Notes
to Condensed Consolidated Financial Statements
March
31, 2019
(Unaudited)
NOTE 1 - ORGANIZATION
Business
Ozop Surgical Corp.
(the” Company,” “we,” “us” or “our”) was originally incorporated as Newmarkt Corp.
on July 17, 2015, under the laws of the State of Nevada, for the purpose of the renting different kind of Segways and bicycles,
dual wheels self-balancing electric scooters and related safety equipment. Following the acquisition of OZOP Surgical, Inc. as
discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and distributing innovative
endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and
pain management procedures and specialties.
Reverse Merger
On April 13, 2018,
we entered into and completed a share exchange agreement (the "Share Exchange Agreement") with OZOP Surgical, Inc. (“OZOP”),
the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the then holder of 2,000,000 shares of
our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders transferred and exchanged 100%
of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of our common stock (the “Share
Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock pursuant to the Redemption Agreement
discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the Share Exchange Agreement, we had 25,797,500
shares of common stock issued and outstanding, with the OZOP Shareholders, as a group, owning 96.9% of such shares. Currently,
our executive officers and directors, as a group, own 6,374,223 of our shares representing 21.81 % of our issued and outstanding
shares of common stock. The merger was accounted for as a reverse merger, whereby OZOP was considered the accounting acquirer
and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment for a “reverse merger”
or a “reverse acquisition,” the Company’s historical financial statements prior to the reverse merger were and
will be replaced with the historical financial statements of OZOP prior to the reverse merger, in all future filings with the
U.S. Securities and Exchange Commission (the “SEC”).
In
connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij
for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant
to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company's Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry (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.
OZOP
OZOP
was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”).
On July 19, 2016, Mr. Eric Siu (“Siu”), one of our directors purchased 100% of the outstanding capital stock of Perma
and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled as
a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, Ozop formed as the sole member, Ozop Surgical,
LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, Ozop acquired 100% of Ozop Surgical Limited
(“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong
Kong.
On
February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas
limited liability company (“Spinus
”
), from RWO Medical Consulting LLC (“RWO”), a Texas limited
liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000
shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant
to a license agreement by and between Spinus and a third p
arty (the “Assumed Debt”).
The Assumed Debt is secured by Spinus’s assets and is due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent
to the Company completing a minimum of a $3,000,000 equity raise. OZOP acquired Spinus to gain control of a license rights agreement
for exclusive rights to intellectual property related to minimally invasive spine surgery techniques. The Assumed Debt of $250,000
was paid in November 2018.
The
following table summarizes the preliminary value of the consideration issued and the preliminary purchase price allocation of
the fair value of assets acquired and liabilities assumed in the acquisition:
|
|
Purchase
Price Allocation
|
Fair value of consideration issued
|
|
$
|
250,000
|
|
Liabilities
assumed
|
|
|
532,289
|
|
Total
purchase consideration
|
|
$
|
782,289
|
|
Assets acquired
|
|
$
|
543,138
|
|
Goodwill
|
|
|
239,151
|
|
|
|
$
|
782,289
|
|
The
total purchase price of $782,289 has been allocated on a preliminary basis to the tangible and intangible assets acquired and
liabilities assumed based on preliminary estimated fair values as of the c
ompletion of the Acquisition.
These allocations reflect various preliminary estimates that are currently available and are subject to change upon the valuation
being finalized within the measurement period. The final fair value of Spinus’s identifiable intangible assets will be determined
primarily using the income approach which requires an estimate or forecast of all the expected future cash flows, either through
the use of the relief-from-royalty method or the multi-period excess earnings method. The Company will record amortization expense
assuming a straight-line basis over the expected life of the finite lived intangible assets, which approximates expected future
cash flows.
Goodwill represents
the amount by which the estimated consideration transferred exceeds the historical costs of the assets the Company acquired and
the liabilities the Company assumed. The Company will not amortize the goodwill, but will instead test the goodwill for impairment
at least annually and whenever events or circumstances have occurred that may indicate a possible impairment.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING PRONOUNCEMENTS
Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting
only of normal recurring accruals) to present the financial position of the Company as of March 31, 2019, and the results of operations
and cash flows for the periods presented. The results of operations for the three months ended March 31, 2019, are not necessarily
indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and related notes thereto included in the
Company’s
Current Report on Form 10-K filed on April 16, 2019.
