Notes
to Consolidated Financial Statements
December
31, 2019
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. (“Ozop”) 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.
On
January 21, 2020, the Company filed an amendment to its Certificate of Incorporation, with the Nevada Secretary of State, for
1-for-1,000 reverse stock split of our common stock (the “Reverse Stock Split”) effective February 10, 2020. The number
of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of
one- thousand and no fractional shares were issued. All historical share in this report have been adjusted to reflect the Reverse
Stock Split (see Note 13). There were no changes to the authorized number of shares and the par value of our common stock.
Acquisition
On
August 23, 2019, the Company entered into an Exclusive License Agreement (the “Agreement”) with Spinal Resources,
Inc. (“SRI”). Pursuant to the Agreement, SRI granted to the Company an exclusive license, for products, as defined
in the Agreement, and utilized in spine and related surgical procedures. In accordance with ASC 805, the Company has determined
to account for the Agreement as a business combination. As consideration for the Agreement, the Company agreed to pay license
fees equal to $1,500,000, over the eighteen- month term of the Agreement. The Company recorded the liability at its present value
of $1,234,089. Additionally, the Company has agreed to issue 6,000 shares of restricted common stock on a quarterly basis, pursuant
to the terms of the Agreement, of which 1,000 shares were issued on August 23, 2019. The Company valued the shares issued at $49,000
(based on the market price of the common stock) and included the $49,000 as part of the consideration of the transaction. The
remaining 5,000 shares to be issued has been recorded as a $245,000 liability to be paid in common stock and was included in the
total consideration issued in the transaction. The Company also issued a Promissory Note (the “Note”) to SRI for $723,524
for the purchase of the inventory of the Products (as defined in the Agreement). The Note has a stated interest rate of six percent
(6%) and payment terms of the Note are in eighteen equal installments, beginning on October 1, 2019. Either party may terminate
the Agreement upon written notice if the other party has failed to remedy a material breach within 30 days (or 15 days in the
case of a breach of a payment obligation). SRI also granted the Company an option to purchase the Company on or before the termination
date of the license for a minimum of $5,500,000 which can increase based on the revenue rate at the time the option is exercised.
If the Company does not elect to exercise their option to purchase SRI, SRI can “put” the Acquisition to the Company.
Any payments made for the license, the Note and other liabilities assumed by the Company can be net against the option to buy
price. The Company calculated the net minimum purchase price to be $3,093,604 and recorded the liability at its present value
of $2,834,692. The difference of $258,912 will be charged to interest expense over the option period.
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 transaction:
|
|
Purchase
Price Allocation
|
Fair
value of consideration issued
|
|
$
|
5,286,305
|
|
Liabilities
assumed
|
|
|
524,387
|
|
Total
purchase price
|
|
$
|
5,810,692
|
|
Assets
acquired
|
|
$
|
723,524
|
|
Intellectual
Property/Technology
|
|
|
2,810,000
|
|
Goodwill
|
|
|
2.277,168
|
|
|
|
$
|
5,810,692
|
|
The
total purchase price of $5,810,692 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 transaction. 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 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 fair value 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.
On
January 16, 2020, the Company received via email from SRI notice that the Agreement dated August 23, 2019, between SRI and the
Company has been revoked, as the Company did not pay the January 6. 2020 license payment (See Note 9) nor cure the default payment.
Based on the termination of the Agreement, as of December 31, 2019, the Company recorded an impairment of $274,854. The impairment
was calculated based on the balance of the assets acquired and the liabilities assumed as December 31, 2019. See Note 13 for more
detailed discussion.
Reverse
Merger
On
April 13, 2018, we entered into and completed a share exchange agreement (the “Share Exchange Agreement”) with OZOP,
the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the then holder of 2,000 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 newly issued shares of our common stock (the “Share Exchange”).
After giving effect to the redemption of 2,000 shares of our common stock pursuant to the Redemption Agreement discussed below
and the issuance of 25,000 shares of our common stock pursuant to the Share Exchange Agreement, we had 25,798 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 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 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 resigned
March 4, 2019) and Eric Siu (who resigned March 5, 2019) were named as directors of the Company.
Corporate
Matters
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 April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the
Company’s CEO and Director. The shares were valued at $68,000 of which $25,000 was applied to accrued liabilities-related
and $43,000 was recorded as stock-based compensation expense-related parties.
On
September 18, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 50,000 shares
as Series C Preferred Stock. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof,
at any time after the date of issuance, into one share of fully paid and non-assessable share of common stock. Each share of Series
C Preferred Stock shall entitle the holder thereof to ten thousand (10,000) votes on all matters submitted to a vote of the stockholders
of the Company. On September 19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock to the Company’s
CEO and Director, in consideration of the cancellation and return of 1,000,000 shares of the Company’s Series B Preferred
Stock. On September 20, 2019, the Company filed a Certificate of Withdrawal of Certificate
of Designation (the “Certificate of Withdrawal”) for the Company’s Series B Preferred Stock, pursuant to which
the prior designation of the Company’s Series B Stock was cancelled.
On
October 29, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock
to 2,500,000,000 shares, of which 2,490,000,000 have 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 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
December 26, 2019, the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate
of incorporation to effect a 1-for-1,000 reverse stock split of the Company’s common stock. The reverse stock split became
effective on February 10, 2020. The par values and the authorized shares of the Company’s common stock and convertible preferred
stock were not adjusted as a result of the reverse stock split. All common stock, stock options and per share amounts in the financial
statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.
On
December 30, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock
to 5,000,000,000 shares, of which 4,990,000,000 have 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 shall
be issuable in such series, and with such designations, rights and preferences
as the Board of Directors may determine from time
to time.
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
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”). 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 final valuation of the consideration issued and the 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
|
|
|
278,779
|
|
Total purchase consideration
|
|
$
|
528,779
|
|
Assets acquired
|
|
$
|
289,628
|
|
Tradename
|
|
|
44,200
|
|
Goodwill
|
|
|
194,951
|
|
|
|
$
|
528,779
|
|
The
total purchase price of $528,779 has been allocated to the tangible and intangible assets acquired and liabilities assumed based
on estimated fair values as of the completion of the Acquisition. These allocations reflect various estimates that are currently
available. The final fair value of Spinus’s identifiable intangible assets were 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 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying consolidated 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. On
January 16, 2020, the Company received via email from SRI notice that the Agreement dated August 23, 2019, between SRI and the
Company has been revoked, as the Company did not cure a payment default within the cure period. As
of December 31, 2019, the Company had a stockholders’ deficit of $5,167,116 and a working capital deficit of $7,475,421.
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.
On
February 28, 2020, the Company entered into a Binding Letter of Intent (the “LOI”) with Power Conversion Technologies,
Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer
(“CEO”) and its sole shareholder. Pursuant to the terms of the LOI, the Company will acquire 100% of the issued and
outstanding shares of PCTI (the “PCTI Shares”) from Chis (the “Acquisition”). PCTI
operates in the very high power niche of the power electronics market, designing and manufacturing leading edge equipment for
use in power conversion applications. PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid,
telecommunications, military, transportation, renewable energy, aerospace and mission critical defense systems. PCTI’s clients
include Fortune 500 companies, all branches of the US Department of Defense including the US Army and the US Air Force, NASA as
well as other global military organizations. Pursuant to the LOI, the Acquisition is to close by June 30, 2020, and is in the
best interests of the Company and its’ shareholders.
