Quarterly Report (10-q)

Date : 08/19/2019 @ 6:49PM
Source : Edgar (US Regulatory)
Stock : Ozop Surgical Corp. (OZSC)
Quote : 0.0021  0.0001 (5.00%) @ 9:45PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended:  June 30, 2019

  

OR

  

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________ to____________

Commission File Number: 000-55976

 

OZOP SURGICAL CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   35-2540672
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

319 Clematis Street, Suite 714, West Palm Beach FL 33401

(Address of principal executive offices) (zip code)

 

(760) 466-8076

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

    

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preced ing 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☑ Yes    ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☑ Yes    ☐ No

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company) Emerging growth company

 

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

 

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

   

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   N/A   N/A

 

As of August 16, 2019, there were 35,467,189 shares outstanding of the registrant’s common stock, $0.001 par value per share.

 
 

 

Ozop Surgical Corp.

 

INDEX
       
PART I. FINANCIAL INFORMATION  
       
  ITEM 1 Financial Statements (Unaudited)  
    Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited) 1
    Condensed Consolidated Statement of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 (Unaudited) 2
    Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the three and six months ended June 30, 2019 and 2018 (Unaudited) 3
    Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited) 4
    Notes to Interim Unaudited Condensed Consolidated Financial Statements 5
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 30
  ITEM 4. Controls and Procedures 31
     
PART II. OTHER INFORMATION
       
  ITEM 1. Legal Proceedings 32
  ITEM 1A. Risk Factors 32
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
  ITEM 3. Defaults Upon Senior Securities 32
  ITEM 4. Mine Safety Disclosures  33 
  ITEM 5. Other Information 33
  ITEM 6. Exhibits 33
       
  SIGNATURES 36

 

 
 

 

Ozop Surgical, Corp
Condensed Consolidated Balance Sheet
(Unaudited)
         
      June 30,       December 31,  
      2019       2018  
ASSETS                
Current Assets                
Cash   $ 4,738     $ 50,903  
Advance to vendor     —         86,149  
Prepaid assets     9,096       16,457  
Accounts receivable     3,228       45,818  
Total Current Assets     17,062       199,327  
                 
Office equipment, net     5,600       7,199  
Goodwill     194,951       239,151  
Intangible assets     192,708       213,542  
TOTAL ASSETS   $ 410,321     $ 659,219  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
Liabilities                
Current Liabilities                
Accounts payable and accrued expenses   $ 302,699     $ 298,319  
Accounts payable and accrued expenses, related parties     498,882       552,806  
Convertible notes payable, net of discounts     1,098,844       514,102  
Convertible note payable, related party     50,000       50,000  
Notes Payable     330,033       332,838  
Notes Payable, related party     60,000       60,000  
Derivative liabilities     1,342,404       1,199,514  
Total Current Liabilities     3,682,862       3,007,579  
                 
Stockholders' Deficit                
Preferred stock (10,000,000 shares authorized, par value $0.001, no shares issued and outstanding) Series B Preferred Stock (1,000,000 shares authorized and issued and outstanding, par value $0.001, June 30, 2019)     1,000       —    
Common stock (990,000,000 shares authorized par value $0.001; 35,467,189 and 29,068,202 shares issued and outstanding June 30, 2019, and December 31, 2018, respectively)     35,468       29,069  
Deferred stock compensation     (115,065 )     (269,167 )
Common stock to be issued (900,000 shares issuable June 30, 2019)     900       —    
Additional paid in capital     3,695,202       1,959,857  
Accumulated Deficit     (6,890,144 )     (4,068,747 )
Stock subscription receivable     (7,600 )     (7,600 )
Accumulated other comprehensive gain     7,698       8,228  
Total Stockholders' Deficit     (3,272,541 )     (2,348,360 )
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT   $ 410,321     $ 659,219  
                 
                 
See notes to unaudited condensed consolidated financial statements.

 

  1  

 

Ozop Surgical, Corp
Condensed Consolidated Statement of Comprehensive Loss
(Unaudited)
                 
   

For the Three Months Ended

June 30,

 

For the Six Months Ended

June 30,

    2019   2018   2019   2018
Revenue   $ 1,521     $ 79,513     $ 49,123     $ 86,240  
Cost of goods     —         37,378       —         37,378  
Gross profit     1,521       42,135       49,123       48,862  
                                 
Operating expenses:                                
General and administrative, related parties     163,000       120,062       283,000       240,015  
General and administrative, other     453,454       152,281       1,048,819       258,213  
Research and development     10,400       —         63,604       10,565  
Impairment of intangible asset     44,200       —         44,200       —    
Total operating expenses     671,054       272,344       1,439,623       508,794  
                                 
Operating loss     (669,533 )     (230,208 )     (1,390,500 )     (459,932 )
                                 
Other (income) expenses:                                
Interest expense     572,229       934,141       939,703       962,364  
(Gain) on change in fair value of derivatives     (20,762 )     (255,469 )     (68,372 )     (255,469 )
Loss (Gain) on extinguishment of debt     696,241       (300,280 )     559,566       (300,280 )
Total Other Expenses     1,247,708       378,392       1,430,897       406,615  
                                 
Loss before provision for income taxes     (1,917,241 )     (608,600 )     (2,821,397 )     (866,547 )
Income tax provision     —         —         —         —    
Net loss   $ (1,917,241 )   $ (608,600 )   $ (2,821,397 )   $ (866,547 )
                                 
Other comprehensive loss:                                
Foreign currency translation adjustment     (717 )     264       (530 )     576  
Comprehensive loss   $ (1,917,958 )   $ (608,336 )   $ (2,821,927 )   $ (865,971 )
                                 
Loss per share   $ (0.06 )   $ (0.02 )   $ (0.09 )     (0.04 )
                                 
Weighted average shares outstanding                                
Basic and diluted     32,202,542       25,918,389       30,710,581       22,692,528  
                                 
                                 
See notes to unaudited condensed consolidated financial statements.