The unaudited condensed
consolidated financial statements include the 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 three months ended
March 31, 2019, and 2018, and their accounts receivable balance as of March 31, 2019:
|
|
Sales
% Three Months Ended
March
31, 2019
|
|
Sales
% Three Months Ended
March
31, 2018
|
|
Accounts
receivable balance
March
31, 2019
|
Customer
A
|
|
|
100
|
%
|
|
|
100
|
%
|
|
$
|
62,256
|
|
Accounts
Receivable
The
Company records accounts receivable at the time products and services are delivered. An allowance for losses is established
through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when
management
believes collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb
estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss
experience.
Inventory
Inventory, which
will consist of finished goods, is valued at the lower of cost or net realizable value. Cost is determined using the first in
first out (FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management analysis or inventory
levels and future sales forecasts. The Company has not recorded any loss during the periods presented.
Purchase
concentration
The principal purchases
by the Company is 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 three months ended March 31, 2019, and 2018:
|
|
Purchase
% Three Months Ended
March
31, 2019
|
|
Purchase
% Three Months Ended
March
31, 2018
|
Supplier
A
|
|
|
100
|
%
|
|
|
100
|
%
|
Management
believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause
a delay and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.
Property,
plant and equipment
Property and equipment
are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets.
Office equipment
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:
|
|
March
31,
2019
|
|
December
31,
2018
|
Office equipment
|
|
$
|
9,590
|
|
|
$
|
9.590
|
|
Less: Accumulated Depreciation
|
|
|
(3,190
|
)
|
|
|
(2,391
|
)
|
Property and Equipment, Net
|
|
$
|
6,400
|
|
|
$
|
7,199
|
|
Depreciation expense
was $799 and $162 for the three months ended March 31, 2019, and 2018, respectively.
Intangible
Assets
Intangible
assets primarily represent purchased license rights. The Company amortizes these costs over the shorter of the legal life of the
patent or its estimated economic life using the straight-line method. The Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows to be generated
by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The Company has not recognized impairment losses for any
long-lived assets.
For the three months ended March 31, 2019, the Company recorded amortization
expense of $10,417. There was no amortization expense for the three months ended March 31, 2018. Goodwill is measured as the excess
of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business
acquisition. In accordance with ASC 350,
“Intangibles—Goodwill and Other,”
goodwill and other
intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever
events or changes in circumstances indicate that the asset might be impaired.
Goodwill
The
Company reviews the goodwill allocated to each of our reporting units for possible impairment annually and whenever
events or changes in circumstances indicate carrying amount may not be recoverable. When assessing goodwill for impairment, the
Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads
to a determination that it is more likely than not that the fair value of a reporting unit is less than its’ carrying amount.
If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value
of a reporting unit is less than its’ carrying amount, then the Company performs a two-step impairment test. If the Company
concludes otherwise, then no further action is taken. The Company also has the option to bypass the qualitative assessment and
only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test,
the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill,
to the estimated fair value of the reporting unit. There were no events or changes in circumstances that indicated potential impairment
of intangible assets during the three months ended March 31, 2019.
In
assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the
carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting
unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include
the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance
and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively
or negatively and the magnitude of any such impact.
The
carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing
goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit,
the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit.
Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to
our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value
of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets
acquired and liabilities assumed that are assigned to the reporting unit.
If
the carrying amount of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform
the second step of the impairment analysis to measure the amount of the impairment loss, by allocating the reporting unit’s
fair value to its assets and liabilities other than goodwill, comparing the carrying amount of the goodwill to the resulting implied
fair value of the goodwill, and recording an impairment charge for any excess.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance
obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance
obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. For the comparative
periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605,
revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and
determinable; and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of
its’ customers. Revenues from Spinus of $47,602 and $6,727 for the three months ended March 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 three months ended March 31, 2019
and 2018.
Advertising
and Marketing Expenses
The Company expenses
advertising and marketing costs as incurred. For the three months ended March 31, 2019, and 2018, the Company recorded $56,802
and $38,869 of advertising and marketing (including trade shows) expenses, respectively.