The
accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
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.
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, 2019, and 2018, and their accounts receivable balances as of December 31, 2019, and 2018:
|
|
Sales % Year Ended
December 31, 2019
|
|
|
Sales % Year Ended
December 31, 2018
|
|
|
Accounts
receivable balance
December 31, 2019
|
|
|
Accounts
receivable balance
December 31, 2018
|
|
Customer A
|
|
|
84.4
|
%
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Customer B
|
|
|
15.6
|
%
|
|
|
78.0
|
%
|
|
$
|
-
|
|
|
$
|
45,818
|
|
Customer C
|
|
|
-
|
|
|
|
22.0
|
%
|
|
$
|
-
|
|
|
$
|
-
|
|
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. Based on
the termination of the SRI Agreement, the Company recorded an allowance of $92,767 of accounts receivable as of December 31, 2019.
Inventory
Inventory,
which consists 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.
Purchase
concentration
The
principal purchases by the Company are comprised of finished goods that the Company sells to its customers. Following is a summary
of suppliers who accounted for more than ten percent (10%) of the Company’s purchases for the years ended December 31, 2019,
and 2018:
|
|
Purchase %, year ended
December 31, 2019
|
|
|
Purchase %, year ended
December 31, 2018
|
|
Supplier A
|
|
|
100.0
|
%
|
|
|
-
|
|
Supplier B
|
|
|
-
|
|
|
|
64.6
|
%
|
Supplier C
|
|
|
-
|
|
|
|
33.6
|
%
|
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, 2019
|
|
|
December 31, 2018
|
|
Spinal instruments
|
|
$
|
379,270
|
|
|
$
|
-
|
|
Office equipment
|
|
|
9,590
|
|
|
|
9.590
|
|
Less: Accumulated Depreciation
|
|
|
(30,873
|
)
|
|
|
(2,391
|
)
|
Property and Equipment, Net
|
|
$
|
357,987
|
|
|
$
|
7,199
|
|
Depreciation
expense was $28,482 and $8,719 for the years ended December 31, 2019, and 2018, respectively. In connection with the termination
of the Agreement with SRI (See Note 13), the Company has returned to the seller the spinal instruments as of January 16,
2020.
Intangible
Assets
Intangible
assets primarily represent purchased patent and license rights. During the year ended December 31, 2019, the Company recorded
$2,810,000 of patent 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. For the year ended December 31, 2019, the Company impaired $44,200
of tradenames as management has decided not to go forward with the use of the trade name Spinus. For
the years ended December 31, 2019, and 2018, the Company recorded amortization expense of $126,820 and $36,458, respectively.
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
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. During the year ended December 31, 2019, the Company recorded goodwill of $2,277,168
related to the SRI transaction. The Company reviews the goodwill allocated to each of our reporting units for possible impairment
annually 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. During the year ended December 31, 2019. the
Company recorded an impairment of goodwill of $274,854, for the termination of the SRI License Agreement as of January 16, 2020,due
to no known future cash flows being provided by the assets. See Note 13 for more detailed discussion.
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. Under ASC 606, 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 its’ customers.
Revenues from Spinus were $49,123 and $107,851 for the years ended December 31, 2019, and 2018 (from February 17, 2018, the date
of the acquisition of Spinus), respectively, 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, 2019 and 2018.
Advertising
and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the years ended December 31, 2019, and 2018, the Company recorded
$64,216 and $43,527, respectively, of advertising and marketing expenses.
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, 2019, and 2018, the Company recorded $75,434 and $88,572 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 instrument 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 derivative instruments that are measured at fair value on a recurring basis as
of December 31, 2019, and 2018, for each fair value hierarchy level:
December 31, 2019
|
|
Derivative
Liabilities
|
|
|
Total
|
|
Level I
|
|
$
|
-
|
|
|
$
|
-
|
|
Level II
|
|
$
|
-
|
|
|
$
|
-
|
|
Level III
|
|
$
|
2,462,940
|
|
|
$
|
2,462,940
|
|
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, 2019, and 2018, (Hong Kong dollar per one U.S. dollar):
|
|
December
31,
2019
|
|
December
31,
2018
|
Balance
sheet date
|
|
|
.1284
|
|
|
|
.1277
|
|
Average
rate for statements of operations and comprehensive loss
|
|
|
.1276
|
|
|
|
.1276
|
|
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during
each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of December 31, 2019, and
2018, the Company’s dilutive securities are convertible into approximately 2,847,777 and 2,045 shares of common stock, respectively.
This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. The following
table represents the classes of dilutive securities as of December 31, 2019, and 2018:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Common stock to be issued
|
|
|
1,350
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
50,000
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
2,796,427
|
|
|
|
2,045
|
|
|
|
|
2,847,777
|
|
|
|
2,045
|
|
Recent
Accounting Pronouncements
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, 2019, that are of significance or potential significance to the Company.
NOTE
4 – INTANGIBLE ASSETS
Patents
as of December 31, 2019, and 2018, consist of the following:
|
|
December
31, 2019
|
|
December
31, 2018
|
Patents
and license rights
|
|
$
|
3,060,000
|
|
|
$
|
250,000
|
|
Accumulated
amortization
|
|
|
(163,278
|
)
|
|
|
(36,458
|
)
|
Net
carrying amount
|
|
$
|
2,896,722
|
|
|
$
|
213,542
|
|
Amortization
expense for the years ended December 31, 2019, and 2018, was $126,820 and $36,458, respectively. In connection with the termination
of the Agreement with SRI (See Note 13), the Company no longer owns the license rights of $xxx, net, related to the SRI Agreement.
See Note 13.be using the spinal instruments as of January 16, 2020.
NOTE
5 - 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. The 2017 Notes matured 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 15th 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 was 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. On August 29, 2019, pursuant to a Debt Purchase Agreement, one investor
sold the principal balance of $15,000, accrued and unpaid interest of $2,624 and a repayment balance of $5,250 to third party
investor, for a total purchase price of $22,874 (see below). Also, on August 29, 2019, pursuant to a Debt Purchase Agreement,
a second investor sold the principal balance of $25,000, accrued and unpaid interest of $4,248 and a repayment balance of $8,750
to third party investor, for a total purchase price of $37,998 (see below). As of December 31, 2019, and 2018, the outstanding
principal balance of the 2017 Notes was $175,000 and $215,000, respectively.
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. From time to time the investor waives any Repayment Amount for a period of time as agreed
upon. During the year ended December 31, 2019, principal payments of $50,000 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, 2019, amortization of the debt discounts of $53,896 was charged to interest expense.
During the year ended December 31, 2019, the investor sold $30,000 of the note to another investor (see below). The Note is in
default and the Company recorded interest expense of $26,188 and added that amount to the principal amount outstanding. As of
December 31, 2019, and December 31, 2018, the outstanding principal balance of the note was $78,563 and $132,375, respectively,
with a carrying value as of December 31, 2019, and 2018, of $78,563 and $78,479, net of unamortized discounts of $53,896 as of
December 31, 2018.
