Notes to Condensed Consolidated Financial
Statements
September 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.
License Agreement
On August 23,
2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Spinal Resources,
Inc. (“SRI”). Pursuant to the License Agreement, SRI granted to the Company an exclusive license for an eighteen-
month term, for products, as defined in the License Agreement, and utilized in spine and related surgical procedures. As
consideration for the licensed rights under the License Agreement, the Company agreed to pay a license fees equal to $1,500,000,
of which $200,000 has been paid as of September 30, 2019, over the eighteen- month term of the License Agreement. The Company
recorded the liability at its present value of $1,234,089. Additionally, the Company has agreed to issue 6,000,000 shares of restricted
common stock on a quarterly basis, pursuant to the terms of the License Agreement, of which 1,000,000 shares were issued on August
23, 2019. The Company valued the shares issued at $49,000 (based on the market price of the common stock) and included the $49,000
as part of the consideration of the transaction. The remaining 5,000,000 shares to be issued has been recorded as a $245,000 liability
to be paid in common stock and was included in the total consideration issued in the transaction. The Company also issued a Promissory
Note (the “Note”) to SRI for $768,844 (subject to adjustments) for the purchase of the inventory and instruments of
the Licensed Products (as defined in the License Agreement). The Note has a stated interest rate of six percent (6%) and payment
terms of the Note are in eighteen equal installments, beginning on October 1, 2019. Either party may terminate the License Agreement
upon written notice if the other party has failed to remedy a material breach within 30 days (or 15 days in the case of a breach
of a payment obligation). SRI also granted the Company an option to purchase SRI on or before the termination date of the
license for a minimum of $5,500,000 which can increase based on the revenue rate at the time the option is exercised. If the Company
does not elect to exercise their option to purchase SRI, SRI can “put” SRI to the Company. Any payments made for the
license, the Note and other liabilities assumed by the Company can be net against the option to buy price. The Company calculated
the net minimum purchase price to be $3,093,604 and recorded the liability at its present value of $2,834,692. The difference
of $258,912 will be charged to interest expense over the option period.
The
Company analyzed the transaction in accordance with ASC 805. The Company has determined that the acquired assets constitute a
business based on the criteria set forth in ASC 805. The acquired assets consist of inputs, processes applied to those inputs,
and outputs that are used to generate a return. Based on the foregoing, the Company has accounted for the acquisition as a business
combination.
The following table summarizes the preliminary
value of the consideration issued and the preliminary purchase price allocation of the fair value of assets acquired and liabilities
assumed in the transaction:
|
|
Purchase Price Allocation
|
Fair value of consideration issued
|
|
$
|
5,331,625
|
|
Liabilities assumed
|
|
|
524,387
|
|
Total purchase price
|
|
$
|
5,856,012
|
|
Tangible Assets acquired
|
|
$
|
768,844
|
|
Intellectual Property/Technology
|
|
|
2,810,000
|
|
Goodwill
|
|
|
2,277,168
|
|
|
|
$
|
5,856,012
|
|
The total purchase price of $5,856,012 has
been allocated on a preliminary basis to the tangible and intangible assets acquired and liabilities assumed based on preliminary
estimated fair values as of the completion of the transaction. These allocations reflect various preliminary estimates that are
currently available and are subject to change upon the valuation being finalized within the measurement period. The final fair
value of SRI’s identifiable intangible assets will be determined primarily using the income approach which requires an estimate
or forecast of all the expected future cash flows, either through the use of the relief-from-royalty method or the multi-period
excess earnings method. The Company will record amortization expense assuming a straight-line basis over the expected life of the
finite lived intangible assets, which approximates expected future cash flows.
Goodwill represents the amount by which the
estimated consideration transferred exceeds the historical costs of the assets the Company acquired and the liabilities the Company
assumed. The Company will not amortize the goodwill, but will instead test the goodwill for impairment at least annually and whenever
events or circumstances have occurred that may indicate a possible impairment.
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 and Director. The shares were valued
at $68,000 of which $25,000 was applied to accrued liabilities-related and $43,000 was recorded as stock-based compensation expense-related
parties.
On September 18, 2019, the Company filed a
Certificate of Designation with the Secretary of State of Nevada to designate 50,000 shares as Series C Preferred Stock. Each share
of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance,
into one share of fully paid and non-assessable share of common stock. Each share of Series C Preferred Stock shall entitle the
holder thereof to ten thousand (10,000) votes on all matters submitted to a vote of the stockholders of the Company. On September
19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock to the Company’s CEO and Director, in consideration
of the cancellation and return of 1,000,000 shares of the Company’s Series B Preferred Stock. On
September 20, 2019, the Company filed a Certificate of Withdrawal of Certificate of Designation (the “Certificate of Withdrawal”)
for the Company’s Series B Preferred Stock, pursuant to which the prior designation of the Company’s Series B Stock
was cancelled.
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”). 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 fair value of the assets the Company acquired and the liabilities the
Company assumed. The Company will not amortize the goodwill, but will instead test the goodwill for impairment at least
annually and whenever events or circumstances have occurred that may indicate a possible impairment.