Research
and Development
Costs and expenses
that can be clearly identified as research and development are charged to expense as incurred. For the three months ended March
31, 2019, and 2018, the Company recorded $53,204 and $10,565 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 partic
ipants
would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework
for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned
a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
•
|
Level
1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level
3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts
payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of
the short maturity of these instruments.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
March 31, 2019, and December 31, 2018, for each fair value hierarchy level:
March 31,
2019
|
|
Derivative
Liabilities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,268,477
|
|
|
$
|
1,268,477
|
|
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 March
31, 2019, and December 31, 2018 (Hong Kong dollar per one U.S. dollar):
|
|
March
31,
2019
|
|
December
31,
2018
|
Balance sheet date
|
|
|
0.1274
|
|
|
|
0.1277
|
|
Average rate for statements of operations and comprehensive loss
|
|
|
0.1274
|
|
|
|
0.1276
|
|
Earnings
(Loss) Per Share
The Company
computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation of
both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using
the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive.
Recent Accounting
Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and
lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial
statements.
In January 2017,
the FASB issued ASU 2017-01, “
Business Combinations (Topic 805) Clarifying the Definition of a Business
” (“ASU
2017-01”). The Amendments in this Update clarify the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation.
The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods.
Early adoption of this standard is permitted. The Company adopted ASU 2017-01 on January 1, 2018, with no significant impact on
the consolidated financial statements.
With the exception
of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements
during the three months ended March 31, 2019, that are of significance or potential significance to the Company.
NOTE
3 – INTANGIBLE ASSETS
Patents as of March 31, 2019, and December
31, 2018, consist of the following:
|
|
March
31,
2019
|
|
|
December
31,
2018
|
|
Patents and license rights
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Accumulated amortization
|
|
|
(46,875
|
)
|
|
|
(36,458
|
)
|
Net carrying amount
|
|
$
|
203,125
|
|
|
$
|
213,542
|
|
Amortization
expense for the three months ended March 31, 2019, was $10,417. There was no amortization expense for the three months ended March
31, 2018.
NOTE 4 - CONVERTIBLE
NOTES PAYABLE
During the year
ended December 31, 2017, OZOP issued 19 convertible promissory notes (the “2017 Notes”), in amounts of $10,000 to
$50,000. OZOP received proceeds of $710,000 in the aggregate. Of the 2017 Notes, $50,000 was from the wife of one of our Directors
at the time (see Note 7). The 2017 Notes mature(d) on their one- year anniversary and bear interest at ten percent (10%). The
initial conversion feature allowed the holders to convert the note and any unpaid interest due, into shares of the Company’s
common stock on the 15
th
business day that the Company becomes listed, at conversion prices equal to discounts of 35%-50%
of the average of the three lowest closing prices of the common stock. In August 2018, the Company offered any noteholder to convert
their principal and interest into shares of common stock at $0.50 per share. OZOP also issued $25,500 of convertible notes for
consulting fees. During the year ended December 31, 2018, the Company issued a $50,000 convertible promissory note (the “March
2018 Note”) and received proceeds of $50,000.
The Company determined that the conversion
feature of the 2017 Notes and the March 2018 Note (together, the “Notes”) did not meet the criteria of an embedded
derivative and therefore the conversion feature was not bi-furcated and accounted for as a derivative because the Company was
a private company, there was no quoted price and no active market for the Company’s common stock.
On April 13, 2018,
the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes were convertible
into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered to be conventional
debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.
Accordingly, the fair value of the derivative instruments of the Notes that occurred prior to April 13, 2018, were recorded as
a liability on April 13, 2018, with the corresponding amount recorded as a discount to the Note. Such discount is being amortized
from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts
are recorded in other income or expenses in the reporting period, with the offset to the derivative liability on the balance sheet.
The embedded feature included in the Notes resulted in an initial debt discount of $620,075, interest expense of $14,000 and initial
derivative liability of $634,075. As of March 31, 2019, and December 31, 2018, the outstanding principal balance of the 2017 Notes
was $165,000.
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
three months ended March 31, 2019, principal payments of $42,000 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 three months ended March 31, 2019, amortization of the debt discounts of $48,906 was charged to interest expense. During
the three months ended March 31, 2019, the investor sold $30,000 of the note to another investor (see below). As of March 31,
2019, and December 31, 2018, the outstanding principal balance of the note was $60,375 and $132,375, respectively, with a carrying
value as of March 31, 2019, and December 31, 2018, of $55,385 and $78,479, net of unamortized discounts of $4,990 and $53,896,
respectively.