 

  2  

 

OZOP SURGICAL, CORP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
THREE AND SIX MONTHS ENDED JUNE 30, 2019
(Unaudited)
                                           
    Common stock   Common stock to be issued   Series B Preferred Stock   Deferred Stock   Stock Subscription   Accumulated Other Comprehensive   Additional Paid-in   Retained Earnings   Total Equity
    Shares   Amount   Shares   Amount   Shares   Amount   Compensation   Receivable   Income   Capital   (Deficit)   (Deficit)
Balance January 1, 2019     29,068,201     $ 29,069       —       $ —         —       $ —       $ (269,167 )   $ (7,600 )   $ 8,228     $ 1,959,857     $ (4,068,747 )   $ (2,348,360 )
                                                                                                 
Shares issued for conversions of note and interest payable     230,844       231       —         —         —         —         —         —         —         69,998       —         70,229  
                                                                                                 
Shares issued and to be issued for services     171,400       171       450,000       450       —         —         (422,100 )     —         —         421,479       —         —    
                                                                                                 
Amortization of deferred stock compensation     —         —         —         —         —         —         395,720       —         —         —         —         395,720  
                                                                                                 
Shares issued in private placement     160,000       160       —         —         —         —         —         —         —         79,840       —         80,000  
                                                                                                 
Foreign currency translation adjustment     —         —         —         —         —         —         —         —         187       —         —         187  
                                                                                                 
Net loss for the three months ended March 31, 2019     —         —         —         —         —         —         —         —         —         —         (904,156 )     (904,156 )
                                                                                                 
Balance March 31, 2019     29,630,445     $ 29,631       450,000     $ 450       —       $ —       $ (295,547 )   $ (7,600 )   $ 8,415     $ 2,531,174     $ (4,972,903 )   $ (2,706,380 )
                                                                                                 
Shares issued for conversions of note and interest payable     5,596,743       5,597       —         —                         —         —         —         990,218       —         995,815  
                                                                                                 
Shares issued and to be issued for services     200,000       200       450,000       450       —         —         (55,500 )     —         —         86,850       —         32,000  
                                                                                                 
Amortization of deferred stock compensation     —         —         —         —         —         —         235,982       —         —         —         —         235,982  
                                                                                                 
Shares issued in private placement     40,000       40       —         —         —         —         —         —         —         19,960       —         20,000  
                                                                                                 
Shares of Series B Preferred Stock issued     —         —         —         —         1,000,000       1,000       —         —         —         67,000       —         68,000  
                                                                                                 
Foreign currency translation adjustment     —         —         —         —         —         —         —         —         (717 )     —         —         (717 )
                                                                                                 
Net loss for the three months ended June 30, 2019     —         —         —         —         —         —         —         —         —         —         (1,917,241 )     (1,917,241 )
                                                                                                 

Balance

June 30, 2019 

    35,467,189     $ 35,468       900,000     $ 900       1,000,000     $ 1,000     $ (115,065 )   $ (7,600 )   $ 7,698     $ 3,695,202     $ (6,890,144 )   $ (3,272,541 )

 

  3  

 

OZOP SURGICAL, CORP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
THREE AND SIX MONTHS ENDED JUNE 30, 2018
                                                 
    Common stock   Common stock to be issued   Series B Preferred Stock   Deferred Stock   Stock Subscription   Accumulated Other Comprehensive   Additional Paid-in   Retained Earnings   Total Equity
    Shares   Amount   Shares   Amount   Shares   Amount   Compensation   Receivable   Income   Capital   (Deficit)   (Deficit)
Balances January 1, 2018     13,000,000     $ 13,000       —       $ —         —       $ —       $ —       $ —       $ 2,859     $ 291,155     $ (1,562,476 )   $ (1,255,462 )
                                                                                                 
Issue 7,600,000 shares for subscription agreements     7,600,000       7,600       —         —         —         —         —         (7,600 )     —         —         —         —    
                                                                                                 
Cancel 600,000 shares of common stock     (600,000 )     (600 )     —         —         —         —         —         —         —         600       —         —    
                                                                                                 
Issue 5,000,000 shares for Spinus acquisition     5,000,000       5,000       —         —         —         —         —         —         —         245,000       —         250,000  
                                                                                                 
Unrealized gain on foreign translation     —         —         —         —         —         —         —         —         312       —         —         312  
                                                                                                 
Net loss for the three months ended March 31, 2018     —         —         —         —         —         —         —         —         —         —         (257,947 )     (257,947 )
                                                                                                 
Balances March 31, 2018     25,000,000     $ 25,000       —       $ —         —       $ —       $ —       $ (7,600 )   $ 3,171     $ 536,755     $ (1,820,423 )   $ (1,263,097 )
                                                                                                 
Effect of reverse merger     2,797,500       2,798       —         —         —         —         —         —         —         (53,991 )     —         (51,194 )
                                                                                                 
Redemption of shares     (2,000,000 )     (2,000 )     —         —         —         —         —         —         —         (348,000 )     —         (350,000 )
                                                                                                 
Debt forgiveness from former CEO     —         —         —         —         —         —         —         —         —         51,193       —         51,193  
                                                                                                 
Shares issued for conversions of note and interest payable     —         —         1,180,768       1,181       —         —         —         —         —         589,176       —         590,357  
                                                                                                 
Shares issued in private placement     500,000       500       —         —         —         —         —         —         —         249,500       —         250,000  
                                                                                                 
Unrealized gain on foreign translation     —         —         —         —         —         —         —         —         264       —         —         264  
                                                                                                 
Net loss for the three months ended June 30, 2018     —         —         —         —         —         —         —         —         —         —         (608,600 )     (608,600 )
                                                                                                 
Balance June 30, 2018     26,297,500     $ 26,298       1,180,768     $ 1,181       —       $ —       $ —       $ (7,600 )   $ 3,435     $ 1,024,633     $ (2,429,023 )   $ (1,381,076 )
                                                                                                 
                                                                                                 
See notes to unaudited condensed consolidated financial statements.

