are subject to the same FDA regulation as the manufacturers and suppliers we purchase from. These regulations
govern (i) the introduction of new medical devices; (ii) the observance of certain standards with respect to the design, manufacturing,
testing, labeling, promotion, and sales of the devices; (iii) the maintenance of certain records; (iv) the ability to track devices;
(v) the reporting of potential product defects; (vi) the importing and exporting of devices; and (vii) various other matters.
Furthermore, manufacturers that create the products we market face an increasing amount of scrutiny and compliance costs as more
states implement regulations governing medical devices. In addition, we are subject to ongoing compliance concerning 510(k) approvals,
as well as potential onsite inspections by the FDA. Being found in violation and failing to correct an FDA compliance issue, could
potentially result in product recall, product seizure, or the de-listing of our products with 510(k) Approval. These types of
FDA regulations could affect many of the products we market, impacting our revenues and profitability, results of operations,
and working capital.
The
commercial launch and sale of certain of our products may require FDA approval
We
may be required to receive FDA approval for certain of our products before we may begin their commercial launch and sale of such
products to the public. FDA approval has not yet been received for these products, and failure to receive such approval would
have a material adverse effect on our business and revenues.
Our
industry is subject to rapid technological changes.
The
market for the products we plan to offer is characterized by innovative technology, evolving industry standards and new product
introductions and enhancements that may render existing products obsolete. As a result, the market position we expect to enter
into could erode rapidly due to unforeseen changes in the features of competing products. Our future success will depend in part
upon our ability to enhance the products we are currently developing and to develop and introduce new products enhancements to
meet changing client requirements. The process of developing products such as those we are currently developing is extremely complex
and is expected to become increasingly complex and expensive in the future. There can be no assurance that we will successfully
complete the development of new products in a timely fashion or that our current or future products will satisfy the needs of
our target market.
We currently have only a small management
team and no other staff, which could limit our ability to effectively seize market opportunities and grow our business.
Our
operations are subject to all of the risks inherent in a growing business enterprise, including the likelihood of operating losses.
As a smaller company with a limited operating history, our success will depend, among other factors, upon how we will manage the
problems, expenses, difficulties, complications and delays frequently encountered in connection with the growth of a new business,
products and channels of distribution, and current and future development. In addition, as a company with a limited operating
history we have only a small management team and no staff to grow our business and manage the risks inherent in a growing business
enterprise. These factors could limit our ability to effectively seize market opportunities and grow our business.
We operate in and plan to expand into
extremely competitive environments, which will make it difficult for us to achieve market recognition and revenues.
We
operate in an extremely competitive environment and the markets for our products are characterized by rapidly changing technologies,
frequent new product introductions, short product life cycles and evolving industry standards. Our success depends, in substantial
part, on the timely and successful introduction of our new products and services and thereafter upgrades of our products and services
to comply with emerging industry standards and to address competing technological and product developments by our competitors.
The research and development of new, technologically advanced products is a complex and uncertain process requiring high levels
of innovation and investment, as well as the accurate anticipation of technology, market trends and customer needs. We may focus
our resources on technologies that do not become widely accepted, are not timely released or are not commercially viable. In addition,
our products may contain defects or errors that are detected only after deployment. If our products are not competitive or do
not work properly, our business could suffer and our financial performance could be negatively impacted. You have no assurance
that our new products and services, which we intend to be a significant part or our business, will be accepted in the marketplace.
If our products and services do not achieve market acceptance, our revenues will be significantly below the level we anticipate.
Our
growth will depend on our ability to develop our brand and any failure to do so could limit our business prospects, which could
have a material adverse effect on our results of operations and financial condition.
We
believe that establishing a strong brand will be critical to achieving widespread acceptance and adoption of our products and
services. Promoting and positioning our brand will depend largely on the success of our marketing efforts, distribution channels
and ability to provide high quality service. Establishing a significant brand presence for an orthopedic company often requires
substantial marketing investment, and many companies have failed to generate the necessary adoption rates even after such a process.
Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses
we incur in building our brand. If we are not successful in building our brand, it could limit our business prospects, which could
have a material adverse effect on our results of operations and financial condition.
If
we fail to implement our expansion plans, our financial condition and results of operations could be materially and adversely
affected.
An
important part of our strategy is to grow our business by acquiring additional distributors of our products. In addition, the
operation of our business will require a significant cash investment to finance purchases of products we intend to sell. We will
need additional financing to implement our expansion strategy to acquire additional medical device distributors and finance their
operations. We may not have access to the funding required for these plans on acceptable terms. Our expansion plans
may also suffer significant delays as a result of a variety of factors, such as legal and regulatory requirements, either of which
could prevent us from completing our plans as currently expected. Our expansion plans may also result in other unanticipated adverse
consequences, such as the diversion of management’s attention from our existing operations. In addition, even if we can
implement our strategy of expansion in new markets, increased sales may not materialize to the extent we expect, or at all, resulting
in unrecoverable expenses and investments. Any failure to successfully implement our business strategy, including for any of the
above reasons, could materially and adversely affect our financial condition and results of operations. We may, in addition, decide
to alter or discontinue certain aspects of our business strategy at any time.
We
have significant concentration in and dependence on a small number of customers.
In 2018, two (2)
customers represented one hundred percent (100%) of our consolidated net revenues. If we lose either customer relationship, without
replacing them, it could adversely impact our business, future operating results, and financial condition.
To grow revenues
and profitability from certain products, we must expand our relationships with hospital systems, third-party distributors and
independent sales representatives, whom we do not control.
We plan to derive
significant revenues through our relationships with hospital systems, distributors and independent sales representatives. If such
a relationship terminated or otherwise negatively impacted for any reason, it could materially and adversely affect our ability
to generate revenues and profits. Because the independent distributor often controls the customer relationships within its territory,
there is a risk that if our relationship with the distributor ends, we could lose our relationship with our ultimate customer.
Our
success partially depends on our ability to retain and motivate our distributors, independent sales agencies, and their representatives
to sell our products in certain territories. However, such parties may not be successful in implementing our strategies and marketing
plans. Some of our distributors and independent sales agencies do not sell our products exclusively and may offer competing products
from other companies. Our distributors and independent sales agencies may terminate their contracts with us, may devote insufficient
sales efforts to our products, or may focus their sales efforts on other products that produce greater commissions for them, which
could adversely affect our operations and operating results. We also may not be able to find additional distributors and independent
sales representatives who will agree to market or distribute our products on commercially reasonable terms, if at all. If we are
unable to establish new distribution and independent sales representative relationships or renew current distribution and sales
agency agreements on commercially acceptable terms, our business, financial condition and results of operations could be materially
and adversely affected.
Our
growth and profitability will depend in large part upon the effectiveness of our marketing strategies and investments.
Our
future growth and profitability will partially depend on our marketing performance and appropriate cost structure, including our
ability to:
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create
greater awareness of the products we sell and the quality control and customer service of our Company;
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identify
and utilize the most effective sales representatives who are experienced with understanding the advantages
of our
products and who can effectively communicate that to our customers; and
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effectively
scale marketing and administrative expenditures with revenue value and profitability.
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Ineffective
sales representatives, promotional efforts, and management of working capital could adversely affect our future results of operations
and financial condition.
Product quality problems, or defects
in our products could harm our reputation and adversely affect our business, financial condition, results of operations and prospects.
We
sell highly complex products that incorporate advanced technologies. Despite testing prior to their sale, our products may contain
undetected defects or fail to meet specifications. Product defects or failure to meet specifications could affect the performance
of our products. Allegations of unsatisfactory performance could cause us to lose revenue or market share, increase our service
costs, cause us to incur substantial costs in redesigning the products, cause us to lose significant customers, subject us to
liability for damages and divert our resources from other tasks, any one of which could materially adversely affect our business,
financial condition, results of operations and prospects.
In
the event of discovery of defects in our products, we may become subject to high costs of remediation. We may also be required
to provide full replacements or refunds for such defective products. We cannot assure you that such remediation would not have
a material effect on our business, financial condition, results of operations and prospects.
Dependence
on third-party manufacturers to build our products may result in manufacturing delays and pricing fluctuations that could prevent
us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales and end
customers.
We
anticipate we will heavily depend on third-party contract manufacturers for our product lines. Our reliance on these third-party
contract manufacturers reduces our control over the manufacturing process, quality assurance, product costs and product supply
and timing, which exposes us to risk. Any manufacturing disruption by these third-party manufacturers could severely impair our
ability to fulfill orders on time, if at all, or on a cost-effective basis.
Our
plans to rely on contract manufacturers also yields the potential for their infringement of third- party intellectual property
rights in the manufacturing of our products or misappropriation of our intellectual property rights in the manufacturing of other
customers’ products. If we are unable to manage our relationships with our future third-party contract manufacturers effectively,
or if these third-party manufacturers suffer delays or disruptions for any reason, experience increased manufacturing lead times,
capacity constraints or quality control problems in their manufacturing operations or fail to meet our future requirements for
timely delivery, our ability to ship products to our end customers would be severely impaired, and our business, financial condition,
results of operations and prospects would be seriously harmed.
We
may in the future be sued by third parties for alleged infringement of their proprietary rights.
The
medical device industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent
litigation based on allegations of infringement or other violations of intellectual property rights. We may receive in the future
communications from third parties claiming that we have infringed the intellectual property rights of others. We may in the future
be, sued by third parties for alleged infringement of their proprietary rights. Our products may not be able to withstand any
third-party claims against their use. The outcome of any litigation is inherently uncertain. Any intellectual property claims,
whether with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing
our business plan and could require us to change our products, change our business practices and/or pay monetary damages or enter
into short- or long-term royalty or licensing agreements which may not be available in the future at the same terms or at all.
In addition, the company anticipates that future distribution agreements may require us to indemnify our customers for third-party
intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. Any adverse
determination related to intellectual property claims or litigation could prevent us from offering our service to others, or could
otherwise adversely affect our operating results or cash flows or both in a particular quarter.
We are highly dependent on our Officers
and Directors and the loss of any of them could have a material adverse effect on our business and results of operations. Further,
we may not be able to attract qualified directors or officers to replace them or other key management personnel necessary to grow
our business.
We
are highly reliant on the services of our Director and Chief Executive Officer, Michael Chermak and our Chief Operating Officer
and Director Thomas McLeer and our Chief Financial Officer Barry Hollander. If either of the foregoing left, it could have a material
adverse effect on our business and results of operations. Furthermore, we must continue to hire experienced managers to continue
to grow our business. As a company with limited operating history, we may have difficulty attracting and retaining new individuals.
If we are not successful in attracting management, it could have a material adverse effect on our ability to grow our business,
which would adversely affect our results of operations and financial condition.
Supporting a growing customer base could
strain our personnel and corporate infrastructure, and if we are unable to scale our operations and increase productivity, we
may not be able to successfully implement our business plan.
Our
current management is comprised of our Directors, Chief Executive Officer, Chief Financial Officer and Chief Operating Officer.
Our success will depend, in part, upon the ability of our management to manage our proposed business effectively. To do so, we
will need to hire, train and manage new employees as needed. To manage the expected growth of our operations and personnel, we
will need to continue to improve our operational, financial and management controls and our reporting systems and procedures.
If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
If
we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
To
manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient
manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our
management fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material
adverse effect on the Company’s business, financial condition, results of operations and future prospects.