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 19,900,000 shares of our
common stock and we pledged the shares of our subsidiary OZOP Surgical, Inc. (collectively, the “Collateral”). Upon
a default under the terms of the Note, Carebourn may, among other things, collect or take possession of the Collateral, proceed
with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
On August 29, 2018,
we issued a convertible promissory note in the principal amount of $339,250 (the “Note”), pursuant to a Securities
Purchase Agreement we entered into with the investor. The Note bears interest at the rate of 12% per annum and is due and payable
on August 29, 2019. The note is convertible at any time following the funding of the note into a variable number of the Company's
common stock, based on a conversion ratio of 55% of the average of the lowest trading price for the 25 days prior to conversion.
The note was funded on August 29, 2018, when the Company received proceeds of $280,000, after OID of $44,250, and disbursements
for the lender’s transaction costs, fees and expenses of $15,000, which were recorded as discounts against the debt to be
amortized into interest expense through maturity. Periodic payments are due by us on the Note at the rate of $1,000 per day (the
“Repayment Amount”) via direct withdrawal from our bank account, beginning on August 30, 2018, until the Note is satisfied
in full. From time to time the investor waives any Repayment Amount for a period of time as agreed upon. During the three months
ended March 31, 2019, principal payments of $42,000 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 three
months March 31, 2019, amortization of the debt discounts of $77,071 was charged to interest expense. As of March 31, 2019, and
December 31, 2018, the outstanding principal balance of the note was $219,250 and $261,250, respectively, with a carrying value
as of March 31, 2019, and December 31, 2018, of $73,924 and $38,853, net of unamortized discounts of $145,326 and $222,397, respectively.
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 three months ended March 31, 2019, amortization
of the debt discounts of $16,806 was charged to interest expense. For the three months ended March 31, 2019, the investor converted
a total of $21,750 of the face value into 75,000 shares of common stock. As of March 31, 2019, and December 31, 2018, the outstanding
principal balance of the note was $33,250 and $55,000, respectively with a carrying value as of March 31, 2019 and December 31,
2018, of $32,944 and $37,888, net of unamortized discounts of $306 and $17,112, respectively.
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 three months ended March 31, 2019, amortization of the debt discounts of $15,175 was charged to interest expense.
As of March 31, 2019, and December 31, 2018, the outstanding principal balance of the note was $78,000 with a carrying value as
of March 31, 2019, and December 31, 2018, of $45,392 and $30,217, respectively, net of unamortized discounts of $32,608 and $47,783,
respectively.
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 three
months ended March 31, 2019, amortization of the debt discounts of $101,327 was charged to interest expense. As of March 31, 2019,
and December 31, 2018, the outstanding principal balance of the note was $500,000 with a carrying value as of March 31, 2019,
and December 31, 2018, of $248,321 and $146,994, respectively, net of unamortized discounts of $251,679 and $353,006, respectively.
On December 5,
2018, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $63,000, pursuant
to a Securities Purchase Agreement we entered into with the investor. The Note matures 12 months after the date of issuance. The
Note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to 65% multiplied by the average of the lowest two trading prices during the 15-
trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The note was
funded on December 10, 2018, when the Company received proceeds of $60,000 after disbursements for the lender’s transaction
costs, fees and expenses of $3,000, which were recorded as discounts against the debt to be amortized into interest expense through
maturity. The embedded conversion feature included in the note resulted in an initial debt discount and derivative liability of
$47,170. For the three months ended March 31, 2019, amortization of the debt discounts of $12,543 was charged to interest expense.
As of March 31, 2019, and December 31, 2018, the outstanding principal balance of the note was $63,000 with a carrying value as
of March 31, 2019, and December 31, 2018, of $29,213 and $16,670, respectively, net of unamortized discounts of $33,787 and $46,330,
respectively.
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 three months ended March 31, 2019, amortization
of the debt discounts of $29,414 was charged to interest expense. As of March 31, 2019, the outstanding principal balance of the
note was $150,000 with a carrying value as of March 31, 2019, of $51,164, net of unamortized discounts of $98,836.