  

  4  

 

 

OZOP SURGICAL, CORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
         
   

For the Six Months Ended

June 30,

    2019   2018
Cash flows from operating activities:                
Net loss   $ (2,821,397 )   $ (866,547 )
Adjustments to reconcile net loss to net cash used in operations                
Non-cash interest expense     860,561       895,962  
Amortization and depreciation     22,433       4,847  
Gain on fair value change of derivatives     (68,372 )     (255,469 )
Loss (Gain) on extinguishment of debt     559,567       (300,280 )
Stock compensation expense     706,702       —    
Issuance of convertible notes for fees     —         9,500  
Impairment of intangible asset     44,200       —    
Changes in operating assets and liabilities:                
Inventory     —         16,334  
Accounts receivable     42,590       (41,511 )
Prepaid assets     7,359       (6,911 )
Accounts payable and accrued expenses     137,501       49,612  
Accounts payable and accrued expenses, related parties     (28,924 )     183,717  
Net cash used in operating activities     (537,780 )     (310,746 )
                 
Cash flows from investing activities:                
Cash acquired in acquisitions     —         21,580  
Purchase of office and computer equipment     —         (4,941 )
Net cash provided by investing activities     —         16,639  
                 
Cash flows from financing activities:                
Redemption of common stock     —         (350,000 )
Proceeds from sale of common stock     100,000       250,000  
Proceeds from issuances of convertible notes payable     494,950       400,000  
Proceeds from issuances of notes payable     —         200,000  
Payments of principal of convertible note payable and notes payable     (102,805 )     (41,846 )
Net cash provided by financing activities     492,145       458,154  
                 
Effects of exchange rate on cash   $ (530 )   $ 573  
                 
Net increase (decrease) in cash     (46,165 )     164,620  
                 
Cash, Beginning of period     50,903       110,792  
                 
Cash, End of period   $ 4,738     $ 275,412  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 3,135     $ 56,323  
Cash paid for income taxes   $ —       $ —    
                 
Schedule of non-cash Investing or Financing Activity:                
Original issue discount included in notes payable   $ 66,050     $ 122,175  
Issuance of common stock upon convertible note and accrued interest conversion   $ 155,440     $ 589,176  
                 
Acquisition of Spinus, LLC                
Issuance of Common stock as consideration   $ —       $ 250,000  
Assumed liabilities     —         278,779  
Accounts receivable     —         (19,054 )
Other Assets     —         (250,000 )
Tradename     —          (44,200 )
Goodwill     —         (194,951 )
Cash acquired   $ —       $ 20,574  
                 
Acquisition of Newmarkt                
Issuance of Common stock as consideration       $ 2,798  
Assumed liabilities             62,464  
Paid in capital             (53,990 )
Inventory             (8,359 )
Prepaid expenses             (1,907 )
Cash acquired         $ 1,006  
                 
                 
See notes to unaudited condensed consolidated financial statements.

 

  5  

 

OZOP SURGICAL, CORP

Notes to Condensed Consolidated Financial Statements

June 30, 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. On April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the Company’s CEO. 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.

 

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.

 

  6  

 

On February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas limited liability company (“Spinus ), from RWO Medical Consulting LLC (“RWO”), a Texas limited liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000 shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant to a license agreement by and between Spinus and a third party (the “Assumed Debt”). 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 – 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 June 30, 2019, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 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. 

 

  7  

 

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 and six months ended June 30, 2019, and 2018, and their accounts receivable balance as of June 30, 2019:

 

    Sales % Three Months Ended June 30, 2019   Sales % Three Months Ended June 30, 2018   Sales % Six Months Ended June 30, 2019   Sales % Six
Months Ended
June 30, 2018
 

Accounts receivable balance

June 30, 2019

Customer A     100 %     43.6 %     100 %     48 %   $ 3,228  
Customer B     —         56.4 %     —         52 %     —    

 

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.

 

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 and six months ended June 30, 2019, and 2018:

 

  8  

 

    Purchase % Three Months Ended June 30, 2019   Purchase % Three Months Ended June 30, 2018   Purchase % Six Months Ended June 30, 2019   Purchase % Six
Months Ended
June 30, 2018
Supplier A     100 %     41.3 %     100 %     45.7 %
Supplier B     —         58.7 %     —         54.3 %

 

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:

 

    June 30, 2019   December 31, 2018
Office equipment   $ 9,590     $ 9.590  
Less: Accumulated Depreciation     (3,990 )     (2,391 )
Property and Equipment, Net   $ 5,600     $ 7,199  

 

Depreciation expense was $1,599 and $435 for the six months ended June 30, 2019, and 2018, respectively.

 

Intangible Assets

 

Intangible assets primarily represent purchased license rights and trademarks. 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 six months ended June 30, 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 six months ended June 30, 2019, the Company recorded amortization expense of $20,834. There was no amortization expense for the six months ended June 30, 2018.

 

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. 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. 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 goodwill during the six months ended June 30, 2019.

  9  

 

 

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 $1,521 and $49,123 for the three and six months ended June 30, 2019, and $34,660 and $41,387 for the three and six months ended June 30, 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 and six months ended June 30, 2019 and 2018.

 

Advertising and Marketing Expenses

 

The Company expenses advertising and marketing costs as incurred. For the six months ended June 30, 2019, and 2018, the Company recorded $59,442 and $35,355 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 six months ended June 30, 2019, and 2018, the Company recorded $63,604 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.

 

  10  

 

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 financial instruments that are measured at fair value on a recurring basis as of June 30, 2019, and December 31, 2018, for each fair value hierarchy level:

 

June 30, 2019   Derivative
Liabilities
  Total
Level I   $ —       $ —    
Level II   $ —       $ —    
Level III   $ 1,342,404     $ 1,342,404  

 

 

  11  

 

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 bein g 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 June 30, 2019 and December 31, 2018, (Hong Kong dollar per one U.S. dollar):

 

    June 30, 2019   December 31, 2018
Balance sheet date     .1279       .1277  
Average rate for statements of operations and comprehensive loss     .1275       .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.

 

  12  

 

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 six months ended June 30, 2019, that are of significance or potential significance to the Company.

 

 

NOTE 3 – INTANGIBLE ASSETS

 

Patents as of June 30, 2019, and December 31, 2018, consist of the following:

 

    June 30, 2019     December 31, 2018  
Patents and license rights   $ 250,000     $ 250,000  
Accumulated amortization     (57,292 )     (36,458 )
Net carrying amount   $ 192,708     $ 213,542  

 

Amortization expense for the six months ended June 30, 2019, was $20,834. There was no amortization expense for the six months ended June 30, 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.