Our
business model is subject to change
We
may elect to make hiring, marketing, pricing, and service decisions that could increase our expenses, affect our revenues and
impact our overall financial results. Moreover, because our expense levels in any given quarter are based, in part, on management’s
expectations regarding future revenues, if revenues are below expectations, the effect on our operating results may be magnified
by our inability to adjust spending in a timely manner to compensate for a shortfall in revenues. The extent to which expenses
are not subsequently followed by increased revenues would harm our operating results and could seriously impair our business.
Healthcare policy changes, including
legislation to reform the U.S. healthcare system, may have a material adverse effect on our business, financial condition, results
of operations and cash flows.
Political,
economic and regulatory influences are subjecting the healthcare industry to potential fundamental changes that could substantially
affect our results of operations. In response to perceived increases in healthcare costs in recent years, there have been and
continue to be proposals and enactments by members of U.S. Congress, state governments, regulators and third-party payers to control
these costs and, more generally, to reform the U.S. healthcare system. These changes are causing the marketplace to put increased
emphasis on the delivery of more cost-effective treatments. The adoption of some or all of these enactments and proposals could
have a material adverse effect on us. We cannot predict the final form these might take or their effects on our business.
The
Patient Protection and Affordable Care Act and Healthcare and Education Affordability Reconciliation Act of 2010 were enacted
into law in the U.S. in March 2010. As a U.S. headquartered company with sales in the U.S., this healthcare reform legislation
will materially impact us. Certain provisions of the legislation will not be effective for a number of years, there are many programs
and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear
what the full impact of the legislation will be. The legislation imposes on medical device manufacturers such as us a 2.3 percent
excise tax on U.S. sales of Class I, II and III medical devices beginning in 2013. Both downward pressure on reimbursement and
the excise tax could have a material adverse effect on our business, financial condition and the results of operations. Other
provisions of this legislation, including Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness
research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully
change the way healthcare is developed and delivered, and may adversely affect our business and results of operations. Further,
we cannot predict what healthcare programs and regulations ultimately will be implemented at the federal or state level, or the
effect of any future legislation or regulation in the U.S. or internationally. However, any changes that lower reimbursements
for our products or reduce medical procedure volumes could adversely affect our business and results of operations.
The
application of the privacy provisions of HIPAA is unclear, and we will become subject to other laws and regulations regarding
the privacy and security of medical information.
HIPAA,
among other things, protects the privacy and security of individually identifiable health information by limiting its use and
disclosure. HIPAA directly regulates "covered entities" (insurers, clearinghouses, and most healthcare providers) and
indirectly regulates "business associates" with respect to the privacy of patients' medical information. All entities
that receive and process protected health information are required to adopt certain procedures to safeguard the security of that
information. It is unclear whether we would be deemed to be a covered entity or a business associate under the HIPAA regulations.
In either case, we will be required to physically safeguard the integrity and security of the patient information that we, or
our physician customers receive, store, create or transmit. If we fail to safeguard patient information, then we or our physician
customers may be subject to civil monetary penalties, and this could adversely affect our ability to market our products. We also
may be liable under state laws governing the privacy of health information.
We
conduct business in a heavily regulated industry, and changes in regulations and violations of regulations may result in increased
costs or sanctions.
Our
business is subject to extensive federal, state, and, in some cases, local regulation. As the healthcare industry continues to
evolve, we anticipate increased regulation. Compliance with these regulatory requirements, as interpreted and amended from time
to time, can increase operating costs or reduce revenue and thereby adversely affect the financial viability of our business.
Because these laws are amended from time to time and are subject to interpretation, we cannot predict when and to what extent
liability may arise. Non-compliance with these laws and regulations could cause us to become the subject of a variety of enforcement
or private actions, subject us or our management personnel to fines or various forms of civil or criminal prosecution, and result
in negative publicity potentially damaging our reputation, and our relationships with members and consumers in general.
A global economic downturn could result
in unfavorable economic conditions and may have an adverse impact on our business results or financial condition.
A
global economic downturn could result in unfavorable economic conditions in many markets in which we plan to sell our products.
Our business or financial results may be adversely impacted by these unfavorable economic conditions, including reduced demand
for our products resulting from a slow-down in the general economy or a shift in consumer preferences for economic reasons to
private label products or to less profitable channels. In addition, we cannot predict how current or worsening economic conditions
will affect our critical customers, suppliers and distributors and any negative impact on our critical customers, suppliers or
distributors may also have an adverse impact on our business results or financial condition.
Risks
Related to Our Common Stock
Market
volatility may affect our stock price, and the value of an investment in our common stock may be subject to sudden decreases
.
The
trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock
trades depends on a number of factors, including the following, many of which are beyond our control:
•
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the results of operating and financial performance and prospects of other companies in our industry;
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•
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strategic actions by us or our competitors, such as acquisitions or restructurings;
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•
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announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
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•
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the public’s reaction to our press releases, media coverage and other public announcements, and filings with the SEC;
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market conditions for providers of services to telecommunications, utilities and managed cloud services customers;
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•
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lack of securities analyst coverage or speculation in the press or investment community about us or opportunities in the markets in which we compete;
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•
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changes in government policies in the United States and, as our international business increases, in other foreign countries;
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•
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dilution caused by the conversion into common stock of convertible debt securities;
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•
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market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
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•
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changes in accounting standards, policies, guidance, interpretations or principles;
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•
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any lawsuit involving us, our services or our products;
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•
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arrival and departure of key personnel;
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•
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sales of common stock by us, our investors or members of our management team; and
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•
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changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.
|
Any
of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume
of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This
may prevent stockholders from being able to sell their shares at or above the price they paid for shares of our common stock,
if at all. In addition, following periods of volatility in the market price of a company’s securities, stockholders often
institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding,
including the existing lawsuits filed against us and described elsewhere in this report, could divert our senior management’s
attention and could adversely affect our business, financial condition, results of operations and prospects.
We
have convertible notes outstanding that could affect our price.
Due
to the Convertible Notes outstanding, aggregating $1,517,875, we have a substantial number of shares that are subject to issuance
pursuant to conversions of this debt at a conversion prices of up to 55% of the lowest price quoted on the OTC Markets for our
common stock during certain time periods prior to the conversion date. The issuance of common stock pursuant to our convertible
notes at conversion less than market prices may have the effect of limiting an increase in market price of our common stock until
all of these shares underlying the convertible debt have been issued.
Michael
Chermak, our Chief Executive Officer and Member of Our Board of Directors holds 1,000,000 Series B Preferred Shares which gives
him voting control of the Company and therefore effective control of the Company.
As
the holder of the Series B Preferred, Michael Chermak, the Company’s Chief Executive Officer and a member of its board of
directors, will have 50 votes per each share of the 1,000,000 share of Series B Preferred that he owns, constituting 50,000,000
votes, on any matter submitted to the holders of the common stock of the Company, effectively giving Mr. Chermak voting control
of the Company, as there are only 29,555,446 shares of the Company’s common stock currently issued and outstanding. Upon
the issuance of the Series B Preferred to Mr. Chermak on March 29, 2019, he acquired voting control over the Company which resulted
in a change of control of the Company. In addition to the voting power held by Mr. Chermak via the Series B Preferred, he is also
the holder of 5,359,223 shares of the Company’s common stock representing 18.14% of the issued and outstanding shares of
the Company’s common stock. As a result of the issuance of the preferred, Mr. Chermak’s total voting percentage, including
his common stock, is now 69.59%. This leaves our shareholders with no control over our business and operations, and any investors
in our Company should be aware of this risk.
Because
our officers and board of directors will make all management decisions, you should only purchase our securities if you are comfortable
entrusting our directors to make all decisions.
Our
board of directors will have the sole right to make all decisions with respect to our management. Investors will not have an opportunity
to evaluate the specific projects that will be financed with future operating income. You should not purchase our securities unless
you are willing to entrust all aspects of our management to our officers and directors.
Our
issuance of additional common stock in exchange for services or to repay debt would dilute your proportionate ownership and voting
rights and could have a negative impact on the market price of our common stock.
We
may generally issue shares of common stock upon conversion of our convertible debt, to pay for debt or services, without further
approval by our stockholders based upon such factors as our board of directors may deem relevant at that time. It is possible
that we will issue additional shares of common stock under circumstances we may deem appropriate at the time. Any such new issuances
may cause a decrease in the quoted price of our common stock.
Our
common stock is thinly traded, and there is no guarantee of the prices at which the shares will trade.
Trading
of our common stock is conducted on the OTCQB Marketplace operated by the OTC Markets Group, Inc. under the trading symbol “OZSC.”
Not being listed for trading on an established securities exchange has an adverse effect on the liquidity of our common stock,
not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing
of transactions and reduction in security analysts’ and the media’s coverage of the Company. This may result in lower
prices for your common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked
prices for our common stock. Historically, our common stock has been thinly traded, and there is no guarantee of the prices at
which the shares will trade, or of the ability of stockholders to sell their shares without having an adverse effect on market
prices.
Our common stock may be considered
a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult
to sell.
Our
common stock is considered to be a “penny stock.” It does not qualify for one of the exemptions from the definition
of “penny stock” under Section 3a51-1 of the Exchange Act. Our common stock is a “penny stock” because
it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded
on a “recognized” national exchange or (iii) it is not quoted on the NASDAQ Global Market, or has a price less than
$5.00 per share. The principal result or effect of being designated a “penny stock” is that securities broker-dealers
participating in sales of our common stock are subject to the “penny stock” regulations set forth in Rules 15-2 through
15g-9 promulgated under the Securities Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to
provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written
receipt of the document at least two business days before effecting any transaction in a penny stock for the investor's account.
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks
before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information
concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on
that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge
and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with
a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive
a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation,
investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming
for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
FINRA
sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend
that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect
on the market for our shares.
Rule 144 sales in the future may have
a depressive effect on the company's stock price as an increase in supply of shares for sale, with no corresponding increase in
demand will cause prices to fall.
All
of the outstanding shares of common stock held by the present officers, directors, and affiliate stockholders are "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares
may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions
from registration under the Securities Act of 1933 and as required under applicable state securities laws. Rule 144 provides in
essence that a person who is an affiliate or officer or director who has held restricted securities for six months may, under
certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of
1.0% of a Company's issued and outstanding common stock. There is no limit on the amount of restricted securities that may be
sold by a non-affiliate after the owner has held the restricted securities for a period of six months if the Company is a current
reporting company under the Securities Exchange Act of 1934. A sale under Rule 144 or under any other exemption from the Securities
Act of 1933 if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have depressive
effect upon the price of the common stock in any market that may develop.
There may in all likelihood be little demand
for shares of our common stock and as a result, investors may be unable to sell at or near ask prices or at all if they need to
liquidate their investment.
There
may be little demand for shares of our common stock on the OTC Markets, meaning that the number of persons interested in purchasing
our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable
to a number of factors, including the fact that it is a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or influence sales volume, and that even if the Company
came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company
such as ours or purchase or recommend the purchase of any of our Securities until such time as it became more seasoned and viable.
As a consequence, there may be periods of several days or more when trading activity in the Company's securities is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on the securities price. We cannot give investors any assurance that a broader or more
active public trading market for the Company's common securities will develop or be sustained, or that any trading levels will
be sustained. Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near
ask prices or at all if they need money or otherwise desire to liquidate their securities of the Company.