On February 5,
2019, the Company issued an 8% convertible promissory note (the “Note”) in the aggregate principal amount of up to
$165,000 in exchange for an aggregate purchase price of up to $148,500 with an original issue discount of $16,500 to cover the
Investor’s accounting fees, due diligence fees, monitoring and other transactional costs incurred in connection with the
purchase and sale of the Note, which is included in the principal balance of the Note. On February 8, 2019, the Investor funded
the first tranche under the Note, and the Company received $49,500 ($47,500 after payment of $2,000 of the Investor’s legal
fees) for this first tranche of $55,000 under the Note and on the same date, the Company issued the Note to the Investor. The
Note is convertible into shares of the Company’s common stock, beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day
period ending on the last completed trading date prior to the date of conversion of the Note and (2) 65% multiplied by the average
of the 3 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed
trading day of the common stock prior to the date of conversion of the Note. The embedded conversion feature included in the note
resulted in an initial debt discount and derivative liability of $38,502. For the three months ended March 31, 2019, amortization
of the debt discounts of $6,900 was charged to interest expense. As of March 31, 2019, the outstanding principal balance of the
note was $55,000 with a carrying value as of March 31, 2019, of $15,898, net of unamortized discounts of $39,102.
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 three months ended March 31, 2019, amortization of the debt discounts of $5,230 was charged to interest expense.
As of March 31, 2019, the outstanding principal balance of the note was $53,000 with a carrying value as of March 31, 2019, of
$10,899, net of unamortized discounts of $42,101.
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 three months ended March 31, 2019,
amortization of the debt discounts of $5,310 was charged to interest expense. As of March 31, 2019, the outstanding principal
balance of the note was $85,000 with a carrying value as of March 31, 2019, of $5,816, net of unamortized discounts of $79,184.
A summary of the
convertible note balance as of March 31, 2019, and December 31, 2018, is as follows:
|
|
March
31,
2019
|
|
December
31,
2018
|
Principal balance
|
|
$
|
1,461,875
|
|
|
$
|
1,254,625
|
|
Unamortized discount
|
|
|
(727,917
|
)
|
|
|
(740,523
|
)
|
Ending balance, net
|
|
$
|
733,958
|
|
|
$
|
514,102
|
|
NOTE 5 – DERIVATIVE LIABILITIES
On April 13, 2018,
the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes were convertible
into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered to be conventional
debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.
The Company valued
the derivative liabilities at March 31, 2019, and December 31, 2018, at $1,268,477 and $1,199,514, respectively. The Company used
the Monte Carlo simulation valuation model with the following assumptions as of March 31, 2019, 2018, risk-free interest rates
from 2.42% to 2.44% and volatility of 48% to 49%, 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 three months ended March
31, 2019, used the following assumptions; risk-free interest rates from 2.51% to 2.58% and volatility of 51% to 63%.
A summary of the
activity related to derivative liabilities for the three months ended March 31, 2019, and the year ended December 31, 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
|
|
|
271,727
|
|
Converted or paid
|
|
|
(155,154
|
)
|
Change in fair value recognized
in operations
|
|
|
(47,610
|
)
|
Balance- March 31, 2019
|
|
$
|
1,268,477
|
|
NOTE 6 –
NOTES PAYABLE
The Company has
the following note payables outstanding:
|
|
March
31,
2019
|
|
December
31,
2018
|
Note payable, interest at 8%, matured
September 6, 2018, in default
|
|
$
|
330,033
|
|
|
$
|
330,033
|
|
Other, due on demand
|
|
|
2,805
|
|
|
|
2,805
|
|
Total notes payable
|
|
$
|
332,838
|
|
|
$
|
332,838
|
|
NOTE 7
– RELATED PARTY TRANSACTIONS
Note payable
On October
25, 2017, the Company issued a $60,000 promissory note to the wife of an officer and director of the Company in exchange for $50,000.
The note originally matured November 25, 2017, and was extended until November 25, 2018. As of March 31, 2019, and December 31,
2018, the balance of the note is $60,000 and is in default.
Convertible
note payable
On October
16, 2017, OZOP issued a $50,000 convertible promissory note to the wife of an officer and director in exchange for $50,000. The
note bears interest at ten percent (10%), matured on October 16, 2018. The initial conversion feature allowed the holder to convert
the note and any unpaid interest due, into shares of the Company’s common stock on the 15
th
business day that
the Company becomes listed, at conversion prices equal to discounts of 35%-50% of the average of the three lowest closing prices
of the common stock. In August 2018, the Company offered any noteholder to convert their principal and interest into shares of
common stock at $0.50 per share. As of March 31, 2019, and December 31, 2018, the balance of the note is $50,000 and is in default.