In
connection with our obligations under the Note, our executive officers at the time, and the Company entered into a Pledge Agreement
(the “Pledge Agreement”) whereby they pledged as collateral for the Note an aggregate of 19,900 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, the investor 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. From time to time the investor waives any Repayment Amount for a period of time as agreed
upon. During the year ended December 31, 2019, principal payments of $50,000 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 December 31, 2019, amortization of the debt discounts of $222,397 was charged to interest expense. For
the year ended December 31, 2019, the investor converted a total of $111.509 of the face value and $32,910 of accrued interest
into 40,302 shares of common stock. The Note is in default and the Company recorded interest expense of $87,390 and added that
amount to the principal amount outstanding. As of December 31, 2019, and 2018, the outstanding principal balance of the note was
$187,130 and $261,250, respectively, with a carrying value as of December 31, 2019, and 2018, of $187,130 and $38,853, net of
unamortized discounts of $222,397 as of December 31, 2018.
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, 2019, amortization of the debt discounts of $17,112 was charged to interest expense. For the year ended December 31, 2019,
the investor converted a total of $55,000 of the face value and $5,323 of accrued interest into 7,473 shares of common stock.
As of December 31, 2019, and 2018, the outstanding principal balance of the note was $-0- and $55,000, respectively with a carrying
value as of December 31, 2018, of $37,888, net of unamortized discounts of $17,112 as of December 31, 2018.
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, 2019, the investor converted a total of $26,960 of the face value into 2,327 shares of
common stock. For the year ended December 31, 2019, amortization of the debt discounts of $47,783 was charged to interest expense.
On June 7, 2019, pursuant to a Note Assignment Agreement, the investor sold the remaining principal balance of $51,040, accrued
and unpaid interest of $5,546 and a repayment balance of $20,414 to third party investor, for a total purchase price of $77,000.
As of December 31, 2019, and 2018, the outstanding principal balance to the initial noteholder of the note was $-0- and $78,000,
respectively 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, 2019, amortization of the debt discounts of $353,006 was charged to interest expense. For the
year ended December 31, 2019, the investor converted a total of $54,640 of the face value and $61,943 of accrued interest and
fees into 73,886 shares of common stock. As of December 31, 2019, and 2018, the outstanding principal balance of the note was
$445,360 and $500,000, respectively, with a carrying value as of December 31, 2019, and 2018, of $445,360 and $146,994, respectively,
net of unamortized discounts as of December 31, 2018, 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. On June 5, 2019, pursuant to a Note Assignment Agreement, the investor sold the principal balance of $63,000, accrued
and unpaid interest of $3,708 and a repayment balance of $26,683 to third party investor, for a total purchase price of $93,391
(see below). For the year ended December 31, 2019, amortization of the debt discounts of $46,330 was charged to interest expense.
As of December 31, 2019, and 2018, the outstanding principal balance to the initial noteholder of the note was $-0- and $63,000,
respectively, with a carrying value as of December 31, 2018, of $16,670, net of unamortized discounts of $46,330.
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. The embedded conversion feature
included in the note resulted in an initial debt discount and derivative liability of $111,500. For the year ended December 31,
2019, amortization of the debt discounts of $125,834 was charged to interest expense. As of December 31, 2019, the outstanding
principal balance of the note was $150,000 with a carrying value of $147,584, net of unamortized discounts of $2,416. In February
2020, the Note was sold to another third- party investor.
On
February 5, 2019, the Company issued an 8% convertible promissory note (the “Master 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 Master Note, which is included in the principal balance of the Note. On February 8, 2019, the
Investor funded the first tranche under the Master Note, with a maturity date of February 8, 2020, 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 Master 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 Master 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 Master 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 Master Note. The embedded conversion feature included in the Master Note resulted in an initial debt discount
and derivative liability of $38,502. For the year ended December 31, 2019, amortization of the debt discounts of $41,506 was charged
to interest expense. For the year ended December 31, 2019, the investor converted a total of $45,360 of the face value and $3,000
of fees into 25,050 shares of common stock. As of December 31, 2019, the outstanding principal balance of the Master Note was
$11,640 with a carrying value as of December 31, 2019, of $7,144, net of unamortized discounts of $4,496. The balance of the Note
was converted during 2020. In connection with the issuance of this Note, the Company issued warrants to acquire 36,666 shares
of common stock, for a three-year period with an exercise price of $1,50 per share.
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. The embedded conversion feature included in the note resulted in an initial debt discount and derivative liability of
$44,331. For the year ended December 31, 2019, amortization of the debt discounts of $47,331 was charged to interest expense.
For the year ended December 31, 2019, the investor converted a total of $53,000 of the face value and $3,180 of accrued interest
into 9,180 shares of common stock. As of December 31, 2019, the outstanding principal balance of the note was $-0-.
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. The embedded conversion
feature included in the note resulted in an initial debt discount and derivative liability of $77,394. For the year ended December
31, 2019, amortization of the debt discounts of $68,780 was charged to interest expense. For the year ended December 31, 2019,
the investor converted a total of $53,200 of the face value and $3,896 of accrued interest into 22,886 shares of common stock.
As of December 31, 2019, the outstanding principal balance of the note was $31,800 with a carrying value as of December 31, 2019,
of $16,086, net of unamortized discounts of $15,714.
On
May 3, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $58,000,
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 May 6, 2019, when the Company received proceeds of $55,000 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 $46,492.
For the year ended December 31, 2019, amortization of the debt discounts of $49,492 was charged to interest expense. On October
29, 2019, the Company paid $82,822 in full settlement of the Note. As of December 31, 2019, the outstanding principal balance
of the note was $-0-.
On
May 7, 2019, the Company issued to a third-party investor a convertible redeemable promissory note (the “Note”) with
a face value of $52,500, including an original issue discount of $2,500. The note matures on February 7, 2020, has a stated interest
of 12% and is convertible into a variable number of the Company’s common stock, based on a conversion ratio of 58% of the
average of the two lowest trading prices for the 20 days prior to conversion. The note was funded on May 8, 2019, when the Company
received proceeds of $47,500, 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 and derivative liability of $46,157. For the year ended December 31,
2019, amortization of the debt discounts of $51,157 was charged to interest expense. On November 1, 2019, the Company paid $77,837
in full settlement of the convertible promissory note dated May 7, 2019. As of December 31, 2019, the outstanding principal balance
of the note was $-0-.
The
Company received the funding of the second tranche on May 10, 2019, in an amount of $23,500 (the “Second Tranche”)
under the $165,000 Master Note issued by the Company on February 5, 2019, after 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 Company also issued a warrant (the “Warrant”) to purchase 18,333 shares of the Company’s common
stock at an exercise price of $1.50 for a term of three (3) years to the Master Noteholder. The embedded conversion feature included
in the note resulted in an initial debt discount and derivative liability of $18,262. For the year ended September 30, 2019, amortization
of the debt discounts of $22,262 was charged to interest expense. On November 1, 2019, the Company paid $41,580 in full settlement
of the Second Tranche. As of December 31, 2019, the outstanding principal balance of the Second Tranche was $-0-.