We do not expect to pay dividends in
the future; any return on investment may be limited to the value of our common stock.
We
do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will
depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors
may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital
base and development and marketing efforts. There can be no assurance that the Company will ever have sufficient earnings to declare
and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole
discretion of our board of directors. If we do not pay dividends, our common stock may be less valuable because a return on your
investment will only occur if its stock price appreciates.
Investors who purchase shares of our
common stock should be aware of the possibility of a total loss of their investment.
An
investment in our common stock involves a substantial degree of risk. Before making an investment decision, you should give careful
consideration to the risk factors described in this section in addition to the other information contained in this Agreement.
The risk factors described herein, however, may not reflect all of the risks associated with our business or an investment in
our common stock. You should invest in our Company only if you can afford to lose your entire investment.
When we issue additional shares of common
stock in the future, it will result in the dilution of our existing stockholders.
Our
certificate of incorporation authorizes the issuance of up to 290,000,000 shares of common stock with a $0.001 par value, and
29,555,446 common shares are currently issued and outstanding. If we issue any additional shares, such issuance will cause a reduction
in the proportionate ownership and voting power of all current stockholders. Further, such issuance may result in a change of
control of our corporation.
Our
inability to maintain internal controls over financial reporting and procedures (see “Item 9A. Controls and Procedures”),
could have a material adverse effect on our investors’ confidence in our reported financial information. There is no guarantee
that our internal controls over financial reporting and procedures will not fail in the future.
A
review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer and
Chief Financial Officer, as of the end of the period covered by this annual report on Form 10-K, of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report.
Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December
31, 2018, disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.
Effective internal controls over financial reporting and disclosure controls and procedures are necessary to provide reliable
financial reports and to detect and prevent fraud. Our significant assessment and remediation measures we have taken may not be
sufficient to maintain investors’ confidence, and a damage to our reputation may result in an adverse impact to our
financial position and results of operations. Our disclosure controls and internal controls over financial reporting may not prevent
all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable,
as opposed to absolute, assurances that the objectives of the control system will be met. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within our business have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple errors or mistakes. Individual acts can also circumvent these controls
through collusion of two or more people or through our executive’s override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving
its stated goals under all potential conditions. Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective
control system, misstatements due to error or fraud may have occurred and may not have been detected. A failure in any of our
internal controls and procedures may result in (i) enforcement actions by the SEC or other governmental or regulatory bodies;
(ii) litigation; (iii) loss of reputation; (iv) loss of investor confidence; (v) inability to acquire capital; or (vi) other material
adverse effects on our Company.
Under
our Amended and Restated Articles of Incorporation and Nevada law, we could issue “blank check” preferred stock without
stockholder approval, which would dilute our then current stockholders’ interests and impair such stockholders’ voting
rights, discouraging a takeover that our stockholders may consider favorable.
Our
certificate of incorporation, as amended, provides that we may authorize and issue up to 10,000,000 shares of “blank check”
preferred stock with designations, rights, and preferences as may be determined from time to time by our Board. Our Board has
issued 1,000,000 of Series B Preferred, and is empowered, without stockholder approval, to issue one or more series of preferred
stock with dividend, liquidation, conversion, voting, or other rights, which could dilute the interest of or impair the voting
power of our holders of Common Stock. The issuance of a series of preferred stock could be used as a method of discouraging, delaying,
or preventing a change in control. For example, it would be possible for our Board to issue preferred stock with voting or other
rights or preferences that could impede the success of any attempt to change control of our Company.
If
our Common Stock becomes subject to a “chill” or a “freeze” imposed by the Depository Trust Company (“DTC”)
our stockholders’ ability to sell shares may be limited.
The
DTC acts as a depository or nominee for street name shares or stock that investors deposit with their brokers. Although through
DTC our Common Stock is eligible for electronic settlement, historically DTC has imposed a chill or freeze on the deposit, withdrawal,
and transfer of common stock of issuers whose common stock trades on the OTC Markets. Depending on the type of restriction, it
can prevent our stockholders from buying or selling our shares of Common Stock and prevent us from raising money. A chill or freeze
may remain imposed on a security for a few days or an extended period. While we have no reason to believe a chill or freeze will
be imposed against our Common Stock, if DTC did so, our stockholders’ ability to sell their shares would be limited.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
We
do not own any real estate or other properties. Our corporate office utilizes the office of our CFO in West Palm
Beach, Florida at no cost to the Company. During 2018, the Company rented on a month to month basis office space in
California from Regus. The Company cancelled the month to month lease in October 2018. During 2017 and 2018 we utilized
office space for Ozop Surgical Limited in Hong Kong on a month to month basis.
ITEM
3. LEGAL PROCEEDINGS.
We
know of no legal proceedings to which we are a party or to which any of our property is the subject which are pending, threatened
or contemplated or any unsatisfied judgments against us.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s common stock began trading on May 8, 2017, on the over-the-counter market, and is now quoted on the OTCQB tier
of the OTC Markets Group Inc. under the symbol “OZSC.” The closing price of our common stock on the OTCQB on April
15, 2019 was $0.43.
Market
Information
The
following table sets forth, for the periods indicated the high and low bid quotations for our common stock. These quotations represent
inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions.
Period
|
|
|
High
|
|
|
|
Low
|
|
Fiscal
Year 2018
|
|
|
|
|
|
|
|
|
First
Quarter (January 1, 2018 – March 31, 2018)
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
Second
Quarter (April 1, 2018 – June 30, 2018)
|
|
$
|
1.75
|
|
|
$
|
1.20
|
|
Third
Quarter (July 1, 2018 – September 30, 2018)
|
|
$
|
1.75
|
|
|
$
|
1.75
|
|
Fourth
Quarter (October 1, 2018 – December 31,2018)
|
|
$
|
1.85
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2017
|
|
|
|
|
|
|
|
|
First
Quarter (January 1, 2017 – March 31, 2017)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Second
Quarter (April 1, 2017 – June 30, 2017)
|
|
$
|
1.20
|
|
|
$
|
0.70
|
|
Third
Quarter (July 1, 2017 - September 30, 2017)
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
Fourth
Quarter (October 1, 2017 – December 31, 2017)
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
Holders
As
of December 31, 2018, the Company had 29,068,202 shares of our common stock issued and outstanding held by 51 holders of record.
Dividends
We
have not declared or paid dividends on our common stock since our formation, and we do not anticipate paying dividends in the
foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of our Board of Directors
and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed
relevant by the Board of Directors. There are no contractual restrictions on our ability to declare or pay dividends.
Securities
authorized for issuance under equity compensation plan
s
None
RECENT
SALES OF UNREGISTERED SECURITIES
As
of December 31, 2018, the Company had 290,000,000 shares of $0.001 par value common stock authorized and there were 29,068,202
shares of common stock issued and outstanding.
The
following reflects all sales of unregistered securities during the period covered by this Annual Report that have not been previously
disclosed.
Issuances
of Common Stock
On
October 24, 2018, the company recorded the issuance of 20,000 shares of common stock pursuant to a consulting agreement.
On
November 21, 2018, the company recorded the issuance of 57,000 shares of common stock for services provided to the Company.
During
the year ended December 31, 2018, holders of an aggregate of $776,357 in principal and accrued interest of convertible debt issued
by OZOP converted their debt and accrued interest into 1,463,701 shares of our common stock at an average conversion price of
$0.53 per share.
The
above issuances of common stock were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended
(the “Act”), in reliance upon exemptions from the registration requirements of the Act in transactions not involving
a public offering, including, but not limited to the exemption provided pursuant to Rule 506(b) of Regulation D, as promulgated
by the Securities and Exchange Commission under the Act for offers and sales of restricted securities in a private, non-public
transaction to accredited investors, as defined in Rule 501 of Regulation D.
OTHER
STOCKHOLDER MATTERS
None.
Item
6. Selected Financial Data
Not
applicable to smaller reporting companies
.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following is management’s discussion and analysis of certain significant factors that have affected our financial position
and operating results during the periods included in the accompanying consolidated financial statements, as well as information
relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,”
“estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are
intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the
matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to
time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed
on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking
statements.
The
independent auditors’ reports on our financial statements for the years ended December 31, 2018 and 2017 includes a “going
concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s
plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 12 to the consolidated
financial statements filed herein.
While
our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised
a substantial doubt about our ability to continue as a going concern.
THE
COMPANY
Ozop
Surgical Corp. (the “Company,” “we,” “us” or “our”) was originally incorporated
as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of renting out Segways and bicycles.
Following the acquisition of OZOP Surgical, Inc. as discussed below, we have been engaged in the business of inventing, designing,
developing, manufacturing and globally distributing innovative endoscopic instruments, surgical implants, instrumentation, devices
and related technologies, focused on spine, neurological and pain management procedures and specialties.
On
April 13, 2018, we entered into and completed a share exchange agreement (the "Share Exchange Agreement") with OZOP
Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the
then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders
transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of
our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock
pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the
Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group,
owning 96.9% of such shares. The merger was accounted for as a reverse merger, whereby OZOP was considered the accounting acquirer
and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment for a “reverse merger”
or a “reverse acquisition,” the historical financial statements prior to the reverse merger were and will be replaced
with the historical financial statements of OZOP prior to the reverse merger, in all future filings with the SEC. The consolidated
financial statements after completion of the reverse merger have and will include the assets, liabilities and results of operations
of the combined company from and after the closing date of the reverse merger.
In
connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij
for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant
to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company's Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry and Eric Siu were named
as directors of the Company. On March 3, 2019, Mr. Thomas McLeer was named a director. Mr. Chaudhry resigned form our board of
directors on March 4, 2019, and Mr. Siu resigned from the board on March 5, 2019.
On
May 8, 2018, we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to
Ozop Surgical Corp.
in
order to
reflect
more
accurately the
name
of our core
service
offering
and operations. The
Amendment
also
increased
our
authorized shares of capital stock to 300,000,000, of
which
290,000,000
has been designated as common stock, par
value
$0.001, and 10,000,000 shares
have
been
designated as preferred stock, par
value
$0.001 (the “Preferred Stock”).
The
Preferred
Stock
shall
be
issuable in
such
series, and with such designations, rights and preferences as the Board of Directors
may
determine
from
time
to
time.
The
Company’s trading symbol for its common stock which trades on the OTC PINK Tier of the OTC Markets, Inc. was changed to
“OZSC” effective on May 21, 2018.
On
April 19, 2018, the Board of Directors of the Company authorized a Private Placement Memorandum (the “April PPM”),
which as amended, was an offering of a minimum of $50,000 and up to $3,000,000 of up to 6,000,000 shares of common stock for a
price of $0.50 per share (the “Purchase Price”). During the year ended December 31, 2018, we sold 500,000 shares of
common stock pursuant to the April PPM and received proceeds of $250,000.
On
October 13, 2018, the Board of Directors of the Company authorized a Private Placement Memorandum (the “October PPM”)
offering of a minimum of $50,000 and up to $3,000,000 of up to 6,000,000 units (a “Unit”), for a price of $0.50 per
Unit (the “Purchase Price”) with each Unit consisting of one (1) share of Common Stock and a warrant (a “Warrant”)
to purchase one (1) share of Common Stock, with each Warrant having a three year term and an exercise price of $1.00 per share
of Common Stock. During the year ended December 31, 2018, we sold 100,000 Units of the October PPM at $0.50 per Unit, issued 100,000
shares of our common stock and received proceeds of $50,000.