 

  13  

 

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. As of June 30, 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 six months ended June 30, 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 six months ended June 30, 2019, amortization of the debt discounts of $53,896 was charged to interest expense. During the six months ended June 30, 2019, the investor sold $30,000 of the note to another investor (see below). As of June 30, 2019, and December 31, 2018, the outstanding principal balance of the note was $52,375 and $132,375, respectively, with a carrying value as of June 30, 2019, and December 31, 2018, of $52,375 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 19,900,000 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 six months ended June 30, 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 six months June 30, 2019, amortization of the debt discounts of $186,902 was charged to interest expense. For the six months ended June 30, 2019, the investor converted a total of $25,000 of the face value and $22,896 of accrued interest into 1,469,960 shares of common stock. As of June 30, 2019, and December 31, 2018, the outstanding principal balance of the note was $186,250 and $261,250, respectively, with a carrying value as of June 30, 2019, and December 31, 2018, of $150,755 and $38,853, net of unamortized discounts of $35,495 and $222,397, respectively.

 

  14  

 

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 six months ended June 30, 2019, amortization of the debt discounts of $17,112 was charged to interest expense. For the six months ended June 30, 2019, the investor converted a total of $21,750 of the face value into 75,000 shares of common stock. As of June 30, 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 June 30, 2019 and December 31, 2018, of $33,250 and $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 six months ended June 30, 2019, the investor converted a total of $26,960 of the face value into 2,326,783 shares of common stock. For the six months ended June 30, 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 June 30, 2019, and December 31, 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, respectively, 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 six months ended June 30, 2019, amortization of the debt discounts of $202,653 was charged to interest expense. For the six months ended June 30, 2019, the investor converted a total of $4,759 of the face value and $24,075 of accrued interest into 1,800,000 shares of common stock. As of June 30, 2019, and December 31, 2018, the outstanding principal balance of the note was $ 495,241 and $500,000, respectively, with a carrying value as of June 30, 2019, and December 31, 2018, of $344,889 and $146,994, respectively, net of unamortized discounts of $150,353 and $353,006, respectively.

 

  15  

 

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 six months ended June 30, 2019, amortization of the debt discounts of $46,330 was charged to interest expense. As of June 30, 2019, and December 31, 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 six months ended June 30, 2019, amortization of the debt discounts of $61,523 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the note was $150,000 with a carrying value as of June 30, 2019, of $83,272, net of unamortized discounts of $66,727.

 

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, 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 six months ended June 30, 2019, amortization of the debt discounts of $18,422 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the Master Note was $55,000 with a carrying value as of June 30, 2019, of $27,420, net of unamortized discounts of $27,580.

 

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 six months ended June 30, 2019, amortization of the debt discounts of $17,071 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the note was $53,000 with a carrying value as of June 30, 2019, of $22,740, net of unamortized discounts of $30,260.

 

  16  

 

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 six months ended June 30, 2019, amortization of the debt discounts of $26,454 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the note was $85,000 with a carrying value as of June 30, 2019, of $26,960, net of unamortized discounts of $58,040.

 

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 six months ended June 30, 2019, amortization of the debt discounts of $8,207 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the note was $58,000 with a carrying value as of June 30, 2019, of $16,715, net of unamortized discounts of $41,285.

 

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 six months ended June 30, 2019, amortization of the debt discounts of $9,956 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the note was $52,500 with a carrying value as of June 30, 2019, of $11,299, net of unamortized discounts of $41,201.

 

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 six months ended June 30, 2019, amortization of the debt discounts of $3,230 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the Second Tranche of the Master Note was $27,500 with a carrying value as of June 30, 2019, of $8,469,

 

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 six months ended June 30, 2019, amortization of the debt discounts of $22,601 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of the note was $80,000 with a carrying value as of June 30, 2019, of $25,483, net of unamortized discounts of $54,517.

 

  17  

 

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 six months ended June 30, 2019, amortization of the debt discounts of $34,947 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of assigned note was $93,391, with a carrying value as of June 30, 2019, of $68,428, net of unamortized discounts of $24,962.

 

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 six months ended June 30, 2019, amortization of the debt discounts of $34,123 was charged to interest expense. As of June 30, 2019, the outstanding principal balance of assigned note was $77,000, with a carrying value as of June 30, 2019, of $61,788, net of unamortized discounts of $15,212.

 

A summary of the convertible note balance as of June 30, 2019, and December 31, 2018, is as follows:

 

    June 30, 2019   December 31, 2018
Principal balance   $ 1,713,507     $ 1,254,625  
Unamortized discount     (564,663 )     (740,523 )
Ending balance, net   $ 1,148,844     $ 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 June 30, 2019, and December 31, 2018, at $1,342,404 and $1,199,514, respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions as of June 30, 2019, 2018, risk-free interest rates from 1.96% to 2.09% and volatility of 34% to 41%, 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 six months ended June 30, 2019, used the following assumptions; risk-free interest rates from 2.25% to 2.58% and volatility of 39% to 63%.

 

A summary of the activity related to derivative liabilities for the six months ended June 30, 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     562,300  
Converted or paid     (351,038 )
Change in fair value recognized in operations     (68,372 )
Balance June 30, 2019   $ 1,342,404  

 

 

  18  

 

NOTE 6 – NOTES PAYABLE

 

The Company has the following note payables outstanding:

 

    June 30, 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  
Total notes payable   $ 330,033     $ 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 June 30, 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 June 30, 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 and six months ended June 30, 2019, and 2018, the Company recorded expenses to its officers in the following amounts:

 

    Three months ended
June 30,
  Six months ended
June 30,
    2019   2018   2019   2018
CEO, parent   $ 45,000     $ 30,000     $ 90,000     $ 60,000  
Former CEO, Subsidiary     —         30,000       —         60,000  
CCO     —         30,000       —         60,000  
COO     45,000       —         90,000       —    
CFO     30,000       30,000       60,000       60,000  
Total   $ 120,000     $ 120,000     $ 240,000     $ 240,000  

 

As of June 30, 2019, and December 31, 2018, included in accounts payable and accrued expenses, related party is $498,882 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.

 

    June 30, 2019   December 31, 2018
CEO, parent   $ 9,327     $ 22,825  
Former CEO, subsidiary     140,233       162,215  
Former COO and CCO     190,785       236,905  
COO     97,500       45,000  
CFO     61,037       58,037  
Non-officer affiliate     —         27,824  
Total   $ 498,882     $ 552,806  

 

  19  

 

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. 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.

 

 

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 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 six months ended June 30, 2019, the Company amortized $162,500 as stock- based compensation expense. As of June 30, 2019, there remains $54,167 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 six months ended June 30, 2019, the Company amortized $52,500 as stock-based compensation expense. For the six months ended June 30, 2019, the Company recorded 900,000 shares of common stock to be issued, and valued the shares at $400,470, based on the market price of the common stock on the date of the shares being earned. For the six months ended June 30, 2019, the company amortized $395,920 as stock-based compensation expense. As of June 30, 2019, there remains $4,550 of deferred stock compensation on the condensed consolidated balance sheet, to be amortized in July, 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. 