On
May 29, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $80,000,
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 29, 2019, when the Company received
proceeds of $73,300 after OID of $2,800, and disbursements for the lender’s transaction costs, fees and expenses of $3,900,
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 $70,418. For the year ended December
31, 2019, amortization of the debt discounts of $45,097 was charged to interest expense. As of December 31, 2019, the outstanding
principal balance of the note was $80,000 with a carrying value of $47,979, net of unamortized discounts of $32,021.
On
June 5, 2019, an investor (the “Purchaser”) pursuant to an Assignment Agreement, purchased a convertible note issued
by the Company on December 5, 2018 (see above). The Purchaser paid $93,391 to acquire the note. 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 embedded conversion feature pursuant to the Assignment Agreement resulted in an initial debt discount and derivative liability
of $59,909. For the year ended December 31, 2019, amortization of the debt discounts of $59,909 was charged to interest expense.
As of December 31, 2019, the outstanding principal balance of assigned note was $93,391.
On
June 7, 2019, an investor (the “Purchaser”) pursuant to an Assignment Agreement, purchased a convertible note issued
by the Company on October 19, 2018 (see above). The Purchaser paid $77,000 to acquire the note. 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 embedded conversion feature pursuant to the Assignment Agreement resulted in an initial debt discount and derivative liability
of $49,335. For the year ended December 31, 2019, amortization of the debt discounts of $49,335 was charged to interest expense.
As of December 31, 2019, the outstanding principal balance of assigned note was $77,000.
On
July 22, 2019, the Company issued a 10% convertible promissory note, (the “Note”) in the principal amount of $38,900,
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 60% of the lowest closing
bid price 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 July 24, 2019, when the Company received proceeds of $30,000 after
OID of $3,900, and 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 and derivative liability of $31.452. For the year ended December 31, 2019, amortization
of the debt discounts of $17,765 was charged to interest expense. As of December 31, 2019, the outstanding principal balance of
the note was $38,900 with a carrying value of $16,313, net of unamortized discounts of $22,587.
On
August 2, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $157,500,
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 60% multiplied by the average of the lowest two trading prices during the 20
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 August 2, 2019, when the Company received proceeds of $150,000 after disbursements for the lender’s transaction
costs, fees and expenses of $7,500, 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
$125,982. For the year ended December 31, 2019, amortization of the debt discounts of $55,638 was charged to interest expense.
As of December 31, 2019, the outstanding principal balance of the note was $157,500 with a carrying value of $79,656, net of unamortized
discounts of $77,844.
On
August 21, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $55,125,
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 58% multiplied by the average of the lowest two trading prices during the 20-
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 August 21, 2019, when the Company received proceeds of $50,000 after OID of $2,625, and disbursements for the lender’s
transaction costs, fees and expenses of $2,500, 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 $47,117. For the year ended December 31, 2019, amortization of the debt discounts of $18,763 was charged to interest
expense. As of December 31, 2019, the outstanding principal balance of the note was $55,125 with a carrying value of $21,646,
net of unamortized discounts of $33,479.
On
August 19, 2019, the Company issued an 8% convertible promissory note, (the “Note”) in the principal amount of $85,000,
pursuant to a Securities Purchase Agreement we entered into with the investor. The Note matures May 19, 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 August 22, 2019, when the Company received proceeds
of $75,000 after OID of $7,250, 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. The embedded conversion feature
included in the note resulted in an initial debt discount and derivative liability of $54,802. For the year ended December 31,
2019, amortization of the debt discounts of $31,146 was charged to interest expense. As of December 31, 2019, the outstanding
principal balance of the note was $85,000 with a carrying value of $51,344, net of unamortized discounts of $33.656.
On
August 23, 2019, the Company issued to a third-party investor a convertible redeemable promissory note (the “Note”)
with a face value of $37,800, including an original issue discount of $1,800. The note matures on May 23, 2020, has a stated interest
of 10% and is convertible into a variable number of the Company’s common stock, based on a conversion ratio of 58% of the
average of the two lowest trading prices for the 20 days prior to conversion. The note was funded on August 26, 2019, when the
Company received proceeds of $33,500, after disbursements for the lender’s transaction costs, fees and expenses of $2,500,
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 $32,229. For the year ended December
31, 2019, amortization of the debt discounts of $17,290 was charged to interest expense. As of December 31, 2019, the outstanding
principal balance of the note was $37,800 with a carrying value of $18,561, net of unamortized discounts of $19,239.
On
August 29, 2019, the Company issued a 10% convertible promissory note, (the “Note”) in the principal amount of $45,000,
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 60% multiplied by the average of the lowest two trading prices during the 20
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 September 4, 2019, when the Company received proceeds of $40,000 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 and derivative liability of
$35,794. For the year ended December 31, 2019, amortization of the debt discounts of $14,228 was charged to interest expense.
As of December 31, 2019, the outstanding principal balance of the note was $45,000 with a carrying value of $18,434, net of unamortized
discounts of $26,566.
On
August 29, 2019, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note
issued by the Company on September 1, 2017 (see above). The Purchaser paid $22,874 to acquire the note. The Note, as amended,
is convertible into common stock at a conversion price equal to a 35% discount to the average of the 3 lowest closing prices of
the common stock for fifteen prior trading days including the day upon which a notice of conversion is received. The embedded
conversion feature pursuant to the Assignment Agreement resulted in an initial debt discount and derivative liability of 13,793.
For the year ended December 31, 2019, amortization of the debt discounts of $13,793 was charged to interest expense. For the year
ended December 31, 2019, the investor converted a total of $7,000 of the face value into 4,039 shares of common stock. As of December
31, 2019, the outstanding principal balance of assigned note was $15,874.
On
August 29, 2019, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note
issued by the Company on October 2, 2017 (see above). The Purchaser paid $37,998 to acquire the note. The Note, as amended, is
convertible into common stock at a conversion price equal to a 35% discount to the average of the 3 lowest closing prices of the
common stock for fifteen prior trading days including the day upon which a notice of conversion is received. The embedded conversion
feature pursuant to the Assignment Agreement resulted in an initial debt discount and derivative liability of $22,953. For the
year ended December 31, 2019, amortization of the debt discounts of $22,953 was charged to interest expense. As of December 31,
2019, the outstanding principal balance of assigned note was $37,998.
On
October 1, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $68,000,
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 lowest closing bid price during the 20- 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 2,
2019, when the Company received proceeds of $65,000 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 $52,457. For the year
ended December 31, 2019, amortization of the debt discounts of $13,873 was charged to interest expense. As of December 31, 2019,
the outstanding principal balance of the note was $68,000 with a carrying value of $26,416, net of unamortized discounts of $41,584.