OZOP
OZOP
was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”).
On July 19, 2016, Mr. Eric Siu (“Siu”), one of our directors purchased 100% of the outstanding capital stock of Perma
and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled as
a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, Ozop formed as the sole member, Ozop Surgical,
LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, Ozop acquired 100% of Ozop Surgical Limited
(“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong
Kong.
On
February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas
limited liability company (“Spinus
”
), from RWO Medical Consulting LLC (“RWO”), a Texas limited
liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000
shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant
to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt is secured by
Spinus’s assets and is due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum
of a $3,000,000 equity raise. The Company paid the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of
net sales on any product sold utilizing any of the patents. There have not been any sales of the licensed products and accordingly,
no royalties have been incurred.
Results
of Operations for the year ended December 31, 2018 and 2017:
Revenue
For
the year ended December 31, 2018, the Company generated total revenue of $157,458 compared to $56,612 for the year ended December
31, 2017. The revenues are from the sale of spine surgery products and endoscopes. The increase in revenues is a result of revenues
of $107,851 for the year ended December 31, 2018, from Spinus. Spinus was acquired in February 2018 and therefore there were no
revenues in the 2017 period from Spinus.
Cost
of revenues
For
the year ended December 31, 2018, cost of revenues was $39,692 compared to $38,761 for the year ended December 31, 2017.
Operating
expenses
Total
operating expenses for the year ended December 31, 2018, were $1,561,539 compared to $1,361,416 for the year ended December 31,
2017. The operating expenses were comprised of:
|
|
Year ended
December 31,
|
|
|
2018
|
|
2017
|
Management fees
|
|
$
|
545,901
|
|
|
$
|
378,007
|
|
Professional and consulting fees
|
|
|
235,279
|
|
|
|
425,153
|
|
Stock based compensation
|
|
|
334,333
|
|
|
|
—
|
|
Rent
|
|
|
22,075
|
|
|
|
22,081
|
|
Research and development
|
|
|
88,572
|
|
|
|
264,563
|
|
Other
|
|
|
335,379
|
|
|
|
271,612
|
|
Total
|
|
$
|
1,561,539
|
|
|
$
|
1,361,416
|
|
The
increase in management fees is a result of the Company engaging a CFO in 2018, and incurring expenses of $120,000 for the year
ended December 31, 2018, as well as effective October 1, 2018, hiring a new chief operating officer, and incurring $45,000 of
expense for the year ended December 31, 2018. The Company estimates current annual expense for management fees to be approximately
$480,000 for fiscal year ended December 31, 2019. The Company also anticipates hiring additional employees beginning in the second
quarter of 2019.
Professional
and consulting fees decreased in the current period as the 2017 period included approximately $379,000 of expenses for fees related
to services provided as the Company was attempting to go public in European markets. During the year ended December 31, 2018,
the Company completed the reverse merger and has engaged US counsel on a monthly retainer of $6,500. In addition to the monthly
retainer, in 2019, the Company anticipates additional legal expenses related to patent filings as well as the filing of a registration
statement, pursuant to various Registration Rights Agreements the Company has executed.
Stock
compensation expense of $334,333 for the year ended December 31, 2018, is comprised of:
-
On
July 1, 2018, the Company recorded the issuance of 30,000 of common stock for legal services. The Company valued the shares at
$0.50 per share (the price the Company was selling shares of common stock on the date of the agreement), pursuant to the April
PPM and recorded $15,000 of stock- based compensation expense.
-
On
September 30, 2018, the company recorded the issuance of 650,000 shares of common stock pursuant to a one-year consulting agreement.
The Company valued the shares at $0.50 per share (the price the Company was selling shares of common stock on the date of the
agreement), pursuant to the April PPM. The Company recorded $325,000 as deferred stock compensation to be amortized over the term
of the agreement, and accordingly has included $108,333 in stock-based compensation for the year ended December 31, 2018.
-
On
October 19, 2018, the company recorded the issuance of 450,000 shares of common stock, as the first tranche of a one- year consulting
agreement requiring a total of 1,800,000 shares. The Company valued the shares issued at $0.50 per share (the price the Company
was selling shares of common stock on the date of the agreement), pursuant to the October PPM. The Company recorded $225,000 as
deferred stock compensation to be amortized over the first three months of the agreement, and accordingly has included $172,500
in stock-based compensation for the year ended December 31, 2018.
-
On
October 24, 2018, the company recorded the issuance of 20,000 shares of common stock pursuant to a consulting agreement. The Company
valued the shares at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement),
pursuant to the October PPM and recorded $10,000 of stock- based compensation expense.
-
On
November 21, 2018, the company recorded the issuance of 57,000 shares of common stock for services provided to the Company. The
Company valued the shares at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement),
pursuant to the October PPM and recorded $28,500 of stock- based compensation expense.
Research
and development costs in the 2017 period were related to Ozop Surgical Limited, our Hong Kong subsidiary. Additionally, Spinus’s
research and development expenses for the year ended December 31, 2018, of $88,572, is included in the 2018 period. The Company
anticipates incurring substantial research and development costs in 2019 and beyond as it continues to develop, engineer and test
prototypes of new products to be introduced to the market.
General
and administrative expenses, other
Other
general and operating expenses were $335,379 and $271,612 for the years ended December 31, 2018, and 2017, respectively, and were
comprised of:
|
|
Year ended
December 31,
|
|
|
2018
|
|
2017
|
Travel expenses
|
|
$
|
107,553
|
|
|
$
|
99,004
|
|
Advertising and marketing
|
|
|
43,527
|
|
|
|
19,454
|
|
Trade show expenses
|
|
|
35,922
|
|
|
|
—
|
|
Meals and entertainment
|
|
|
20,605
|
|
|
|
16,094
|
|
Commissions
|
|
|
12,332
|
|
|
|
—
|
|
Filing fees
|
|
|
11,724
|
|
|
|
48,394
|
|
General and administrative
|
|
|
103,716
|
|
|
|
88,666
|
|
Total
|
|
$
|
335,379
|
|
|
$
|
271,612
|
|
Other
Income (Expenses)
Other
expenses, net, for the year ended December 31, 2018 was $1,046,932, compared to other expenses, net, of $70,485, for the year
ended December 31, 2017, were as follows.
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
Interest expense
|
|
$
|
442,845
|
|
|
$
|
70,485
|
|
Loss on change in fair value of derivatives
|
|
|
33,787
|
|
|
|
—
|
|
Amortization of debt discounts
|
|
|
1,232,154
|
|
|
|
—
|
|
Gain on extinguishment of debt
|
|
|
(661,854
|
)
|
|
|
—
|
|
Total other expense (income), net
|
|
$
|
1,046,932
|
|
|
$
|
70,485
|
|
The
increase in other expense is primarily a result of increases in interest expense and amortization of debt discounts, partially
offset by gains on extinguishment of debt for the year ended December 31, 2018.
Net
loss
The
net loss for the years ended December 31, 2018, and 2017, was $2,490,705 and $1,414,050, respectively. The increases
are a result of the changes discussed above.
Liquidity
and Capital Resources
Currently,
we have limited operating capital. The Company anticipates that it will require a minimum of $6,000,000 of working capital to
complete substantially all of its desired business activity for the next twelve months, including bringing new products to market
as well as meeting the qualifications for an uplist to the NASDAQ market. The Company has earned limited revenue from its business
operations. Our current capital and our other existing resources will be sufficient only to provide a limited amount of working
capital, and, to date, the revenues generated from our business operations have not been sufficient to fund our operations or
planned growth. As noted above, we will require additional capital to continue to operate our business, and to further expand
our business. We may be unable to obtain the additional capital required. Our inability to generate capital or raise additional
funds when required will have a negative impact on our operations, business development and financial results.
For
the year ended December 31, 2018, we primarily funded our business operations with $1,533,000 of proceeds from the issuance of
a note payable ($230,000) and convertible note financings ($1,527,425) as well as $300,000 from the sale of 600,000 shares of
common stock at $0.50 per share. Of the proceeds $350,000 was used to redeem 2,000,000 shares of common stock from our former
CEO, $471,812 used to make payments on convertible debt of $201,800 and a note payable of $270,012 and for working capital. We
are conducting a private placement offering to seek to raise the necessary working capital to continue to fund our business operations,
or we may continue to rely on the issuance of convertible promissory notes to fund our business operations.
As
of December 31, 2018, we had cash of $50,903 as compared to $111,035 at December 31, 2017. As of December 31, 2018, we had current
liabilities of $3,007,578 (including $1,199,514 of non-cash derivative liabilities), compared to current assets of $199,327, which
resulted in a working capital deficit of $2,808,251. The current liabilities are comprised of accounts payable, accrued expenses,
convertible debt, derivative liabilities, license fees payable and notes payable.
Operating
Activities
For
the year ended December 31, 2018, net cash used in operating activities was $835,376, compared to $972,845 for the year ended
December 31, 2017. For the year ended December 31, 2018, our net cash used in operating activities was primarily attributable
to the net loss of $2,490,705 and a gain of $661,854 in extinguishment of debt, adjusted by the non-cash expenses of interest
and amortization and depreciation of $1,582,786, stock based compensation of $333,333 and loss on the change in fair value of
derivatives of $33,787. Net changes of $366,274 in operating assets and liabilities reduced the cash used in operating activities.
For the year ended December 31, 2017, our net cash used in operating activities was primarily attributable to the net loss adjusted
by the net changes of $415,445 in operating assets and liabilities.
Investing
Activities
For
the year ended December 31, 2018, cash used investing activities of $236,066 was comprised of the cash acquired in the Spinus
acquisition of $21,580, offset by the purchase of office equipment of $7,646 and payment of $250,000 under the Spinus license
agreement. For the year ended December 31, 2017, the Company purchased office equipment of $1,944.
Financing
Activities
For
the year ended December 31, 2018, the net cash provided by financing activities was $1,011,188, compared to $960,000 for the year
ended December 31, 2017. During the year ended December 31, 2018, we received $1,333,000 of proceeds from the issuance of a note
payable ($230,000) and convertible note financings ($1,527,425) as well as $300,000 from the sale of 600,000 shares of common
stock at $0.50 per share. Payments of $350,000 was used to redeem 2,000,000 shares of common stock from our former CEO and we
also made payments on convertible debt of $201,800 and notes payable of $270,012. The net cash provided by financing activities
of $960,000 for the year ended December 31, 2017, resulted from proceeds of $710,000 from the issuances of convertible notes and
$250,000 from the issuance of notes payable.
Critical
Accounting Policies
Our
significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in
this Annual Report on Form 10-K. We believe the following accounting policies to be most critical to the judgement and estimates
used in the preparation of our financial statements:
Basis
of Presentation
The
accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the
United States of America ("US GAAP"). The consolidated financial statements of the Company
include
the consolidated accounts of the Company and Ozop and its’ wholly owned subsidiaries; Ozop LLC, Ozop HK and Spinus. All
intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the
Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies
by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in
the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in
the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue
has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue
is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed
and determinable; and (4) the collectability of the fee is reasonably assured.