 

  20  

 

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 six months ended June 30, 2019, the Company paid Mr. Chaudhry $36,415, and the balance owed is $190,785.

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 six months ended June 30, 2019, the Company amortized $20,782 as stock-based compensation expense. As of June 30, 2019, there remains $56,348 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:

    Six Months Ended
    June 30,
    2019   2018
Pre-tax loss   $ (2,821,397 )   $ (866,547 )
U.S. federal corporate income tax rate     21 %     21 %
Expected U.S. income tax credit     (592,493 )     (181,975 )
Tax rate difference between U.S. and foreign operations     289       2,699  
Permanent differences     414,713       71,445  
Change of valuation allowance     174,491       179,276  
Effective tax expense   $ —       $ —    

The Company had deferred tax assets as follows:

    June 30, 2019   December 31, 2018
Net operating losses carried forward   $ 744,314     $ 569,822  
Less: Valuation allowance     (744,314 )     (569,822 )
Net deferred tax assets   $ —       $ —    

 

  21  

 

As of June 30, 2019, the Company has approximately $3,077,000 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 June 30, 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 six months ended June 30, 2019, and 2018, and no provision for interest and penalties is deemed necessary as of June 30, 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.

 

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 six months ended June 30, 2019, we sold 200,000 Units pursuant to the October PPM at $0.50 per Unit, issued 200,000 shares of our common stock and received proceeds of $100,000.

 

During the six months ended June 30, 2019, holders of an aggregate of $108,469 in principal and $46,971 of accrued interest of convertible notes issued by the Company, converted their debt into 5,827,587 shares of our common stock at an average conversion price of $0.0267 per share.

 

On March 24, 2019, the Company recorded the issuance of 171,400 of common stock for consulting services. The shares were valued at $0.45 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 100,000 of common stock for consulting services. The shares were valued at $0.275 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 100,000 of common stock for consulting services. The shares were valued at $0.045 per share (the market price on the date of the agreement) and $4,500 was recorded as stock-based compensation expense.

 

As of June 30, 2019, the Company has 290,000,000 (increased to 990,000,000 0n August 25, 2019) shares of $0.001 par value common stock authorized and there are 35,467,189 shares of common stock issued and outstanding.

 

  22  

 

Common stock to be issued

 

On October 19, 2018, the Company entered into a consulting agreement Draper (see note 8). 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. For the six months ended June 30, 2019, the Company recorded 900,000 shares of common stock to be issued, and valued the shares at $400,470, based on the market price of the common stock on the date of the shares being earned. For the six months ended June 30, 2019, the company amortized $395,920 as stock-based compensation expense. As of June 30, 2019, there are 900,000 shares of common stock to be issued.

 

Preferred stock

 

As of June 30, 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.

 

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

 

For the three and six months ended June 30, 2019, the Company operated only in the United States. For the three and six months ended June 30, 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.

 

   

Three months ended

June 30, 2018

 

Six months ended

June 30, 2018

Revenue:                
United States   $ 34,660     $ 41,387  
Hong Kong   $ 44,853     $ 44,853  
    $ 79,513     $ 86,240  
Gross Profit                
United States   $ 34,660     $ 41,387  
Hong Kong   $ 7,475     $ 7,475  
    $ 42,135     $ 48,862  

 

 

    June 30, 2019   December 31, 2018
Total Assets:                
United States   $ 409,949     $ 658,350  
Hong Kong     372       869  
Total Assets   $ 410,321     $ 659,219  

 

 

  23  

 

NOTE 12 – GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying unaudited condensed 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. As of June 30, 2019, the Company had a stockholders’ deficit of $3,272,541 and a working capital deficit of $3,665,800. 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.

 

 

NOTE 13 – SUBSEQUENT EVENTS

 

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”), requiring the Company to use its commercially reasonable efforts to have the Registration Statement filed with the SEC within 30 calendar days of July 5, 2019, and declared effective by the SEC within 30 calendar days thereafter. Additionally, on July 5, 2019, the Company issued to the Investor two promissory notes, one in the amount of $30,000 (“Note 1”) to cover the Investor’s transaction costs of entering into the Equity Agreement and the Registration Rights Agreement, and a second promissory note of $15,000 (“Note 2”), issued in exchange for cash consideration of $15,000. Note 1 and Note 2 mature on January 5, 2020, and bear interest at the rate of 8% per annum.

 

On August 2, 2019, the Company issued to a third-party investor a convertible redeemable promissory note (the “Note”) with a face value of $157,500. The note matures on August 2, 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 60% of the average of the two lowest closing bid prices for the 20 days prior to 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.

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.

 

  24  

 

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

   

This quarterly report and other reports filed by Ozop Surgical Corp.   (“we,” “us,” “our,” or the “Company”), from time to time contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

   

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

   

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates.

 

The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q.

 

THE COMPANY

  

Ozop Surgical Corp. (the “Company,” “we,” “us” or “our”) was originally incorporated as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of renting out Segways and bicycles. Following the acquisition of OZOP Surgical, Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and globally distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and pain management procedures and specialties.

 

On April 13, 2018, we entered into and completed a share exchange agreement (the "Share Exchange Agreement") with OZOP Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group, owning 96.9% of such shares. The merger was accounted for as a reverse merger, whereby OZOP was considered the accounting acquirer and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment for a “reverse merger” or a “reverse acquisition,” the 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 SEC. The consolidated financial statements after completion of the reverse merger have and will include the assets, liabilities and results of operations of the combined company from and after the closing date of the reverse merger.

 

  25  

 

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.

 

On May 8, 2018, we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to Ozop Surgical Corp.  in  order to  reflect  more accurately the  name  of our core  service offering  and operations. The  Amendment  also  increased  our authorized shares of capital stock to 300,000,000, of  which  290,000,000 has been designated as common stock, par  value  $0.001, and 10,000,000 shares  have  been designated as preferred stock, par  value  $0.001 (the “Preferred Stock”). On August 25, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock to 1,000,000,000 shares, of which 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.  The Company’s trading symbol for its common stock which trades on the OTC QB Tier of the OTC Markets, Inc. was changed to “OZSC” effective on May 21, 2018. 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. On April 1, 2019, the Company issued 1,000,000 shares of the Series B Preferred Stock to the Company’s CEO. 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 party (the “Assumed Debt”). The Assumed Debt was paid in November 2018.