On
October 8, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $66,000,
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 60% 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 October 10, 2019, when the Company received
proceeds of $57,000 after OID of $6,000, and disbursements for the lender’s transaction costs, fees and expenses of $2,300,
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 $52,281. For the year ended December
31, 2019, amortization of the debt discounts of $13,733 was charged to interest expense. As of December 31, 2019, the outstanding
principal balance of the note was $66,000 with a carrying value of $18,452, net of unamortized discounts of $47,548.
On
October 24, 2019, the Company issued a convertible promissory note in the principal amount of $248,400 (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 matures 12 months after the date of issuance. 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 60% of the lowest trading price for
the 25 days prior to conversion. The note was funded on October 28, 2019, when the Company received proceeds of $200,000, after
OID of $32,400, and disbursements for the lender’s transaction costs, fees and expenses of $16,000, 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 $203,637. For the year December 31, 2019, amortization
of the debt discounts of $30,354 was charged to interest expense. As of December 31, 2019, the outstanding principal balance of
the note was $248,400, with a carrying value of $26,717, net of unamortized discounts of $221,683.
On
October 24, 2019, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $225,000,
pursuant to a Securities Purchase Agreement we entered into with the investor. The Note matures October 24, 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) $0.05 and (2) 58% multiplied by the average of the 2 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 October 31, 2019, when the Company received proceeds
of $202,250 after OID of $20,000, 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. The embedded conversion feature
included in the note resulted in an initial debt discount and derivative liability of $144,302. For the year ended December 31,
2019, amortization of the debt discounts of $19,263 was charged to interest expense. As of December 31, 2019, the outstanding
principal balance of the note was $225,000 with a carrying value of $77,311, net of unamortized discounts of $147,689.
On
October 25, 2019, the Company issued a convertible promissory note in the principal amount of $36,750 (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 matures 12 months after the date of issuance. 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 two lowest
closing bid prices for the 20 days prior to conversion. The note was funded on October 25, 2019, when the Company received proceeds
of $33,000, after OID of $1,750, and disbursements for the lender’s transaction costs, fees and expenses of $2,000, 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 $31,316. For the year December 31, 2019,
amortization of the debt discounts of $3,960 was charged to interest expense. As of December 31, 2019, the outstanding principal
balance of the note was $36,750, with a carrying value of $5,644, net of unamortized discounts of $31,106.
On
November 27, 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 56% multiplied by the lowest closing bid price during the 20- 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
2, 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.
The embedded conversion feature included in the note resulted in an initial debt discount and derivative liability of $49,808.
For the year ended December 31, 2019, amortization of the debt discounts of $4,434 was charged to interest expense. As of December
31, 2019, the outstanding principal balance of the note was $53,000 with a carrying value of $4,626, net of unamortized discounts
of $48,374.
A
summary of the convertible note balance as of December 31, 2019, and 2018, is as follows:
|
|
December
31, 2019
|
|
December
31, 2018
|
|
|
|
|
|
Principal
balance
|
|
$
|
2,500,230
|
|
|
$
|
1,304,625
|
|
Unamortized
discount
|
|
|
(806,003
|
)
|
|
|
(740,523
|
)
|
Ending
balance, net
|
|
$
|
1,694,227
|
|
|
$
|
514,102
|
|
NOTE
6 – DERIVATIVE LIABILITIES
The
Company determined the conversion feature of the Notes, which contain a variable conversion rate, represented an embedded derivative
since the Notes were convertible into a variable number of shares upon conversion. Accordingly, the Notes are 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, 2019, and 2018, at $2,462,940 and $1,199,514, respectively. The Company
used the Monte Carlo simulation valuation model with the following assumptions as of December 31, 2019, risk-free interest rates
from 1.57% to 1.77% and volatility of 31% to 36%, and as of December 31, 2018; risk-free interest rates from 2.56% to 2.62% and
volatility of 61% to 65%. The initial derivative liabilities for convertible notes issued during the year ended December 31, 2019,
used the following assumptions; risk-free interest rates from 1.59% to 2.58% and volatility of 28% to 63%.
A
summary of the activity related to derivative liabilities for the years ended December 31, 2019, and 2018, is as follows:
Balance-
January 1, 2018
|
|
$
|
-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
|
|
Issued
during the period
|
|
|
1,460,123
|
|
Converted
or paid
|
|
|
(850,248
|
)
|
Change
in fair value recognized in operations
|
|
|
653,551
|
|
Balance
December 31, 2019
|
|
$
|
2,462,940
|
|
NOTE
7 – NOTES PAYABLE
The
Company has the following note payables outstanding:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Note payable, interest at 8%, matured September 6, 2018, in default
|
|
$
|
330,033
|
|
|
$
|
330,033
|
|
Note payable, interest at 6%, matures February 26, 2021
|
|
|
640,698
|
|
|
|
-
|
|
Bank line of credit, interest at 5.83%, matures November 13, 2019
|
|
|
447,153
|
|
|
|
-
|
|
Equity line of credit, interest at 5.5%, matures August 5, 2022
|
|
|
45,360
|
|
|
|
-
|
|
Notes payable, interest at 8%, matures January 5, 2020, currently in default
|
|
|
45,000
|
|
|
|
-
|
|
Other, due on demand, interest at 6%
|
|
|
50,000
|
|
|
|
2,805
|
|
Total notes payable
|
|
|
1,558,244
|
|
|
|
332,838
|
|
Less long-term portion
|
|
|
(1,440
|
)
|
|
|
-
|
|
Current portion
|
|
$
|
1,556,804
|
|
|
$
|
332,838
|
|
NOTE
8 – RELATED PARTY TRANSACTIONS
Management
Fees and related party payables
For
the years ended December 31, 2019, and 2018, the Company recorded expenses to its former officers in the following amounts:
|
|
2019
|
|
|
2018
|
|
Former
CEO, parent
|
|
$
|
180,000
|
|
|
$
|
140,885
|
|
Former
CEO, Subsidiary
|
|
|
-
|
|
|
|
120,016
|
|
Former
CCO
|
|
|
-
|
|
|
|
120,000
|
|
Former
COO
|
|
|
135,000
|
|
|
|
52,500
|
|
Former
CFO
|
|
|
120,000
|
|
|
|
120,000
|
|
Total
|
|
$
|
435,000
|
|
|
$
|
553,401
|
|
As
of December 31, 2019, and 2018, included in accounts payable and accrued expenses, related party is $470,886 and $552,806, respectively,
for the following amounts owed the Company’s former officers for accrued fees, accounts payable and loans made. The loans
have no terms of repayment.
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Former
CEO, parent (1)
|
|
$
|
125
|
|
|
$
|
22,825
|
|
Former
CEO, subsidiary (2)
|
|
|
144,639
|
|
|
|
162,215
|
|
Former
COO and CCO (3)
|
|
|
162,085
|
|
|
|
236,905
|
|
Former
COO (4)
|
|
|
112,500
|
|
|
|
45,000
|
|
Former
CFO (5)
|
|
|
51,537
|
|
|
|
58,037
|
|
Non-officer
affiliate
|
|
|
-
|
|
|
|
27,824
|
|
Total
|
|
$
|
470,886
|
|
|
$
|
552,806
|
|
(1)The
former CEO, parent resigned February 28, 2020, pursuant to the LOI with PCTI.