Revenues
from Spinus of $107,851 are recognized as an agent and are recorded at net. There was no impact on the Company’s
financial statements as a result of adopting Topic 606 for the years ended December 31, 2018 and 2017.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended
December 31, 2018, the Company recorded $88,572 and $264,563 of research and development expenses, respectively.
Earnings
(Loss) Per Share
The
Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation
of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using
the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive.
OFF
BALANCE SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk
support and credit risk support or other benefits.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Index to Financial Statements and Financial Statement Schedules appearing on pages F1-F20 of this annual report on Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
A
review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the
“CEO”) and Chief Financial Officer (the “CFO”), as of the end of the period covered by this annual report
on Form 10-K, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of
the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that
as of December 31, 2018, disclosure controls and procedures were not effective at ensuring that the material information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of
SEC rules and forms.
Management’s
Report on Internal Controls over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes
designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP and includes those policies and procedures that:
•
|
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of
our assets;
|
•
|
Provide
reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance
with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted
that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Our
CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules
13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013
framework)
.
As a result of this evaluation, we concluded that our internal control
over financial reporting was not effective as of December 31, 2018,
as described below.
We
assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified
the following material weaknesses:
Insufficient
Resources:
We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate
Segregation of Duties
: We have an inadequate number of personnel to properly implement control procedures.
Lack
of Audit Committee:
We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment
and monitoring of required internal controls and procedures.
We
are committed to improving the internal controls and will (1) consider using third party specialists to address shortfalls in
staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations
of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may
consider appointing additional outside directors and audit committee members in the future.
We
have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of
these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or
interim financial statements could occur that would not be prevented or detected.
This
Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting
firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.
Changes
in Internal Control over Financial Reporting
There
have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
OFF
BALANCE SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk
support and credit risk support or other benefits.
Notes
to Consolidated Financial Statements
December
31, 2018
NOTE
1 - ORGANIZATION
Business
Ozop
Surgical Corp. (the” Company,” “we,” “us” or “our”) was originally incorporated
as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of the renting different kind of Segways
and bicycles, dual wheels self-balancing electric scooters and related safety equipment. Following the acquisition of OZOP Surgical,
Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and distributing
innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological
and pain management procedures and specialties.
Reverse
Merger
On
April 13, 2018, we entered into and completed a share exchange agreement (the "Share Exchange Agreement") with OZOP
Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the
then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders
transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of
our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock
pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the
Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group,
owning 96.9% of such shares. Currently, our executive officers and directors, as a group, own 6,374,223 of our shares representing
21.81 % of our issued and outstanding shares of common stock. The merger was accounted for as a reverse merger, whereby OZOP was
considered the accounting acquirer and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment
for a “reverse merger” or a “reverse acquisition,” the Company’s historical financial statements
prior to the reverse merger were and will be replaced with the historical financial statements of OZOP prior to the reverse merger,
in all future filings with the U.S. Securities and Exchange Commission (the “SEC”).
In
connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij
for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant
to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company's Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry (resigned March 4, 2019)
and Eric Siu (resigned March 5, 2019) were named as directors of the Company.
Corporate
Matters
On
May 8, 2018, we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to
Ozop Surgical Corp.
in
order to
reflect
more
accurately the
name
of our core
service
offering
and operations. The
Amendment
also
increased
our
authorized shares of capital stock to 300,000,000, of
which
290,000,000
has been designated as common stock, par
value
$0.001, and 10,000,000 shares
have
been
designated as preferred stock, par
value
$0.001 (the “Preferred Stock”).
The
Preferred Stock
shall
be
issuable
in
such series, and with such designations, rights and preferences as the Board of Directors
may
determine
from
time
to
time.
On
March 28, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 1,000,000 shares
as Series B Preferred Stock. The Series B Preferred Stock is not convertible into common stock, nor does the Series B Preferred
Stock have any right to dividends and any liquidation preference. The Series B Preferred Stock entitles its holder to a number
of votes per share equal to 50 votes. On March 29, 2019, the Company issued 1,000,000 shares of its Series B Preferred Stock to
the Company’s CEO in consideration of $25,000 of accrued expenses, the Company’s failure to timely pay current and
past due management fees, and the willingness to accrue unpaid management fees.
OZOP
OZOP
was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG
(“Perma”). On July 19, 2016, Mr. Eric Siu (“Siu”), one of our directors purchased 100% of the
outstanding capital stock of Perma and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On December
20, 2016, our shareholders purchased Blitz 16-577 AG, a German company from the sole shareholder, and changed the name of the
corporation to Ozop Medical AG (“Ozop Medical”). On February 1, 2018, Ozop AG was re-domiciled as a
Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, Ozop formed as the sole member, Ozop
Surgical, LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, Ozop acquired 100% of Ozop
Surgical Limited (“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited
company incorporated in Hong Kong.
On
February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas
limited liability company (“Spinus
”
), from RWO Medical Consulting LLC (“RWO”), a Texas limited
liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000
shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant
to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt is secured by
Spinus’s assets and is due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum
of a $3,000,000 equity raise. OZOP acquired Spinus to gain control of a license rights agreement for exclusive rights to intellectual
property related to minimally invasive spine surgery techniques. The Assumed Debt of $250,000 was paid in November 2018.
The
following table summarizes the preliminary value of the consideration issued and the preliminary purchase price allocation of
the fair value of assets acquired and liabilities assumed in the acquisition:
|
|
Purchase Price Allocation
|
Fair value of consideration issued
|
|
$
|
250,000
|
|
Liabilities assumed
|
|
|
532,289
|
|
Total purchase consideration
|
|
$
|
782,289
|
|
Assets acquired
|
|
$
|
543,138
|
|
Goodwill
|
|
|
239,151
|
|
|
|
$
|
782,289
|
|
The
total purchase price of $782,289 has been allocated on a preliminary basis to the tangible and intangible assets acquired and
liabilities assumed based on preliminary estimated fair values as of the completion of the Acquisition. These allocations reflect
various preliminary estimates that are currently available and are subject to change upon the valuation being finalized within
the measurement period. The final fair value of Spinus’s identifiable intangible assets will be determined primarily using
the income approach which requires an estimate or forecast of all the expected future cash flows, either through the use of the
relief-from-royalty method or the multi-period excess earnings method. The Company will record amortization expense assuming a
straight-line basis over the expected life of the finite lived intangible assets, which approximates expected future cash flows.
Goodwill
represents the amount by which the estimated consideration transferred exceeds the historical costs of the assets the Company
acquired and the liabilities the Company assumed. The Company will not amortize the goodwill, but will instead test the goodwill
for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in
the United States of America ("US GAAP"). The consolidated financial statements of the Company
include
the consolidated accounts of the Company and its’ wholly owned subsidiary Ozop and its’ wholly owned
subsidiaries; Ozop LLC, Ozop HK, Ozop Medical and Spinus. All intercompany accounts and transactions have been eliminated in
consolidation.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally
insured limits
Sales
Concentration and credit risk
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the years ended December
31, 2018, and 2017, and their accounts receivable balance as of December 31, 2018:
|
|
Sales % Year Ended December 31, 2018
|
|
Sales % Year Ended
December 31, 2017
|
|
Accounts receivable balance December 31, 2018
|
Customer A
|
|
|
68.5
|
%
|
|
|
-0-
|
|
|
$
|
45,818
|
|
Customer B
|
|
|
31.5
|
%
|
|
|
69.9
|
%
|
|
|
—
|
|
Customer C, related party
|
|
|
-0-
|
|
|
|
30.1
|
%
|
|
|
—
|
|
Accounts
Receivable
The Company records accounts receivable at the time products and services are delivered. An allowance for losses is established
through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes
collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated
losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience.
Inventory
Inventory,
which will consist of finished goods, is valued at the lower of cost or net realizable value. Cost is determined using the
first in first out (FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management
analysis or inventory levels and future sales forecasts. The Company has not recorded any loss during the periods
presented.
Purchase
concentration
The
principal purchases by the Company are comprised of finished goods that the Company sells to its customers. During the
years ended December 31, 2018 and 2017, the Company purchased from one supplier.
Management
believes that other suppliers could provide similar products on comparable terms. A change in suppliers, however, could cause
a delay and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.
Property,
plant and equipment
Property
and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets.
The
Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the
carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:
|
|
December
31,
2018
|
|
December
31,
2017
|
Office equipment
|
|
$
|
9,590
|
|
|
$
|
1,944
|
|
Less: Accumulated Depreciation
|
|
|
(2,391
|
)
|
|
|
(621
|
)
|
Property and Equipment, Net
|
|
$
|
7,199
|
|
|
$
|
1,323
|
|
Depreciation
expense was $1,770 and $621 for the years ended December 31, 2018, and 2017, respectively
Intangible
Assets
Intangible
assets primarily represent purchased license rights. The Company amortizes these costs over the shorter of the legal life of the
patent or its estimated economic life using the straight-line method. The Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows to be generated
by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The Company has not recognized impairment losses for any
long-lived assets.
For the year
ended December 31, 2018, the Company recorded amortization expense of $36,458. There was no amortization expense for the year
ended December 31, 2017. Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair
value of assets acquired, and liabilities assumed in a business acquisition. In accordance with ASC 350,
“Intangibles—Goodwill
and Other,”
goodwill and other intangible assets with indefinite lives are no longer subject to amortization but
are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.
Goodwill
The
Company reviews the goodwill allocated to each of our reporting units for possible impairment annually as of December 31 and whenever
events or changes in circumstances indicate carrying amount may not be recoverable. When assessing goodwill for impairment, the
Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads
to a determination that it is more likely than not that the fair value of a reporting unit is less than its’ carrying amount.
If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value
of a reporting unit is less than its’ carrying amount, then the Company performs a two-step impairment test. If the Company
concludes otherwise, then no further action is taken. The Company also has the option to bypass the qualitative assessment and
only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test,
the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill,
to the estimated fair value of the reporting unit. There were no events or changes in circumstances that indicated potential impairment
of intangible assets during 2018 and 2017.
In
assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the
carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting
unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include
the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance
and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively
or negatively and the magnitude of any such impact.
The
carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing
goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit,
the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit.
Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to
our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value
of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets
acquired and liabilities assumed that are assigned to the reporting unit.
If
the carrying amount of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform
the second step of the impairment analysis to measure the amount of the impairment loss, by allocating the reporting unit’s
fair value to its assets and liabilities other than goodwill, comparing the carrying amount of the goodwill to the resulting implied
fair value of the goodwill, and recording an impairment charge for any excess.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company
recognizes revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify
the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price
to each performance obligation in the contract (if any); and (5) recognize revenue when each performance obligation is
satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 —
Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount
of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The
Company has no outstanding contracts with any of is’ customers. Revenues from Spinus of $107,851 are recognized as an
agent and are recorded at net. There was no impact on the Company’s financial statements as a result of adopting Topic
606 for the years ended December 31, 2018 and 2017.
Advertising
and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the years ended December 31, 2018, and 2017, the Company recorded
$43,527 and $19,454 of advertising and marketing expenses, respectively.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended
December 31, 2018, the Company recorded $88,572 and $264,563 of research and development expenses, respectively.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives
and Hedging Activities.
Applicable
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative i
nstrument
are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP
with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded
derivative instrument would be considered a derivative instrument.