 

Results of Operations for the three and six months ended June 30, 2019 and 2018:

 

Revenue

   

For the three and six months ended June 30, 2019, the Company generated total revenue of $1,521 and $ 49,123, respectively, compared to $79,513 and $86,240 for the three and six months ended June 30, 2018, respectively. The revenues are from the sale of spine surgery products and endoscopes. The decrease in revenues is a result of Spinus deciding to not to continue to supply its’ spine surgery products to the surgeon who previously performed surgeries with Spinus product. Revenues from Spinus are recognized as an agent and are recorded at net.

 

Operating expenses

   

Total operating expenses for the three and six months ended June 30, 2019, were $671,054 and $1,439,623, respectively, compared to $272,344 and $508,794 for the three and six months ended June 30, 2018, respectively. The operating expenses were comprised of:

 

  26  

 

    Three months ended
June 30,
  Six months ended
June 30,
    2019   2018   2019   2018
Management fees   $ 120,000     $ 120,000     $ 240,000     $ 240,000  
Stock-based compensation     310,982       —         706,702       —    
Professional and consulting fees     69,413       53,763       116,669       101,164  
Research and development     10,400       —         63,604       10,565  
Impairment of intangible asset     44,200       —         44,200       —    
General and administrative     116,059       98,581       268,448       157,065  
Total   $ 671,054     $ 272,344     $ 1,439,623     $ 508,794  

 

Current period Management fees consist of monthly fees to our CEO, COO and CFO of $15,000, $15,000 and $10,000, respectively. The 2018 period included monthly fees of $10,000 for the same positions as well as $10,000 per month to the former CEO of Ozop HK (resigned in March 2019).

 

Stock based compensation in the current periods is comprised of:

 

Amortization of $162,500 related to a one-year consulting agreement effective on August 31, 2018, pursuant to the issuance of 650,000 shares of common stock. The Company valued the shares at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement). The Company recorded $325,000 as deferred stock compensation to be amortized over the term of the agreement, and accordingly has included $81,250 and $162,500 in stock-based compensation for the three and six months ended June 30, 2019, respectively.

 

On October 19, 2018, the company recorded the issuance of 450,000 shares of common stock, as the first tranche of a one- year consulting agreement requiring a total of 1,800,000 shares. The Company valued the shares issued at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement). The Company recorded $225,000 as deferred stock compensation to be amortized over the first three months of the agreement, and accordingly has included $52,500 in stock-based compensation for the six months ended June 30, 2019.

 

For the six months ended June 30, 2019, the Company recorded 900,000 shares of common stock to be issued pursuant to the one-year agreement above to issue 1,800,000 shares. The 900,000 shares were valued at $400,470, based on the market price of the common stock on their respective date of issuances, and the Company expensed $135,450 and $395,290 as stock-based compensation for the three and six months ended June 30, 2019, respectively.

 

On March 24, 2019, the Company signed a one-year consulting agreement with Newbridge. As compensation for its services under the Agreement, Newbridge and its assignees received 171,400 shares of the Company’s common stock. 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 and six months ended June 30, 2019, the Company amortized $19,282 and $20,782 as stock-based compensation expense, respectively.

 

On April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the Company’s CEO. 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 for thee three and six months ended June 30, 2019.

 

Research and development costs of $10,400 and $63,604 for the three and six months ended June 30, 2019, respectively, compared to $10,565 for the six months ended June 30, 2018, were all costs related to development of new product. The Company anticipates incurring substantial research and development costs during the remainder of 2019 and beyond as it continues to develop, engineer and test prototypes of new products to be introduced to the market.

 

General and administrative expenses, other

 

Total general and administrative expenses, other, were $116,059 and $268,488 for the three and six months ended June 30, 2019, respectively, compared to $98,581 and $157,065 for the three and six months ended June 30, 2018, respectively, and were comprised of:

 

  27  

 

    Three months ended
June 30,
  Six months ended
June 30,
    2019   2018   2019   2018
Trade shows and travel expenses   $ 22,292     $ 14,677     $ 53,315     $ 53,546  
Advertising and marketing     13,466       35,405       39,245       35,405  
Meals and entertainment     2,318       14,193       6,141       17,370  
Commissions     —         10,494       8,100       10,494  
Investor relations     19,437       —         79,496       —    
Depreciation and amortization     11,216       4,523       22,432       4,685  
Other     47,330       19,289       59,719       35,565  
Total   $ 116,059     $ 98,581     $ 268,488     $ 157,065  

 

Other Income (Expenses)

 

Other expenses, net, for the three and six months ended June 30, 2019, was $1,247,708 and $1,430,897, respectively, compared to other expenses, net of $378,392 and $406,615 for the three and six months ended June 30, 2018, respectively, and were as follows.

    Three months ended
June 30,
  Six months ended
June 30,
    2019   2018   2019   2018
Interest expense   $ 99,701     $ 460,459     $ 148,493     $ 488,682  
Amortization of debt discount     472,528       473,682       791,210       473,682  
Gain on change in fair value of derivatives     (20,762 )     (255,469 )     (68,372 )     (255,469 )
Loss on extinguishment of debt     696,241       (300,280 )     559,566       (300,280 )
Total other expense, net   $ 1,247,708     $ 378,392     $ 1,430,897     $ 406,615  

 

Net loss

   

The net loss for the three and six months ended June 30, 2019, was $1,917,241 and $2,821,397 respectively, compared to $608,600 and $866,547 for the three and six months ended June 30, 2018, respectively. The increases are a result of the changes discussed above.

   

Liquidity and Capital Resources 

 

Currently, we have limited operating capital. The Company anticipates that it will require a minimum of $6,000,000 of working capital to complete substantially all of its desired business activity for the next twelve months, including bringing new products to market as well as meeting the qualifications for an uplist to the NASDAQ market. The Company has achieved only limited revenues from its business operations. Our current capital and our other existing resources will be sufficient only to provide a limited amount of working capital, and, to date, the revenues generated from our business operations have not been sufficient to fund our operations or planned growth. As noted above, we will require additional capital to continue to operate our business, and to further expand our business. We may be unable to obtain the additional capital required. Our inability to generate capital or raise additional funds when required will have a negative impact on our operations, business development and financial results.