(2)
The former CEO, subsidiary resigned on March 4, 2019.
(3)
The Former COO and CCO resigned from those positions on October 1, 2018, and March 4, 2019, respectively.
(4)
The former COO resigned on October 23, 2019.
(5)
The former CFO resigned effective February 28, 2020, pursuant to the LOI with PCTI.
Other
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.
On
April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the Company’s CEO at the time. The shares
were valued at $337,454 of which $25,000 was applied to accrued liabilities-related and $312,454 was recorded as stock-based compensation
expense-related parties. On September 19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock (see Note 11)
to the Company’s CEO and Director at the time, in consideration of the cancellation and return of 1,000,000 shares of the
Company’s Series B Preferred Stock.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Licenses
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 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.
On
August 23, 2019, the Company entered into the Agreement with SRI. Pursuant to the Agreement, SRI granted to the Company an exclusive
license, for products, as defined in the Agreement, and utilized in spine and related surgical procedures. As consideration for
the rights under the Agreement, the Company agreed to pay fees equal to $1,500,000, over the eighteen- month term of the Agreement.
Additionally, the Company has agreed to issue 6,000 shares of restricted common stock on a quarterly basis, pursuant to the terms
of the Agreement. The Company also issued a Promissory Note (the “Note”) to SRI for $768,844 (subject to adjustments)
for the purchase of the inventory of the Products (as defined in the Agreement). The Note has a stated interest rate of six percent
(6%) and payment terms of the Note are in eighteen equal installments, beginning on October 1, 2019. Either party may terminate
the Agreement upon written notice if the other party has failed to remedy a material breach within 30 days (or 15 days in the
case of a breach of a payment obligation). During the year ended December 31, 2019, the Company paid $200,000 of the Acquisition.
The balance of $1,300,000 is due as follows:
January
6, 2020
|
|
$
|
200,000
|
|
April 1, 2020
|
|
$
|
300,000
|
|
July 1, 2020
|
|
$
|
300,000
|
|
October 1,
2020
|
|
$
|
250,000
|
|
January
4, 2021
|
|
$
|
250,000
|
|
Balance
due
|
|
$
|
1,300,000
|
|
On
January 16, 2020, the Company received via email from SRI notice that the Agreement between SRI and the Company has been revoked,
as the Company did not pay the January 6, 2020, payment and did not cure the payment default within the cure period. As a result,
effective January 16, 2020, the Acquisition and Agreement are no longer in effect.
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 shares of our unregistered common stock and reimburse
them for certain out of pocket expenses. The Company valued the common stock at $325,000, based on the market price of the common
stock on the date of the agreement, to be amortized over the one-year term. For the years ended December 31, 2019, and 2018, the
Company expensed $216,667 and $108,333, respectively, as stock- based compensation expense.
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 unregistered shares of the Company’s $0.001
par value per share, common stock, with 450 shares issued upon execution of the Consulting Agreement, and with 150 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. The
Company valued the initial 450 shares at $225,000, based on the market price of the common stock on the date of the agreement,
to be amortized over the first three months of the contract. For the years ended December 31, 2019, and 2018, the Company expensed
$52,500 and $172,500 as stock-based compensation expense. For the year ended December 31, 2019, the Company recorded 1,350 shares
of common stock to be issued, and valued the shares at $410,370, based on the market price of the common stock on the date of
the shares being earned. For the years ended December 31, 2019, the company expensed the $410,370 as stock-based compensation
expense.
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 (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. During the year ended December 31, 2019, the Company paid Mr. Chaudhry
$65,115, and the balance owed is $162,085, which is included in accounts payable and accrued expenses- related party.
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 and its assignees received 172 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. The Company valued the shares at $77,130, based on the market
price of the common stock on the date of the agreement, to be amortized over the one-year term of the contract. For the year ended
December 31, 2019, the Company amortized $59,347 as stock-based compensation expense. As of December 31, 2019, there remains $17,783
of deferred stock compensation on the consolidated balance sheet, to be amortized over the remaining term of the agreement.
On
September 2, 2019, the Company entered Consulting Agreement (the “Agreement”) with a consultant to act as the Company’s
Executive Vice President, Sales and Marketing (the “EVP”) through December 31, 2019, and to provide the Company with
customary services of an EVP. The Company has agreed to compensate the consultant $10,000 per month. Either party may terminate
the Agreement in its sole and absolute discretion. The parties have agreed that they will negotiate follow up agreement with terms
and conditions to include salary, commission, bonuses and stock and or option grants or awards, to be consistent with industry
standards for like size companies prior to the termination of the Agreement. For the year ended December 31, 2019, the Company
has expensed $30,000, included in general and administrative, other. As of December 31, 2019, the Company owes the EVP $10,000,
included in accounts payable and accrued expenses.
On
September 3, 2019, the Company entered into an Investor Relations Agreement (the “Agreement”) with a consultant. Under
the terms of the Agreement, the consultant will provide consulting services to the Company, including, but not limited to assisting
the Company in the conception and implementation of the Company’s corporate and business development plan. The term of the
Agreement is 6 months from the date of the Agreement. As compensation for its services under the Agreement, the consultant received
1,250 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. The Company
valued the shares at $46,875, based on the market price of the common stock on the date of the agreement, to be amortized over
the term of the contract. For the year ended December 31, 2019, the Company amortized $31,250 as stock-based compensation expense.
As of December 31, 2019, there remains $15,625 of deferred stock compensation on the consolidated balance sheet, to be amortized
over the remaining term of the Agreement.
On
September 3, 2019, the Company entered into a Consulting Agreement (the “Agreement”) with a consultant. Under the
terms of the Agreement, the consultant will provide consulting services to the Company, including, but not limited to assisting
the Company in its general strategy for corporate communications. The term of the Agreement is 6 months from the date of the Agreement.
As compensation for its services under the Agreement, the consultant received 1,250 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. The Company valued the shares at $46,875, based on
the market price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the year
ended December 31, 2019, the Company amortized $31,250 as stock-based compensation expense. As of December 31, 2019, there remains
$15,626 of deferred stock compensation on the consolidated balance sheet, to be amortized over the remaining term of the Agreement.
NOTE
10 - 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,
|
|
|
|
2019
|
|
|
2018
|
|
Pre-tax
loss
|
|
$
|
(6.140,158
|
)
|
|
$
|
(2,490,705
|
)
|
U.S.
federal corporate income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Expected
U.S. income tax credit
|
|
|
(1,289,433
|
)
|
|
|
(523,048
|
)
|
Tax
rate difference between U.S. and foreign operations
|
|
|
289
|
|
|
|
4,715
|
|
Permanent
differences
|
|
|
836,895
|
|
|
|
256,373
|
|
Change
of valuation allowance
|
|
|
452,249
|
|
|
|
261,960
|
|
Effective
tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company had deferred tax assets as follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Net
operating losses carried forward
|
|
$
|
1,022,071
|
|
|
$
|
569,822
|
|
Less:
Valuation allowance
|
|
|
(1,022,071
|
)
|
|
|
(569,822
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2019, the Company has approximately $4,399,000 and $595,000 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, 2019, and 2018, 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, 2019, and 2018, and no provision for interest and penalties is deemed necessary as of December
31, 2019, and 2018.