The
Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated
from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized over the term of the related debt to their stated date of redemption.
The
Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment
standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at
their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting
liabilities.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
•
|
Level 1 - Observable
inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level
3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts
payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of
the short maturity of these instruments.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
December 31, 2018, for each fair value hierarchy level:
December 31, 2018
|
|
Derivative
Liabilities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,199,514
|
|
|
$
|
1,199,514
|
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers
it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax
benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred
as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of
the reporting periods presented.
Foreign
Currency Translation
The
accounts of the Company's Hong Kong subsidiary are maintained in Hong Kong dollars and the accounts of the U.S. companies are
maintained in USD. The accounts of the Hong Kong subsidiary were translated into USD in accordance with Accounting Standards Codification
("ASC") Topic 830, Foreign Currency Matters. According to Topic 830, all assets and liabilities were translated at the
exchange rate on the balance sheet date; stockholders' equity is translated at historical rates and statement of comprehensive
income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting from the foreign
currency transactions are reflected in the statements of comprehensive income.
Relevant
exchange rates used in the preparation of the consolidated financial statements are as follows for the periods ended December
31, 2018, and 2017 (Hong Kong dollar per one U.S. dollar):
|
|
December 31,
2018
|
|
December 31,
2017
|
Balance sheet date
|
|
|
0.1277
|
|
|
|
0.128
|
|
Average rate for statements of operations and comprehensive loss
|
|
|
0.1276
|
|
|
|
0.1283
|
|
Earnings
(Loss) Per Share
The
Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation
of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using
the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive.
Recent
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This
guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors
are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the
financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is
effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that
reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently
evaluating the impact of the adoption of this standard will have on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic 805) Clarifying the Definition of a Business
”
(“ASU 2017-01”). The Amendments in this Update clarify the definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation.
The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods.
Early adoption of this standard is permitted. The Company adopted ASU 2017-01 on January 1, 2018, with no significant impact on
the consolidated financial statements.
With
the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting
pronouncements during the year ended December 31, 2018, that are of significance or potential significance to the Company.
NOTE
3 – INTANGIBLE ASSETS
Intangible
assets as of December 31, 2018, consists of the following:
|
|
December 31, 2018
|
|
Patents and license rights
|
|
$
|
250,000
|
|
Accumulated amortization
|
|
|
(36,458
|
)
|
Net carrying amount
|
|
$
|
213,542
|
|
Amortization
expense for the year ended December 31, 2018 was $36,458. There was no amortization expense for the year ended December 31, 2017.
NOTE
4 - CONVERTIBLE NOTES PAYABLE
During
the year ended December 31, 2017, OZOP issued 19 convertible promissory notes (the “2017 Notes”), in amounts of $10,000
to $50,000. OZOP received proceeds of $710,000 in the aggregate. Of the 2017 Notes, $50,000 was from the wife of one of our Directors
at the time (see Note 7). The 2017 Notes mature(d) on their one- year anniversary and bear interest at ten percent (10%). The
initial conversion feature allowed the holders to convert the note and any unpaid interest due, into shares of the Company’s
common stock on the 15
th
business day that the Company becomes listed, at conversion prices equal to discounts of 35%-50%
of the average of the three lowest closing prices of the common stock. In August 2018, the Company offered any noteholder to convert
their principal and interest into shares of common stock at $0.50 per share. OZOP also issued $25,500 of convertible notes for
consulting fees. During the year ended December 31, 2018, the Company issued a $50,000 convertible promissory note (the “March
2018 Note”) and received proceeds of $50,000.
The Company determined that the conversion
feature of the 2017 Notes and the March 2018 Note (together, the “Notes”) did not meet the criteria of an embedded
derivative and therefore the conversion feature was not bi-furcated and accounted for as a derivative because the Company was
a private company, there was no quoted price and no active market for the Company’s common stock.
On
April 13, 2018, the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes
were convertible into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered
to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for
as a derivative liability. Accordingly, the fair value of the derivative instruments of the Notes that occurred prior to April
13, 2018, were recorded as a liability on April 13, 2018, with the corresponding amount recorded as a discount to the Note. Such
discount is being amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the
liability for derivative contracts are recorded in other income or expenses in the reporting period, with the offset to the derivative
liability on the balance sheet. The embedded feature included in the Notes resulted in an initial debt discount of $620,075, interest
expense of $14,000 and initial derivative liability of $634,075. For the year ended December 31, 2018, amortization of the debt
discounts of $385,688 was charged to interest expense. During the year ended December 31, 2018, investors converted $570,500 of
principal and $19,857 of accrued interest into 1,180,768 shares of common stock. Due to the conversions prior to the maturity
of the converted notes, the Company recorded additional interest expense and a loss on extinguishment of debt of $234,386. As
of December 31, 2018, the outstanding principal balance of the 2017 Notes was $165,000. The March 2018 Note was part of the above
conversions, and the balance of the March 2018 Note as of December 31, 2018 was $-0-.
On
April 13, 2018, we issued a convertible promissory note in the principal amount of $442,175 (the “Note”), pursuant
to a Securities Purchase Agreement we entered into with an investor dated April 1, 2018. The Note bears interest at the rate of
12% per annum and is due and payable on April 13, 2019. The note is convertible at any time following the funding of the note
into a variable number of the Company's common stock, based on a conversion ratio of 55% of the average of the lowest trading
price for the 25 days prior to conversion. The note was funded on April 13, 2018, when the Company received proceeds of $350,000,
after OID of $57,675, and disbursements for the lender’s transaction costs, fees and expenses of $34,500, of which $25,000
were recorded as discounts against the debt to be amortized into interest expense through maturity. Periodic payments are due
by us on the Note at the rate of $850 per day (the “Repayment Amount”) via direct withdrawal from our bank account,
beginning on April 27, 2018 and to last for a 30-day period. Following this period, the Repayment Amount increased to $1,100 per
day until the Note is satisfied in full. On June 28, 2018, the Note was amended to increase the Repayment Amount to $1,750 per
day. On August 29, 2018, the parties agreed to stop the Repayment Amount, and on November 20, 2018, the parties agreed to restart
the Repayment Amount at $1,000 per day. During the year ended December 31, 2018, principal payments of $123,800 were made. The
embedded conversion feature included in the note resulted in an initial debt discount of $359,500 interest expense of $150,730
and an initial derivative liability of $510,230. For the year ended December 31, 2018, the investor converted a total of $186,000
of the face value into 258,994 shares of common stock. For the year ended December 31, 2018, amortization of the debt discounts
of $176,887 was charged to interest expense. As of December 31, 2018, the outstanding principal balance of the note was $132,375
with a carrying value as of December 31, 2018, of $78,479, net of unamortized discounts of $53,896.
We
may prepay in full the unpaid principal and interest on the Note, with at least 20 trading days’ notice, (a) any time prior
to the 180th day after the issuance date, by paying 130% of the principal amount of the Note together with accrued interest thereon;
and (b) any time beginning on the 181st day after the issuance date and ending on the 364th day after the issuance date, by paying
150% of the principal amount of the Note together with accrued interest thereon. After the expiration of the 364th day after the
issuance date, we have no right of prepayment.
In
connection with our obligations under the Note, our executive officers and the Company entered into a Pledge Agreement (the “Pledge
Agreement”) whereby they pledged as collateral for the Note an aggregate of 19,900,000 shares of our common stock and we
pledged the shares of our subsidiary OZOP Surgical, Inc. (collectively, the “Collateral”). Upon a default under the
terms of the Note, Carebourn may, among other things, collect or take possession of the Collateral, proceed with the foreclosure
of the security interest in the Collateral or sell, lease or dispose of the Collateral.
On
August 29, 2018, we issued a convertible promissory note in the principal amount of $339,250 (the “Note”), pursuant
to a Securities Purchase Agreement we entered into with the investor. The Note bears interest at the rate of 12% per annum and
is due and payable on August 29, 2019. The note is convertible at any time following the funding of the note into a variable number
of the Company's common stock, based on a conversion ratio of 55% of the average of the lowest trading price for the 25 days prior
to conversion. The note was funded on August 29, 2018, when the Company received proceeds of $280,000, after OID of $44,250, and
disbursements for the lender’s transaction costs, fees and expenses of $15,000, which were recorded as discounts against
the debt to be amortized into interest expense through maturity. Periodic payments are due by us on the Note at the rate of $1,000
per day (the “Repayment Amount”) via direct withdrawal from our bank account, beginning on August 30, 2018, until
the Note is satisfied in full. During the year ended December 31, 2018, principal payments of $78,000 were made. The embedded
conversion feature included in the note resulted in an initial debt discount of $280,000 interest expense of $112,403 and an initial
derivative liability of $392,403. For the year ended December 31, 2018, amortization of the debt discounts of $116,853 was charged
to interest expense. As of December 31, 2018, the outstanding principal balance of the note was $261,250 with a carrying value
as of December 31, 2018, of $38,853, net of unamortized discounts of $222,397.
On
August 29, 2018, we issued a convertible promissory note in the principal amount of $55,000 (the “Note”), pursuant
to a Securities Purchase Agreement we entered into with the investor. The Note bears interest at the rate of 12% per annum and
is due and payable on March 1, 2019. The note is convertible at any time following the funding of the note into a variable number
of the Company's common stock, based on a conversion ratio of 58% of the average of the lowest trading price for the 20 days prior
to conversion. The note was funded on August 29, 2018, when the Company received proceeds of $50,000, after disbursements for
the lender’s transaction costs, fees and expenses of $5,000, which were recorded as discounts against the debt to be amortized
into interest expense through maturity. The embedded conversion feature included in the note resulted in an initial debt discount
of $50,000 interest expense of $5,272 and an initial derivative liability of $55,272. For the year ended December 31, 2018, amortization
of the debt discounts of $37,888 was charged to interest expense. As of December 31, 2018, the outstanding principal balance of
the note was $55,000 with a carrying value as of December 31, 2018, of $37,888, net of unamortized discounts of $17,112.
On
October 19, 2018, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $78,000,
pursuant to a Securities Purchase Agreement we entered into with the investor. The Note matures 12 months after the date of issuance.
The Note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to 65% multiplied by the average of the lowest two trading prices during the 15-
trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The note was
funded on October 22, 2018, when the Company received proceeds of $75,000 after disbursements for the lender’s transaction
costs, fees and expenses of $3,000, which were recorded as discounts against the debt to be amortized into interest expense through
maturity. The embedded conversion feature included in the note resulted in an initial debt discount and derivative liability of
$57,700. For the year ended December 31, 2018, amortization of the debt discounts of $12,917 was charged to interest expense.
As of December 31, 2018, the outstanding principal balance of the note was $78,000 with a carrying value as of December 31, 2018,
of $30,217, net of unamortized discounts of $47,783.
On
November 15, 2018, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $500,000,
pursuant to a Securities Purchase Agreement we entered into with the investor. The Note matures November 15, 2019. The Note is
convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of
the Note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day period
ending on the last completed trading date prior to the date of the Note and (2) 65% multiplied by the average of the 3 lowest
trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed trading day
of the common stock prior to the date of conversion of the Note. Pursuant to the Note, the Company agreed to include on its next
registration statement filed with the Securities and Exchange Commission, all shares issuable upon conversion of the Note. Pursuant
to the Security Agreement, all of the obligations under the Note are secured by a first security interest in and to all of the
Company’s rights, title and interests in, to and under all assets and all personal property of the Company. The Security
Agreement includes customary representations, warranties and covenants by the Company. The note was funded on November 19, 2018,
when the Company received proceeds of $458,500 after OID of $37,500, and disbursements for the lender’s transaction costs,
fees and expenses of $4,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity.