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 September 30, 2019, and the results of operations
and cash flows for the periods presented. The results of operations for the three and nine months ended September 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.
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 nine months ended September 30, 2019, and 2018,
and their accounts receivable balance as of September 30, 2019:
|
|
Sales % Three Months Ended
September 30,
2019
|
|
Sales % Three Months Ended
September 30,
2018
|
|
Sales % Nine Months Ended
September 30,
2019
|
|
Sales % Nine
Months Ended
September 30,
2018
|
|
Accounts receivable balance
September 30,
2019
|
Customer
A
|
|
|
100
|
%
|
|
|
—
|
|
|
|
42.3
|
%
|
|
|
—
|
|
|
$
|
36,030
|
|
Customer
B
|
|
|
—
|
|
|
|
89.1
|
%
|
|
|
57.7
|
%
|
|
|
59
|
%
|
|
$
|
3,228
|
|
Customer
C
|
|
|
—
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
41
|
%
|
|
|
—
|
|
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 consists of finished goods,
is valued at the lower of cost or net realizable value. Cost is determined using the first in first out (FIFO) method. Provision
for potentially obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Purchase concentration
The principal purchases by the Company 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 nine months ended September 30, 2019, and 2018:
|
|
Purchase % Three Months Ended September 30,
2019
|
|
Purchase % Three Months Ended September 30,
2018
|
|
Purchase % Nine Months Ended September 30,
2019
|
|
Purchase % Nine Months Ended
September 30,
2018
|
Supplier A
|
|
|
100
|
%
|
|
|
—
|
|
|
|
100
|
%
|
|
|
—
|
|
Supplier B
|
|
|
—
|
|
|
|
100
|
%
|
|
|
—
|
|
|
|
60.4
|
%
|
Supplier C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.6
|
%
|
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.
Property and 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:
|
|
September 30,
2019
|
|
December 31,
2018
|
Spinal instruments
|
|
$
|
379,270
|
|
|
$
|
—
|
|
Office equipment
|
|
|
9,590
|
|
|
|
9.590
|
|
Less: Accumulated Depreciation
|
|
|
(11,110
|
)
|
|
|
(2,391
|
)
|
Property and Equipment, Net
|
|
$
|
377,750
|
|
|
$
|
7,199
|
|
Depreciation expense was $7,120 and $8,719
for the three and nine months ended September 30, 2019, and $573 and $1,008 for the three and nine months ended September 30, 2018,
respectively.
Intangible Assets
Intangible
assets primarily represent purchased patent and license rights. During the nine months ended September 30, 2019, the Company recorded
$2,810,000 of patent rights. The Company amortizes these costs over the shorter of the legal life of the patent or its estimated
economic life using the straight-line method. The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets. For the nine months ended September 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 nine months ended September 30, 2019, and 2018, the Company recorded amortization expense of $52,538 and $6,618, respectively.
In accordance with ASC 350, “Intangibles—Goodwill and Other,” goodwill
and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually
or whenever events or changes in circumstances indicate that the asset might be impaired.
Goodwill
Goodwill
is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities
assumed in a business acquisition. During the nine months ended September 30, 2019, the Company recorded goodwill of $2,277,168
related to the SRI transaction. The Company reviews the goodwill allocated to each of our reporting units for possible impairment
annually and whenever events or changes in circumstances indicate carrying amount may not be recoverable. When assessing goodwill
for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its’
carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not
that the fair value of a reporting unit is less than its’ carrying amount, then the Company performs a two-step impairment
test. If the Company concludes otherwise, then no further action is taken. The Company also has the option to bypass the qualitative
assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step
impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including
goodwill, to the estimated fair value of the reporting unit. There were no events or changes in circumstances that indicated potential
impairment of goodwill during the nine months ended September 30, 2019.
In
assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the
carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting
unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include
the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance
and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively
or negatively and the magnitude of any such impact.
The
carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing
goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit,
the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where
the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to our reporting
units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired
business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities
assumed that are assigned to the reporting unit.
If
the carrying amount of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the
second step of the impairment analysis to measure the amount of the impairment loss, by allocating the reporting unit’s fair
value to its assets and liabilities other than goodwill, comparing the carrying amount of the goodwill to the resulting implied
fair value of the goodwill, and recording an impairment charge for any excess.
Revenue Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the
Company recognizes revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2)
identify the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the
transaction price to each performance obligation in the contract (if any); and (5) recognize revenue when each performance
obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC
605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred;
(3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably
assured. The Company has no outstanding contracts with any of its’ customers. Revenues of SRI products were $36,030 for
the three and nine months ended September 30, 2019. Revenues from Spinus of $49,123 for the nine months ended September 30,
2019, and $28,229 and $69,616 for the three and nine months ended September 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 nine months ended September 30, 2019
and 2018.
Advertising and Marketing Expenses
The Company expenses advertising and marketing
costs as incurred. For the three and nine months ended September 30, 2019, the Company recorded $4,706 and $43,951, respectively,
of advertising and marketing (including trade shows). For the three and nine months ended September 30, 2018, the Company recorded
$7,466 and $42,811 of advertising and marketing expenses, respectively.