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.
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
11 – STOCKHOLDERS’ EQUITY
On
January 21, 2020, the Company filed an amendment to its Certificate of Incorporation, with the Nevada Secretary of State, for
1-for-1,000 reverse stock split of our common stock (the “Reverse Stock Split”) effective February 10, 2020. The number
of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of
one- thousand and no fractional shares were issued. All historical share in this report have been adjusted to reflect the Reverse
Stock Split (see Note 1). There were no changes to the authorized number of shares and the par value of our common stock.
Common
stock
On
July 5, 2019, the Company entered into an Equity Financing Agreement (the “Equity Agreement”) with GHS Investments,
LLC, a Nevada limited liability company (the “Investor”), with the Investor committing to purchase up to $7,000,000
of the Company’s common stock in tranches of up to $400,000, following an effective registration of the shares and subject
to restrictions regarding the timing of each sale and total percentage stock ownership held by the Investor. The purchase price
for the shares will be 85% of the lowest closing price during the 10-day period prior to each sale, and with each sale, the Investor
will receive an issuance premium of 5% to cover the Investor’s transaction costs associated with selling the shares and
payable by the Company to the Investor in registered shares. The obligation of the Investor to purchase shares pursuant to the
Equity Agreement is subject to several conditions, including (i) that the Company has filed a registration statement (the “Registration
Statement”) with the United States Securities and Exchange Commission (the “SEC”) registering the shares to
be sold to the Investor within 30 calendar days from the date of the Equity Agreement, with the Registration Statement being declared
effective prior to sale of any shares to the Investor; and (ii) that the purchase of shares by the Investor pursuant to the Equity
Agreement shall not cause the Investor to own more than 4.99% of the outstanding shares of the Company’s common stock.
In
connection with the Equity Agreement, on July 5, 2019, the Company also entered into a Registration Rights Agreement with
the Investor (the “Registration Rights Agreement”). On October 1, 2019, the SEC issued a Notice of Effectiveness of
the Company’s Registration Statement.
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 units (a “Unit”), for a price of $500 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, 2019, we sold 200 Units pursuant to the October PPM at $500 per Unit, issued
200 shares of our common stock and received proceeds of $100,000.
During
the year ended December 31, 2019, holders of an aggregate of $434,670 in principal and $110,253 of accrued interest and fees of
convertible notes issued by the Company, converted their debt into 185,296 shares of our common stock at an average conversion
price of $2.94 per share.
On
March 24, 2019, the Company recorded the issuance of 172 shares of common stock for consulting services. The shares were valued
at $450 per share (the market price on the date of the agreement) and $77,130 was recorded as deferred stock-based compensation.
On
June 14, 2019, the Company recorded the issuance of 100 shares of common stock for consulting services. The shares were valued
at $275 per share (the market price on the date of the agreement) and $27,500 was recorded as stock-based compensation expense.
On
June 27, 2019, the Company recorded the issuance of 100 shares of common stock for consulting services. The shares were valued
at $450 per share (the market price on the date of the agreement) and $4,500 was recorded as stock-based compensation expense.
On
August 26, 2019, the Company issued 1,000 shares pursuant to the Agreement (see Note 1). The shares were valued at $30 per share
(the market price on the date of the agreement) and $30,000 was recorded as stock-based compensation expense.
On
September 3, 2019, the Company issued in the aggregate 2,500 shares of common stock for consulting services to third parties,
each receiving 1,250 shares (see Note 9). The shares were valued at $20 per share (the market price on the date of the agreement)
and $50,000 was recorded deferred stock-based compensation.
On
September 3, 2019, the Company issued 200 shares of common stock for web-site development services. The shares were valued at
$20 per share (the market price on the date of the agreement) and $4,000 was recorded as stock-based compensation expense.
On
September 20, 2019, the Company issued 100 shares of common stock for consulting services. The shares were valued at $14.20 per
share (the market price on the date of the agreement) and $1,420 was recorded as stock-based compensation expense.
On
September 25, 2019, the Company issued 300 shares of common stock for consulting services. The shares were valued at $9.00 per
share (the market price on the date of the agreement) and $2,700 was recorded as stock-based compensation expense.
As
of December 31, 2019, the Company has 4,990,000,000 shares of $0.001 par value common stock authorized and there are 219,035 shares
of common stock issued and outstanding.
Common
stock to be issued
On
October 19, 2018, the Company entered into a consulting agreement Draper (see Note 9). 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 unregistered shares of the Company’s $0.001 par value per share, common stock, with 450 shares issued upon execution
of the Consulting Agreement, and with 150 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. For the year ended December 31, 2019, the Company recorded 1,350 shares of
common stock to be issued, and valued the shares at $410,370, based on the market price of the common stock on the date of the
shares being earned. For the year ended December 31, 2019, the company amortized $462,870 as stock-based compensation expense.
As of December 31, 2019, there are 1,350 shares of common stock to be issued.
Preferred
stock
As
of December 31, 2019, 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.
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 April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the
Company’s CEO at the time. This resulted in a change in control of the Company.
On
September 18, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 50,000 shares
as Series C Preferred Stock. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof,
at any time after the date of issuance, into one share of fully paid and non-assessable share of common stock. Each share of Series
C Preferred Stock shall entitle the holder thereof to ten thousand (10,000) votes on all matters submitted to a vote of the stockholders
of the Company.
On
September 19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock to the Company’s CEO and Director,
at the time, in consideration of the cancellation and return of 1,000,000 shares of the Company’s Series B Preferred Stock.
On September 20, 2019, the Company filed a Certificate of Withdrawal of Certificate of Designation
(the “Certificate of Withdrawal”) for the Company’s Series B Preferred Stock, pursuant to which the prior designation
of the Company’s Series B Stock was cancelled. As of December 31, 2019, there are 50,000 shares of Series C Preferred Stock
outstanding and no shares of Series B Preferred Stock outstanding.
On
February 4, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s
Series C Preferred Stock. The voting rights associated with the Series C Preferred Stock were amended whereby each share of Series
C Preferred Stock shall entitle the holder thereof to have voting rights equal to two times the sum of all the number of shares
of other classes of Company capital stock eligible to vote on all matters submitted to a vote of the stockholders of the Company,
divided by the number of shares of Preferred Stock issued and outstanding at the time of voting.
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 shares of common stock.
NOTE
12 – SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
For
the year ended December 31, 2019, the Company operated only in the United States. For the year ended December 31, 2018, the Company
operated 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
|
|
Revenue:
|
|
|
|
United
States
|
|
$
|
107,851
|
|
Hong
Kong
|
|
$
|
49,607
|
|
|
|
$
|
157,458
|
|
Gross
Profit
|
|
|
|
|
United
States
|
|
$
|
107,851
|
|
Hong
Kong
|
|
$
|
9,915
|
|
|
|
$
|
117,766
|
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Total
Assets:
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
5,849,316
|
|
|
$
|
658,350
|
|
Hong
Kong
|
|
|
-
|
|
|
|
869
|
|
Total
Assets
|
|
$
|
5,849,316
|
|
|
$
|
659,219
|
|
NOTE
13 – SUBSEQUENT EVENTS
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to most other countries
and infections have been reported globally. Because COVID-19 infections have been reported throughout the United States, certain
federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing
the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will
depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the
COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional
preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued
business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it
may have a material adverse impact on our business, financial condition and results of operations. Management expects that its
business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business
and the duration for which it may have an impact cannot be determined at this time.