Management
Fees and related party payables
For the three
months ended March 31, 2019, and 2018, the Company recorded expenses to its officers in the following amounts:
|
|
Three
months ended
March 31,
|
|
|
2019
|
|
2018
|
CEO, parent
|
|
$
|
45,000
|
|
|
$
|
30,000
|
|
CEO, subsidiary
|
|
|
—
|
|
|
|
30,000
|
|
CCO
|
|
|
—
|
|
|
|
30,000
|
|
COO
|
|
|
45,000
|
|
|
|
—
|
|
CFO
|
|
|
30,000
|
|
|
|
30,000
|
|
Total
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
As of March
31, 2019, and December 31, 2018, included in accounts payable and accrued expenses, related party is $530,117 and $552,806, respectively,
for the following amounts owed the Company’s officers for accrued fees, accounts payable and loans made. The loans have
no terms of repayment.
|
|
March
31,
2019
|
|
December
31,
2018
|
CEO, parent
|
|
$
|
8,925
|
|
|
$
|
22,825
|
|
Former CEO, subsidiary
|
|
|
151,453
|
|
|
|
162,215
|
|
Former COO and CCO
|
|
|
211,115
|
|
|
|
236,905
|
|
COO
|
|
|
75,000
|
|
|
|
45,000
|
|
CFO
|
|
|
55,317
|
|
|
|
58,037
|
|
Non-officer affiliate
|
|
|
28,307
|
|
|
|
27,824
|
|
Total
|
|
$
|
530,117
|
|
|
$
|
552,806
|
|
On February 9,
2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the issuance of
7,600,000 shares of common stock.
NOTE 8 –
COMMITMENTS AND CONTINGENCIES
License
On February 1,
2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The Company assumed
the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms of the Licensing
Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive rights to other
patents. The patents surround mechanical or inflatable expandable interbody implant products. The $250,000 was due the earlier
of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum of a $3,000,000 equity raise. The Company
paid the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of net sales on any product sold utilizing any
of the patents. There have not been any sales of the licensed products and accordingly, no royalties have been incurred.
Consulting
Agreements
On August
31, 2018, we entered into an investor relations consulting agreement with Kingdom Building, Inc. (“Kingdom”) whereby
Kingdom agreed to provide us with investor relations, public relations and financial media relations consulting services. The
term of the agreement is for a period of 12 months. We may terminate the agreement after the initial six months on 60 days’
notice. We agreed to pay Kingdom $8,500 per month which amount is deferred until we complete a financing transaction with a minimum
raise of $1,500,000 in gross proceeds. In addition, we issued Kingdom 650,000 shares of our unregistered common stock and reimburse
them for certain out of pocket expenses. 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 three months ended March 31, 2019,
the Company amortized $81,250 as stock- based compensation expense. As of March 31, 2019, there remains $135,417 of deferred stock
compensation on the consolidated balance sheet, to be amortized over the remaining contract term.
On October 19,
2018, the Company entered into a consulting agreement (the “Consulting Agreement”) with Draper Inc., a Nevada corporation
(“Draper”). Pursuant to the Consulting Agreement the Company engaged Draper as an independent consultant and Draper
agreed to provide the Company with consulting services. In exchange for the services to be provided by Draper pursuant to the
Consulting Agreement, the Company agreed to issue Draper a total of 1,800,000 unregistered shares of the Company’s $0.001
par value per share, common stock, with 450,000 shares issued upon execution of the Consulting Agreement, and with 150,000 shares
be issued and delivered each month at the beginning of the fourth month to the beginning of the twelve month, until the total
amount of shares is issued. Either party can terminate the Consulting Agreement by giving 30 days written notice to the other
party. The Company valued the initial 450,000 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 three months ended March 31, 2019, the Company
amortized $52,500 as stock-based compensation expense. For the three months ended March 31, 2019, the Company recorded 450,000
shares of common stock to be issued, and valued the shares at $344,970, based on the market price of the common stock on the date
of the shares being earned. For the three months ended March 31, 2019, the company amortized $260,470 as stock-based compensation
expense. As of March 31, 2019, there remains $84,500 of deferred stock compensation on the condensed consolidated balance sheet,
to be amortized in April, 2019.