The embedded conversion feature included in the note resulted in an initial debt discount and derivative liability of $363,806.
For the year ended December 31, 2018, amortization of the debt discounts of $52,300 was charged to interest expense. As of December
31, 2018, the outstanding principal balance of the note was $500,000 with a carrying value as of December 31, 2018, of $146,994,
net of unamortized discounts of $353,006.
On
December 5, 2018, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $63,000,
pursuant to a Securities Purchase Agreement we entered into with the investor. The Note matures 12 months after the date of issuance.
The Note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to 65% multiplied by the average of the lowest two trading prices during the 15-
trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The note was
funded on December 10, 2018, when the Company received proceeds of $60,000 after disbursements for the lender’s transaction
costs, fees and expenses of $3,000, which were recorded as discounts against the debt to be amortized into interest expense through
maturity. The embedded conversion feature included in the note resulted in an initial debt discount and derivative liability of
$47,170. For the year ended December 31, 2018, amortization of the debt discounts of $3,840 was charged to interest expense. As
of December 31, 2018, the outstanding principal balance of the note was $63,000 with a carrying value as of December 31, 2018,
of $16,670, net of unamortized discounts of $46,330.
A
summary of the convertible note balance as of December 31, 2018, and 2017, is as follows:
|
|
December 31, 2018
|
|
December 31, 2017
|
Principal balance
|
|
$
|
1,254,625
|
|
|
$
|
685,500
|
|
Unamortized discount
|
|
|
(740,523
|
)
|
|
|
-0-
|
|
Ending balance, net
|
|
$
|
514,102
|
|
|
$
|
685,500
|
|
NOTE
5 – DERIVATIVE LIABILITIES
On
April 13, 2018, the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes
were convertible into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered
to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for
as a derivative liability.
The
Company valued the derivative liabilities at December 31, 2018, and April 13, 2018, at $1,199,514 and $1,450,030, respectively.
The Company used the Monte Carlo simulation valuation model with the following assumptions as of December 31, 2018; risk-free
interest rates from 2.56% to 2.62% and volatility of 61% to 65%, and the following assumptions at April 13, 2018, risk-free interest
rates from 1.06% to 1.28% and volatility of 140% to 260%. The initial derivative liabilities for convertible notes issued during
the year ended December 31, 2018, used the following assumptions; risk-free interest rates from 1.89% to 2.71% and volatility
of 58% to 81%.
A
summary of the activity related to derivative liabilities for the year ended December 31, 2018, is as follows:
Balance- December 31, 2017
|
|
$
|
-0-
|
|
Issued during period
|
|
|
2,060,656
|
|
Converted or paid
|
|
|
(894,929
|
)
|
Change in fair value recognized in operations
|
|
|
33,787
|
|
Balance- December 31, 2018
|
|
$
|
1,199,514
|
|
NOTE
6 – NOTES PAYABLE
The
Company has the following note payables outstanding:
|
|
December
31, 2018
|
|
December
31, 2017
|
Note payable, interest at 8%, matured September 6, 2018, in default
|
|
$
|
330,033
|
|
|
$
|
370,000
|
|
Other, due on demand
|
|
|
2,805
|
|
|
|
—
|
|
Total notes payable
|
|
$
|
332,838
|
|
|
$
|
370,000
|
|
NOTE
7 – RELATED PARTY TRANSACTIONS
Note
payable
On
October 25, 2017, the Company issued a $60,000 promissory note to the wife of an officer and director of the Company in exchange
for $50,000. The note originally matured November 25, 2017, and was extended until November 25, 2018. The note is currently in
default.
Convertible
note payable
On
October 16, 2017, OZOP issued a $50,000 convertible promissory note to the wife of an officer and director in exchange for $50,000.
The note bears interest at ten percent (10%), matured on October 16, 2018. The initial conversion feature allowed the holder can
convert the note and any unpaid interest due, into shares of the Company’s common stock on the 15
th
business
day that the Company becomes listed, at conversion prices equal to discounts of 35%-50% of the average of the three lowest closing
prices of the common stock. In August 2018, the Company offered any noteholder to convert their principal and interest into shares
of common stock at $0.50 per share. As of December 31, 2018, and 2017, the balance of the note is $50,000 and is in default.
Management
Fees and related party payables
For
the years ended December 31, 2018, and 2017, the Company recorded expenses to its officers in the following amounts:
|
|
Year ended
December 31,
|
|
|
2018
|
|
2017
|
CEO, parent
|
|
$
|
140,885
|
|
|
$
|
122,927
|
|
CEO, subsidiary
|
|
|
120,016
|
|
|
|
120,030
|
|
COO (former) and CCO
|
|
|
120,000
|
|
|
|
120,000
|
|
COO, current
|
|
|
52,500
|
|
|
|
—
|
|
CFO
|
|
|
120,000
|
|
|
|
15,000
|
|
Total
|
|
$
|
553,401
|
|
|
$
|
378,007
|
|
As
of December 31, 2018, and December 31, 2017, included in accounts payable and accrued expenses, related party is $552,806 and
$246,090, respectively, for the following amounts owed the Company’s officers for accrued fees, accounts payable and loans
made. The loans have no terms of repayment.
|
|
December 31, 2018
|
|
December 31, 2017
|
CEO, parent
|
|
$
|
22,825
|
|
|
$
|
46,631
|
|
CEO, subsidiary
|
|
|
162,215
|
|
|
|
26,078
|
|
COO (former) and CCO
|
|
|
236,905
|
|
|
|
158,381
|
|
COO, current
|
|
|
45,000
|
|
|
|
-0-
|
|
CFO
|
|
|
58,037
|
|
|
|
15,000
|
|
Due to stockholder
|
|
|
27,825
|
|
|
|
—
|
|
Total
|
|
$
|
552,806
|
|
|
$
|
246,090
|
|
On
February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the
issuance of 7,600,000 shares of common stock.
NOTE
8– COMMITMENTS AND CONTINGENCIES
License
On
February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The
Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms
of the Licensing Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive
rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The $250,000 was
due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum of a $3,000,000 equity
raise. The Company paid the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of net sales on any product
sold utilizing any of the patents. There have not been any sales of the licensed products and accordingly, no royalties have been
incurred.
Consulting
Agreements
On
August 31, 2018, we entered into an investor relations consulting agreement with Kingdom Building, Inc. (“Kingdom”)
whereby Kingdom agreed to provide us with investor relations, public relations and financial media relations consulting services.
The term of the agreement is for a period of 12 months. We may terminate the agreement after the initial six months on 60 days’
notice. We agreed to pay Kingdom $8,500 per month which amount is deferred until we complete a financing transaction with a minimum
raise of $1,500,000 in gross proceeds. In addition, we issued Kingdom 650,000 shares of our unregistered common stock and reimburse
them for certain out of pocket expenses.
On
October 19, 2018, the Company entered into a consulting agreement (the “Consulting Agreement”) with Draper Inc., a
Nevada corporation (“Draper”). Pursuant to the Consulting Agreement the Company engaged Draper as an independent consultant
and Draper agreed to provide the Company with consulting services. In exchange for the services to be provided by Draper pursuant
to the Consulting Agreement, the Company agreed to issue Draper a total of 1,800,000 unregistered shares of the Company’s
$0.001 par value per share, common stock, with 450,000 shares issued upon execution of the Consulting Agreement, and with 150,000
shares be issued and delivered each month at the beginning of the fourth month to the beginning of the twelve month, until the
total amount of shares is issued. Either party can terminate the Consulting Agreement by giving 30 days written notice to the
other party.
On
October 24, 2018, the Company entered into a consulting agreement (the “Consulting Agreement”) with Jeffrey Patchen,
(“Patchen”). Pursuant to the Consulting Agreement the Company agreed to engage Patchen as an independent consultant
and Patchen agreed to provide the Company with consulting services for sixty (60) days. In exchange for the services to be provided
by Patchen pursuant to the Consulting Agreement, the Company agreed to pay Patchen a total of 20,000 unregistered sh
ares
of the Company’s $0.001 par value per share, common stock.
NOTE
9 - INCOME TAXES
The
Company was incorporated in the United States and has operations in two tax jurisdictions - the United States and Hong Kong. The
Company’s HK subsidiary is subject to a 16.5% profit tax based on its taxable net profit. The Company’s U.S. operations
are subject to income tax according to U.S. tax law.
A
reconciliation of the provision for income taxes determined at the U.S. statutory rate to the Company’s effective income
tax rate is as follows:
|
|
Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
Pre-tax loss
|
|
$
|
(2,490,706
|
)
|
|
$
|
(1,414,050
|
)
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
35
|
%
|
Expected U.S. income tax credit
|
|
|
(523,048
|
)
|
|
|
(494,917
|
)
|
Tax rate difference between U.S. and foreign operations
|
|
|
4,715
|
|
|
|
65,888
|
|
Change of valuation allowance
|
|
|
518,333
|
|
|
|
429,029
|
|
Effective tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company had deferred tax assets as follows:
|
|
December
31, 2018
|
|
December
31, 2017
|
Net operating losses carried forward
|
|
$
|
569,822
|
|
|
$
|
459,854
|
|
Less: Valuation allowance
|
|
|
(569,822
|
)
|
|
|
(459,854
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2018, the Company has approximately $2,202,000 and $588,000 net operating loss carryforwards available in the
United States and Hong Kong, respectively, to reduce future taxable income. The net operating loss from Hong Kong operations can
be carried forward with no time limit from the year of the initial loss pursuant to relevant Hong Kong tax laws and regulations.
For U.S. purposes the NOL deduction for a tax year is equal to the lesser of (1) the aggregate
of the NOL carryovers to
such year, plus the NOL carry-backs to such year, or (2) 80% of taxable income (determined without
regard to the deduction). Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely. The
special extended carryback provisions are generally repealed, except for certain farming and insurance company losses. The amendments
incorporating the 80% limitation apply to losses arising in tax years beginning after Dec. 31, 2017.It is more likely than not
that the deferred tax assets cannot be utilized in the future because there will not be significant future earnings from the entity
which generated the net operating loss. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.
As
of December 31, 2018, and 2017, the Company has no material unrecognized tax benefits which would favorably affect the effective
income tax rate in future periods, and does not believe that there will be any significant increases or decreases of unrecognized
tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company
during the years ended December 31, 2018 and 2017, and no provision for interest and penalties is deemed necessary as of December
31, 2018, and 2017.
The
U.S. Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law.
Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced
earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base
erosion tax, respectively. The Tax Act requires the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings
not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets
and 8% on the remaining earnings. Due to the timing of the enactment and the complexity involved in applying the provisions of
the Tax Act, the Company has not recorded any adjustments according to Tax Act. As the Company collects and prepares necessary
data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting
bodies, the Company may make adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be
completed in 2018.
Since
the Company’s foreign subsidiaries have not generated income since inception, the Company believes that Tax Act will not
have significant impact on the Company’s consolidated financial statements.