 

For the six months ended June 30, 2019, we primarily funded our business operations with $494,950 of proceeds from the issuances of convertible note financings as well as $100,000 from the sale of 200,000 shares of common stock at $0.50 per share. Of the proceeds $100,000 was used to make payments on convertible debt and for working capital. We may continue to rely on the issuance of convertible promissory notes to fund our business operations.

 

As of June 30, 2019, we had cash of $4,738 as compared to $50,903 at December 31, 2018. As of June 30, 2019, we had current liabilities of $3,682,862 (including $1,342,404 of non-cash derivative liabilities), compared to current assets of $17,062, which resulted in a working capital deficit of $3,665,800. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities and notes payable.

 

  28  

 

Operating Activities  

 

For the six months ended June 30, 2019, net cash used in operating activities was $537,780, compared to $310,746 for the six months ended June 30, 2018. For the six months ended June 30, 2019, our net cash used in operating activities was primarily attributable to the net loss of $2,821,397, a gain of $68,372 on the change in fair value of derivative liabilities, adjusted for the loss of $559,567 in extinguishment of debt, non-cash expenses of interest and amortization and depreciation of $882,994, stock-based compensation of $706,702 and an impairment charge of $44,200. Net changes of $158,525 in operating assets and liabilities reduced the cash used in operating activities. For the six months ended June 30, 2018, our net cash used in operating activities was primarily attributable to the net loss of $866,547, the gain on the change in fair value of derivative liabilities and the gain in extinguishment of debt, adjusted by the non-cash expenses of interest and amortization and depreciation of $900,809. Net changes of $201,241 in operating assets and liabilities reduced the cash used in operating activities.

 

Investing Activities  

 

There were no investing activities for the six months ended June 30, 2019. For the six months ended June 30, 2018, investing activities were comprised of the cash acquired in the Spinus acquisition of $21,580 and $4,941spent on purchased office equipment.

 

Financing Activities  

 

For the six months ended June 30, 2019, the net cash provided by financing activities was $492,145, compared to $458,154 for the six months ended June 30, 2018. During the six months ended June 30, 2019, we received $494,950 of proceeds from the issuances of convertible note financings, as well as $100,000 from the sale of 200,000 shares of common stock at $0.50 per share. The Company made payments on convertible debt of $100,000. During the six months ended June 30, 2018, we received $600,000 of proceeds of $200,000 from the issuance of a note payable ($230,000) and received $400,000 from the issuances of convertible note financings ($492,175) as well as $250,000 from the sale of 500,000 shares of common stock at $0.50 per share. Payments of $350,000 was used to redeem 2,000,000 shares of common stock from our former CEO and we also made payments on convertible debt of $41,846.

   

OFF BALANCE SHEET ARRANGEMENTS

   

We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

 

Critical Accounting Policies

 

Our significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe the following accounting policies to be most critical to the judgement and estimates used in the preparation of our financial statements:

 

Basis of Presentation

 

The accompanying 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 June 30, 2019, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 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 Annual Report on Form 10-K filed on April 16, 2019.

 

  29  

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of is’ customers. Revenues from Spinus of $1,521 and $49,123 for the three and six months ended June 30, 2019, and $34,660 and $41,387 for the three and six months ended June 30, 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 and six months ended June 30, 2019 and 2018.

 

Research and Development

 

Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the six months ended June 30, 2019, and 2018, the Company recorded $63,604 and $10,565 of research and development expenses, respectively. 

 

Earnings (Loss) Per Share

 

The Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

   

Not Applicable.

   

 

  30  

 

Item 4. Controls and Procedures.

   

Disclosure Controls and Procedures

   

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

  

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the reasons discussed below.

   

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30 , 2019, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.

 

1. We do not have an Audit Committee – While not being legally obligated to have an audit committee, it is the management’s view that such a committee, including a financial expert member, is an utmost important entity level control over the Company’s financial statement. Currently the Board of Directors acts in the capacity of the Audit Committee, and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities.

 

2. We did not maintain appropriate cash controls – As of June 30, 2019, the Company has not maintained sufficient internal controls over financial reporting for cash, including failure to segregate cash handling and accounting functions, and did not require dual signatures on the Company’s bank accounts.
 

Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

   

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.   

 

Changes in Internal Controls over Financial Reporting

   

There has been no change in our internal control over financial reporting occurred during the three months ended June 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

  31  

 

PART II.  OTHER INFORMATION

   

   
Item 1. LEGAL PROCEEDINGS

   

On July 12, 2019, counsel representing two of the Company’s lenders holding approximately $100,000 in aggregate in principal of convertible notes, sent a demand letter to the Company noting the Company is in default for the Company’s failure to repay the notes at maturity including unpaid interest and an unpaid 35% premium to the principal amount of the notes. The Company retained counsel, which responded to the lender’s counsel, and the Company plans to make a settlement offer inclusive of payment terms by August 23, 2019.

 

We know of no other material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

   

   
Item 1A. RISK FACTORS

   

Not applicable for smaller reporting companies.

   

   
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   

During the three months ended June 30, 2019, we sold 40,000 shares of our common stock at a price of $0.50 per share to three investors and received proceeds of $20,000 and the Company used the proceeds for working capital.

 

The shares of Common Stock in the foregoing issued to the investors were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act of 1933, as amended, (“Securities Act”), and/or Regulation D, as promulgated by the SEC under the Securities Act.

 

During the three months ended June 30, 2019, holders of an aggregate of $56,719 in principal and $46,971 of accrued interest of convertible debt issued by OZOP converted their debt into 5,596,743 shares of our common stock at an average conversion price of $0.0185 per share.

 

The issuances described above related to the conversion of debt were made in reliance on the exemption from registration provided by Sections 3(a)(9) of the Securities Act.

 

On June 14, 2019, the Company issued of 100,000 of common stock for consulting services.

 

On June 27, 2019, the Company issued of 100,000 of common stock for consulting services.

 

The issuances described above related to the issuance of shares for services and pursuant to a consulting agreement, were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act.

   

   
Item 3. DEFAULTS UPON SENIOR SECURITIES

   

None.

 

  32  

 

 

   
Item 4. MINE SAFETY DISCLOSURE

   

Not applicable.