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 three months ended March 31, 2019, the Company paid Mr. Chaudhry $16,086,
and the balance owed is $211,115.
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 171,400 shares of the Company’s common stock. The Agreement contains
customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes customary representations,
warranties and covenants by the Company. 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 three months ended March 31, 2019,
the Company amortized $1,500 as stock-based compensation expense. As of March 31, 2019, there remains $75,630 of deferred stock
compensation on the condensed consolidated balance sheet, to be amortized over the remaining term of the agreement.
NOTE
9 - INCOME TAXES
The
Company was incorporated in the United States and has operations in two tax jurisdictions - the United States and Hong Kong. The
Company’s HK subsidiary is subject to a 16.5% profit tax based on its taxable net profit. The Company’s U.S. operations
are subject to income tax according to U.S. tax law.
A
reconciliation of the provision for income taxes determined at the U.S. statutory rate to the Company’s effective income
tax rate is as follows:
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Pre-tax loss
|
|
$
|
(904,155
|
)
|
|
$
|
(257,948
|
)
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Expected U.S. income tax credit
|
|
|
(189,873
|
)
|
|
|
(54,169
|
)
|
Tax rate difference between U.S. and foreign operations
|
|
|
231
|
|
|
|
1,469
|
|
Permanent differences
|
|
|
111,325
|
|
|
|
—
|
|
Change of valuation allowance
|
|
|
78,317
|
|
|
|
52,700
|
|
Effective tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company had deferred tax assets as follows:
|
|
March 31,
2019
|
|
December 31,
2018
|
Net operating losses carried forward
|
|
$
|
648,139
|
|
|
$
|
569,822
|
|
Less: Valuation allowance
|
|
|
(648,139
|
)
|
|
|
(569,822
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of March 31, 2019, the Company has approximately $2,619,000 and $593,000 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 March 31, 2019, and December 31, 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 three months ended March 31, 2019, and 2018, and no provision for interest and penalties is deemed necessary
as of March 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. The accounting for the tax effects of the Tax Act will be
completed in 2018.
Since
the Company’s foreign subsidiaries have not generated income since inception, the Company believes that Tax Act will not
have significant impact on the Company’s consolidated financial statements.
NOTE 10 –
STOCKHOLDERS’ EQUITY
Common stock
On October 13,
2018, the Board of Directors of the Company authorized a Private Placement Memorandum (the “October PPM”) offering
of a minimum of $50,000 and up to $3,000,000 of up to 6,000,000 units (a “Unit”), for a price of $0.50 per Unit (the
“Purchase Price”) with each Unit consisting of one (1) share of Common Stock and a warrant (a “Warrant”)
to purchase one (1) share of Common Stock, with each Warrant having a three year term and an exercise price of $1.00 per share
of Common Stock. During the three months ended March 31, 2019, we sold 160,000 Units pursuant to the October PPM at $0.50 per
Unit, issued 160,000 shares of our common stock and received proceeds of $80,000.
During the three
months ended March 31, 2019, holders of an aggregate of $51,750 in principal of convertible debt issued by the Company, converted
their debt into 230,844 shares of our common stock at an average conversion price of $0.224 per share.
On March 24, 2019,
the Company recorded the issuance of 171,400 of common stock for consulting services.
As of March 31,
2019, the Company has 290,000,000 shares of $0.001 par value common stock authorized and there are 29,630,455 shares of common
stock issued and outstanding and 450,000 shares of common stock to be issued.
Preferred stock
As of March 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.
Stock subscription
receivable
On February 9,
2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the issuance of
7,600,000 shares of common stock.
NOTE 11 –
SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
The
Company operates in two geographic segments, the United States and Hong Kong. Set out below are the revenues, gross profits and
total assets for each segment.
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
United States
|
|
$
|
47,602
|
|
|
$
|
6,727
|
|
Hong Kong
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
$
|
47,602
|
|
|
$
|
6,727
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
47,602
|
|
|
$
|
6,727
|
|
Hong Kong
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
$
|
47,602
|
|
|
$
|
6,727
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Total Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
657,881
|
|
|
$
|
658,350
|
|
Hong Kong
|
|
|
1,069
|
|
|
|
869
|
|
Total Assets
|
|
$
|
658,950
|
|
|
$
|
659,219
|
|