NOTE
10 – STOCKHOLDERS’ EQUITY
Common
stock
In
April 2018, the Board of Directors of the Company authorized a Private Placement Memorandum (the “April PPM”) offering
a total of 1,000,000 shares of its common stock at $0.50 per share. During the year ended December 31, 2018, we sold 500,000 shares
of common stock, pursuant to the April PPM and received proceeds of $250,000.
On
October 13, 2018, the Board of Directors of the Company authorized a Private Placement Memorandum (the “October PPM”)
offering of a minimum of $50,000 and up to $3,000,000 of up to 6,000,000 units (a “
Unit”),
for a price of $0.50 per Unit (the “Purchase Price”) with each Unit consisting of one (1) share of Common Stock and
a warrant (a “Warrant”) to purchase one (1) share of Common Stock, with each Warrant having a three year term and
an exercise price of $1.00 per share of Common Stock. During the year ended December 31, 2018, we sold 100,000 Units of the October
PPM at $0.50 per Unit, issued 100,000 shares of our common stock and received proceeds of $50,000.
On
July 1, 2018, the Company recorded the issuance of 30,000 of common stock for legal services.
On
September 30, 2018, the company recorded the issuance of 650,000 shares of common stock pursuant to a consulting agreement.
On
October 19, 2018, the company recorded the issuance of 450,000 shares of common stock pursuant to a consulting agreement.
On
October 24, 2018, the company recorded the issuance of 20,000 shares of common stock pursuant to a consulting agreement.
On
November 21, 2018, the company recorded the issuance of 57,000 shares of common stock for services provided to the Company.
During
the year ended December 31, 2018, holders of an aggregate of $776,357 in principal and accrued interest of convertible debt issued
by OZOP converted their debt and accrued interest into 1,463,701 shares of our common stock at an average conversion price of
$0.53 per share.
As
of December 31, 2018, the Company has 290,000,000 shares of $0.001 par value common stock authorized and there are 29,068,202
shares of common stock issued and outstanding.
On
November 15, 2018, in connection with the Note and the SPA issued on the same day (See Noe 4), the Company entered into a registration
rights agreement (the “Registration Rights Agreement”) with the Investor. Pursuant to the Registration Rights Agreement,
the Company granted to the Investor certain registration rights as set forth therein for the shares of the Company’s common
stock issuable upon conversion of the Note. Pursuant to the terms of the Registration Rights Agreement, and subject to the limitations
contained therein, the Company has agreed to use its reasonable best efforts to prepare and file with the Securities and Exchange
Commission a Registration Statement registering the offering and sale of all but not less than all of the Registrable Securities
(as defined in the Registration Rights Agreement) within 30 days from the date of the Registration Rights Agreement. The Registration
Rights Agreement includes customary representations, warranties and covenants by the Company.
Preferred
stock
As
of December 31, 2018, 10,000,000 shares have been authorized as preferred stock, par value $0.001 (the “Preferred Stock”),
which such Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of
Directors may determine from time to time. As of December 31, 2018, there are no shares of preferred stock issued and outstanding.
Stock
subscription receivable
On
February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the
issuance of 7,600,000 shares of common stock.
Warrants
On
November 15, 2018, and in connection with the Note, and pursuant to the SPA, issued on the same date, the Company agreed to issue
to the Investor, a warrant (the “Warrant”) to purchase 166,666 shares of the Company’s Common Stock as a commitment
fee. The Warrant has a term of five (5) years and an exercise price of $1.50. In connection with the Note and the SPA, and to
secure the payment of the Note, the Company entered into a security agreement (the “Security Agreement”) with the
Investor.
NOTE
11 – SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
The
Company operates in two geographic segments, the United States and Hong Kong. Set out below are the revenues, gross profits and
total assets for each segment.
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
United States
|
|
$
|
107,851
|
|
|
$
|
-0-
|
|
Hong Kong
|
|
$
|
49,607
|
|
|
$
|
56,612
|
|
|
|
$
|
157,458
|
|
|
$
|
56,612
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
107,851
|
|
|
$
|
-0-
|
|
Hong Kong
|
|
$
|
9,915
|
|
|
$
|
17,851
|
|
|
|
$
|
117,766
|
|
|
$
|
17,851
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Total Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
658,350
|
|
|
$
|
90,821
|
|
Hong Kong
|
|
|
869
|
|
|
|
31,375
|
|
Total Assets
|
|
$
|
659,219
|
|
|
$
|
122,196
|
|
NOTE
12 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. At December 31, 2018, the Company had a stockholders’
deficit of $2,348,360 and a working capital deficit of $2,808,252. In addition, the Company has generated losses since inception.
These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern.
Management’s
Plans
In
April 2018, OZOP entered into and completed a share exchange agreement with the Company (see Note 1), a publicly traded company.
As a public company, management believes it will be able
to access the public
equities market for fund raising for
product
development and regulatory approvals, sales and marketing and as we expand our distribution in the US market, we will need to
meet increasing inventory requirements.
The
Company is currently offering through a Private Placement Memorandum (the “PPM”) a minimum of $50,000 and up to $3,000,000
of up to 6,000,000 units (a “Unit”), for a price of $0.50 per Unit (the “Purchase Price”) with each Unit
consisting of one (1) share of Common Stock and a warrant (a “Warrant”) to purchase one (1) share of Common Stock,
with each Warrant having a three year term and an exercise price of $1.00 per share of Common Stock. In March 2019, the Company
received $80,000 from the purchase of 160,000 units of the PPM.
NOTE
13 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events
through the date the financial statements were issued.
On January 7, 2019, the Company issued an 8% convertible promissory note,
(the “Note”) in the principal amount of $150,000, pursuant to a Securities Purchase Agreement we entered into with
the investor. The Note matures January 7, 2020. The Note is convertible into shares of the Company’s common stock beginning
on the date which is 180 days from the issuance date of the Note, at a conversion price equal to the lesser of (1) the lowest
trading price during the previous 20 trading day period ending on the last completed trading date prior to the date of the Note
and (2) 65% multiplied by the average of the 3 lowest trading prices of the Company’s common stock during the 20 day trading
period ending on the latest completed trading day of the common stock prior to the date of conversion of the Note. The note was
funded on January 9, 2019, when the Company received proceeds of $133,250 after OID of $14,000, and disbursements for the lender’s
transaction costs, fees and expenses of $2,750, which were recorded as discounts against the debt to be amortized into interest
expense through maturity.
On
February 5, 2019, the Company issued an 8% convertible promissory note (the “Note”) in the aggregate principal amount
of up to $165,000 in exchange for an aggregate purchase price of up to $148,500 with an original issue discount of $16,500 to
cover the Investor’s accounting fees, due diligence fees, monitoring and other transactional costs incurred in connection
with the purchase and sale of the Note, which is included in the principal balance of the Note. On February 8, 2019, the Investor
funded the first tranche under the Note, and the Company received $49,500 ($47,500 after payment of $2,000 of the Investor’s
legal fees) for this first tranche of $55,000 under the Note and on the same date, the Company issued the Note to the Investor.
The Note is convertible into shares of the Company’s common stock, beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day
period ending on the last completed trading date prior to the date of conversion of the Note and (2) 65% multiplied by the average
of the 3 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed
trading day of the common stock prior to the date of conversion of the Note.
On February 21, 2019, the Company issued a
12% convertible promissory note, (the “Note”) in the principal amount of $53,000, pursuant to a Securities Purchase
Agreement we entered into with an investor. The Note matures 12 months after the date of issuance. The Note is convertible into
shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of the Note, at a conversion
price equal to 61% multiplied by the average of the lowest two trading prices during the 15- trading day period ending on the
last completed trading date in the OTC Markets prior to the date of conversion. The note was funded on February 22, 2019, when
the Company received proceeds of $50,000 after disbursements for the lender’s transaction costs, fees and expenses of $3,000,
which were recorded as discounts against the debt to be amortized into interest expense through maturity.
On February 27, 2019, the Company entered
into a Mutual Agreement of Understanding (the “Agreement”) with Eric Siu pursuant to which the Company agreed to approve
and ratify all of Mr. Sui’s and his related parties’ efforts at pursuing medical device sales and manufacturing in
greater China. Additionally, pursuant to the Agreement, the Company and Mr. Siu agreed to confirm and settle amounts owed to Mr.
Siu and related parties by the Company upon the completion of the audit of the Company as of December 31, 2018. On March 5, 2019,
Eric Sui resigned from his position as a member of the Board.
On March 4, 2019, the Company entered into
a Separation Agreement (the “Separation Agreement”) with Salman J. Chaudhry, pursuant to which Mr. Chaudry resigned
immediately from his positions as the CCO and Secretary of the Company and as a member of the Board and from all positions with
the Company effective immediately and pursuant to which the Company agreed to pay Mr. Chaudry $227,200.61 (the “Outstanding
Fees”) in certain increments as set forth in the Separation Agreement. Mr. Chaudry’s resignation was
not
the result of any disagreement with the Company on any matter relating to the Company's operations, policies or practices.
On
March 7, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $85,000,
pursuant to a Securities Purchase Agreement we entered into with an investor. The Note matures 12 months after the date of issuance.
The Note is convertible into shares of the Company’s common stock, at a conversion price equal to 58% of the average of
the two lowest trading prices of the Company’s common stock for the previous 20 trading day period ending on the date the
notice of conversion of the Note is received by the Company. The note was funded on March 11, 2019, when the Company received
proceeds of $77,900 after OID of $3,000, and disbursements for the lender’s transaction costs, fees and expenses of $4,100,
which were recorded as discounts against the debt to be amortized into interest expense through maturity.
On
March 24, 2019, the Company and Newbridge Securities Corporation (“Newbridge”) entered into an Investment Banking
Engagement Agreement (the “Agreement”). Under the terms of the Agreement, Newbridge will provide investment banking
and financial advisory services to the Company, including, but not limited to assisting the Company with an up-listing process
to a national exchange in the United States, introducing the Company to other investment banking firms focused on servicing emerging
growth companies; rendering advice related to capital structures, capital market opportunities, evaluating potential capital raise
transactions and assisting the Company to develop growth optimization strategies. The term of the Agreement is 12 months from
the date of the Agreement, however either party may terminate the Agreement anytime upon 15 days written notice. As compensation
for its services under the Agreement, Newbridge will receive 171,400 shares of the Company’s common stock. The Agreement
contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes customary
representations, warranties and covenants by the Company.
On
March 28, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 1,000,000 shares
as Series B Preferred Stock. The Series B Preferred Stock is not convertible into common stock, nor does the Series B Preferred
Stock have any right to dividends and any liquidation preference. The Series B Preferred Stock entitles its holder to a number
of votes per share equal to 50 votes. On March 29, 2019, the Company issued 1,000,000 shares of its Series B Preferred Stock to
the Company’s CEO in consideration of $25,000 of accrued expenses, the Company’s failure to timely pay current and
past due management fees, and the willingness to accrue unpaid management fees.
During
the three months ended March 31, 2019, pursuant to a private placement, the Company sold 160,000 Units for $0.50 per Unit and
received proceeds of $80,000. A Unit consists of one (1) share of Common Stock and a warrant (a “Warrant”) to purchase
one (1) share of Common Stock, with each Warrant having a three-year term and an exercise price of $1.00 per share of Common Stock.
F-23