   

   
Item 5. OTHER INFORMATION

   

(a) None.
(b) During the quarter ended June 30, 2019, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.

 

   
Item 6. EXHIBITS

 

The following documents are filed as part of this report:

 

Exhibit No.   Description
2.1     Share Exchange Agreement dated April 5, 2018 by and among Newmarkt Corp., the shareholders of Ozop Surgical, Inc., Ozop Surgical, Inc. and Denis Razvodovskij (Incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed on April 19, 2018).  
         
3.1     Articles of Incorporation (Incorporated by reference to our General Form for Registration of Securities on Form S-1 filed on August 1, 2016)  
         
3.2     Bylaws (Incorporated by reference to our General Form for Registration of Securities on Form S-1 filed on August 1, 2016)  
         
3.3     Certificate of Amendment of Amended and Restated Articles of Incorporation as filed with the Nevada Secretary of State on May 8, 2018 (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on May 14, 2018).  
         
3.4    

Certificate of Designations for Series B Preferred Stock. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on April 2, 2019).

 
         
3.5    

Amended and Restated Bylaws of Ozop Surgical Corp. adopted on May 22, 2019. (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed on May 22, 2019).

 
         
3.6    

Amended and Restated Articles of Incorporation as filed with the Nevada Secretary of State on July 25, 2019. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on July 30, 2019).

 

 

10.1 Securities Purchase Agreement entered into between Ozop Surgical Corp. and Auctus Fund, LLC dated January 7, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January 11, 2019).
   
10.2 Convertible Promissory Note issued to Auctus Fund, LLC by Ozop Surgical Corp. dated January 7, 2019. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on January 11, 2019).
   
10.3 Warrant issued by Ozop Surgical Corp. to Auctus Fund, LLC dated January 7, 2019. (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on January 11, 2019).
   
  33  

 

10.4 Securities Purchase Agreement entered into between Ozop Surgical Corp. and Crown Bridge Partners, LLC dated February 5, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 11, 2019).
   
10.5 Convertible Promissory Note issued to Crown Bridge Partners, LLC by Ozop Surgical Corp. dated February 5, 2019. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on February 11, 2019).
   
10.6 Warrant issued by Ozop Surgical Corp. to Crown Bridge Partners, LLC dated February 5, 2019.  (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on February 11, 2019).
   
10.7 Amendment No. 1 to Convertible Promissory Note issued October 19, 2018, entered into between Ozop Surgical Corp. and Power Up Lending Group LTD.  dated February 13, 2019.  (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 15, 2019).
   
10.8 Amendment No. 1 to Convertible Promissory Note issued on December 5, 2018, entered into between Ozop Surgical Corp. and Power Up Lending Group LTD.  dated February 13, 2019. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on February 15, 2019).
   
10.9 Warrant issued by Ozop Surgical Corp. to Power Up Lending Group LTD. dated February 13, 2019. (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on February 15, 2019).
   
10.1 Securities Purchase Agreement, entered into between Ozop Surgical Corp. and Power Up Lending Group LTD.  dated February 21, 2019.  (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February 27, 2019).
   
10.11 Convertible Promissory Note issued on February 21, 2019, by Ozop Surgical Corp. to Power Up Lending Group LTD. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on February 27, 2019).
   
10.12+ Agreement of Understanding between Ozop Surgical Corp. and Eric Sui dated February 27, 2019.  (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 6, 2019).
   
10.13+ Separation Agreement between Ozop Surgical Corp. and Salman J. Chaudhry dated March 4, 2019. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on March 6, 2019).
   
10.14 Securities Purchase Agreement between Ozop Surgical Corp. and GS Capital Partners, LLC dated March 7, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 13, 2019).
   
10.15 Convertible Promissory Note issued by Ozop Surgical Corp. to GS Capital Partners, LLC dated March 7, 2019.  (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on March 13, 2019).
   
10.16 Investment Banking Engagement Agreement between Ozop Surgical Corp. and Newbridge Securities Corporation dated March 24, 2019.  (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 28, 2019).
   
10.17 Securities Purchase Agreement, entered into between Ozop Surgical Corp. and Power Up Lending Group LTD.  dated May 3, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on May 9, 2019).
   
10.18 Convertible Promissory Note issued on May 3, 2019, by Ozop Surgical Corp. to Power Up Lending Group LTD. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on May 9, 2019).
   
  34  

 

10.19 Warrant issued May 7, 2019, by Ozop Surgical Corp. to Crown Bridge Partners, LLC. (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on May 9, 2019).
   
10.2 Securities Purchase Agreement, entered into between Ozop Surgical Corp. and Crossover Capital Fund I, LLC dated May 7,2019. (Incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on May 9, 2019).
   
10.21 Convertible Promissory Note issued on May 7, 2019, by Ozop Surgical Corp. to Crossover Capital Fund I, LLC. (Incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on May 9, 2019).
   
10.22 Securities Purchase Agreement by and between the registrant and GS Capital Partners, LLC dated as of May 29, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on May 31, 2019).
   
10.23 Convertible Redeemable Promissory Note issued on May 29, 2019 by the registrant in favor of GS Capital Partners, LLC. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on May 31, 2019).
   
10.24 Equity Financing Agreement by and between Ozop Surgical Corp. and GHS Investments, LLC, dated July 5, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on July 9, 2019).
   
10.25 Registration Rights Agreement by and between Ozop Surgical Corp. and GHS Investments, LLC, dated July 5, 2019. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on July 9, 2019).
   
10.26 $30,000 Promissory Note issued to GHS Investments, LLC, dated July 5, 2019. (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on July 9, 2019).
   
10.27 $15,000 Promissory Note issued to GHS Investments, LLC, dated July 5, 2019. (Incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on July 9, 2019).
   
31.1* Certification of Chief Executive Officer required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2* Certification of Chief Financial Officer required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1* Certification of Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63

 

101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

* Filed herewith.

 + Management contract or compensatory plan or arrangement. 

 

  35  

 

   

 

SIGNATURES

 

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

 

Dated: August 19, 2019

 

OZOP SURGICAL CORP.

 

By:  /s/ Michael Chermak                     

Michael Chermak

Chief Executive Officer (principal executive officer)

 

By:  /s/ Barry Hollander                      

Barry Hollander

Chief Financial Officer (principal financial and accounting officer)

 

 

 

36

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