From January 1, 2020, through the date of
this report the Company has issued 243,562,612 shares of common stock upon the conversion of $1,168,383 of principal
and $195,437 of accrued interest and fees of convertible notes. The Company also issued 13,244,492 shares of common
stock upon the exercise of warrants.
On
January 16, 2020, the Company received via email from SRI notice that the Agreement dated August 23, 2019, between SRI and the
Company has been revoked, as the Company did not make the required January 6, 2020, license payment nor cure the default. Based
on the termination of the Agreement, the Company recorded an impairment charge to goodwill of $274,854 as of December 31, 2019.
The impairment charge was calculated as the difference of the carrying values of the assets acquired compared to the consideration
and liabilities assumed in the transaction as follows:
Assets
|
|
|
|
|
Inventory
|
|
$
|
378,061
|
|
Instruments,
net
|
|
|
353,985
|
|
Patent
rights, net
|
|
|
2,724,848
|
|
Goodwill
|
|
|
2,277,168
|
|
Total
assets as of December 31, 2019
|
|
$
|
5,734,062
|
|
|
|
|
|
|
Consideration
issued and liabilities assumed
|
|
|
|
|
Common
Stock payable
|
|
$
|
245,000
|
|
License
fee payable
|
|
|
1,234,089
|
|
Equity
Line payable
|
|
|
45,359
|
|
Iberia
Note
|
|
|
447,153
|
|
Inventory
and Instrument note
|
|
|
595,379
|
|
Option
to buy
|
|
|
2,892,228
|
|
Total
consideration and liabilities assumed balances
|
|
$
|
5,459,208
|
|
Impairment
recorded December 31, 2019
|
|
$
|
274,854
|
|
On
January 8, 2020, the Company entered into a securities purchase agreement (the “SPA”) with an investor (the “Investor”),
pursuant to which the Company agreed to issue to the Investor a 12% Convertible Promissory Note, (the “Note”) in the
principal amount of $38,000 in exchange for a purchase price of $35,000. The Note was funded by the Investor on January 13, 2020,
and on such date pursuant to the SPA, the Company reimbursed the Investor for expenses for legal fees and due diligence of $3,000.
The Note proceeds will be used by the Company for general working capital purposes. The SPA includes customary representations,
warranties and covenants by the Company and customary closing conditions.
On
February 4, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s
Series C Preferred Stock (the “Preferred Stock”). The voting rights associated with the Preferred Stock were amended
whereby each share of Preferred Stock shall entitle the holder thereof to have voting rights equal to two times the sum of all
the number of shares of other classes of Company capital stock eligible to vote on all matters submitted to a vote of the stockholders
of the Company, divided by the number of shares of Preferred Stock issued and outstanding at the time of voting.
On
February 7, 2020, the Financial Industry Regulatory Authority (“FINRA”) announced the Company’s 1:1,000 reverse
stock split of the Company’s common stock. The reverse stock split took effect on February 10, 2020. The Company filed a
Certificate of Amendment – Certificate to Accompany Amended and Restated Articles of Incorporation with the State
of Nevada, adding a paragraph to registrant’s Articles of Incorporation to effect the reverse stock split.
On
February 26, 2020, the Company entered into a securities purchase agreement (the “SPA”) with an investor (the “Investor”),
pursuant to which the Company agreed to issue to the Investor a 12% secured convertible promissory note (the “Note”)
in the aggregate principal amount of $132,750 in exchange for a purchase price of $117,750. Pursuant to the SPA, the Company agreed
to pay the Investor $15,000 to cover the Investor’s due diligence expenses incurred in connection with the SPA and Note,
which is to be offset against the proceeds of the Note. The Note was funded by the Investor on February 26, 2020, and on such
date pursuant to the SPA, the Company reimbursed the Investor for expenses for legal fees and due diligence of $2,750. The Note
proceeds will be used by the Company for general working capital purposes. The SPA includes customary representations, warranties
and covenants by the Company and customary closing conditions. The proceeds will be used by the Company for general corporate
purposes. The SPA includes customary representations, warranties and covenants by the Company and customary closing conditions.
On
February 28, 2020, the Company entered into a Binding Letter of Intent (the “LOI”) with Power Conversion Technologies,
Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer
(“CEO”) and its sole shareholder. Pursuant to the terms of the LOI, the Company will acquire 100% of the issued and
outstanding shares of PCTI (the “PCTI Shares”) from Chis (the “Acquisition”). PCTI
operates in the very high power niche of the power electronics market, designing and manufacturing leading edge equipment for
use in power conversion applications. PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid,
telecommunications, military, transportation, renewable energy, aerospace and mission critical defense systems. PCTI’s clients
include Fortune 500 companies, all branches of the US Department of Defense including the US Army and the US Air Force, NASA as
well as other global military organizations. The Company believes the Acquisition will close by June 30, 2020, and is in the best
interests of the Company and its’ shareholders. In conjunction with the LOI, Michael Chermak and Barry Hollander
resigned as Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), respectively, and Brian
Conway was named CEO and Interim CFO. Also, on February 28, 2020, in connection with entering
into the LOI, the Company agreed to purchase and redeem 50,000 shares of the Company’s Series C Preferred Stock from Mr.
Chermak for a total purchase price of $100,000 pursuant to a Redemption Agreement (the “Redemption Agreement”) requiring
aggregate redemption payments of $100,000, of which $50,000 was paid upon the signing of the Redemption Agreement and $50,000
was paid on April 28, 2020, On April 28 2020 Mr. Conway was appointed to the Board of the Company, and Mr. Chermak resigned from
the Board. Mr. Conway is the sole officer and director of the Company.
On
February 28, 2020, the Company and Mr. Conway entered into an employment agreement (the “Employment Agreement”). Pursuant
to the terms of the Employment Agreement, Mr. Conway is to receive an annual salary of $120,000, for his position of CEO of the
Company, payable monthly.
On
March 9, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, (the “Note”)
in the principal amount of $80,000, to an investor. The Note matures 6 months after the Issuance Date. The Note is convertible
into shares of the Company’s common stock beginning on the Issuance Date at $.25 for the first three months after the Issuance
Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.25 or 50%
of the lowest trading price for the thirty trading days prior to the conversion.
On
April 28, 2020, 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 58% multiplied by the lowest closing bid price during the 20- trading day period
ending on the last completed trading date in the OTC Markets prior to the date of conversion.
On
May 4, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $110,000,
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 the lower of $0.50 or 58% multiplied by the average of the two lowest closing
trading price or bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior
to the date of conversion.
The
Company has evaluated subsequent events through the date the financial statements were issued. The Company has determined that
there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.