Research and Development
Costs and expenses that can be clearly identified
as research and development are charged to expense as incurred. For the three and nine months ended September 30, 2019, the Company
recorded $3,370 and $66,974 of research and development expenses. For the three and nine months ended September 30, 2018,
the Company recorded $47,657 and $58,222 of research and development expenses, respectively.
Convertible Instruments
The Company evaluates and accounts for conversion
options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.
Applicable GAAP requires companies to bifurcate
conversion options from their host instruments and account for them as free standing derivative financial instruments according
to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument.
The Company accounts for convertible instruments
(when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows:
The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt
instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over
the term of the related debt to their stated date of redemption.
The Company accounts for the conversion of
convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked
derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any
difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.
Leases
In February
2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets
and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers
specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to
disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to
assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a
modified retrospective adoption, with early adoption permitted. The Company adopted the standard on January 1, 2019, and the
impact of the adoption of this standard was not material to our consolidated financial statements.
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 September 30, 2019, and December 31, 2018, for
each fair value hierarchy level:
September 30, 2019
|
|
Derivative
Liabilities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
2,050,469
|
|
|
$
|
2,050,469
|
|
December 31, 2018
|
|
Derivative
Liabilities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,199,514
|
|
|
$
|
1,199,514
|
|
See Note 5
Income Taxes
Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation
allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Tax benefits from an uncertain tax position
are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The
Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented.
Foreign Currency Translation
The
accounts of the Company's Hong Kong subsidiary are maintained in Hong Kong dollars and the accounts of the U.S. companies are maintained
in USD. The accounts of the Hong Kong subsidiary were translated into USD in accordance with Accounting Standards Codification
("ASC") Topic 830, Foreign Currency Matters. According to Topic 830, all assets and liabilities were translated at the
exchange rate on the balance sheet date; stockholders' equity is translated at historical rates and statement of comprehensive
loss 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 loss.
Relevant exchange rates used in the preparation
of the consolidated financial statements are as follows for the periods ended September 30, 2019 and December 31, 2018, (Hong Kong
dollar per one U.S. dollar):
|
|
September 30,
2019
|
|
December 31,
2018
|
Balance sheet date
|
|
|
.1275
|
|
|
|
.1277
|
|
Average rate for statements of operations and comprehensive loss
|
|
|
.1276
|
|
|
|
.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 comprehensive loss. Basic EPS is computed by dividing net
income (loss) available to common stockholders 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 (which aggregated approximately
360,000,000 shares at September 30, 2019) since assumed to be purchased from the exercise of stock options, warrants and
conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect
is anti-dilutive.
Recent Accounting Pronouncements
In 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 nine months
ended September 30, 2019, that are of significance or potential significance to the Company.
NOTE 3 – INTANGIBLE ASSETS
Patents as of September 30, 2019, and December 31, 2018, consist
of the following:
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
Patents and license rights
|
|
$
|
3,060,000
|
|
|
$
|
250,000
|
|
Accumulated amortization
|
|
|
(88,997
|
)
|
|
|
(36,458
|
)
|
Net carrying amount
|
|
$
|
2,971,003
|
|
|
$
|
213,542
|
|
Amortization expense for the
three and nine months ended September 30, 2019, was $31,704 and $52,538, respectively.
Amortization expense for the three and
nine months ended September 30, 2018 was $2,206 and $6,618, respectively.
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 15th
business day that the Company becomes listed, at conversion prices equal to discounts of 35%-50% of the average of the three lowest
closing prices of the common stock. In August 2018, the Company offered any noteholder to convert their principal and interest
into shares of common stock at $0.50 per share. OZOP also issued $25,500 of convertible notes for consulting fees. During the year
ended December 31, 2018, the Company issued a $50,000 convertible promissory note (the “March 2018 Note”) and received
proceeds of $50,000. The Company determined that the conversion feature of the 2017 Notes
and the March 2018 Note (together, the “Notes”) did not meet the criteria of an embedded derivative and therefore the
conversion feature was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no
quoted price and no active market for the Company’s common stock.
On April 13, 2018, the Company determined the
conversion feature of the Notes represented an embedded derivative since the Notes were convertible into a variable number of shares
upon conversion. Accordingly, on April 13, 2018, the Notes were not considered to be conventional debt under ASC 815 and the embedded
conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of
the derivative instruments of the Notes that occurred prior to April 13, 2018, were recorded as a liability on April 13, 2018,
with the corresponding amount recorded as a discount to the Note. Such discount was amortized from the date of issuance to the
maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income
or expenses in the reporting period, with the offset to the derivative liability on the balance sheet. The embedded feature included
in the Notes resulted in an initial debt discount of $620,075, interest expense of $14,000 and initial derivative liability of
$634,075. On August 29, 2019, pursuant to a Debt Purchase Agreement, one investor sold the principal balance of $15,000, accrued
and unpaid interest of $2,624 and a repayment balance of $5,250 to third party investor, for a total purchase price of $22,874
(see below). As of September 30, 2019, and December 31, 2018, the outstanding principal balance of the 2017 Notes was $150,000
and $165,000, respectively.
On April 13, 2018, we issued a convertible
promissory note in the principal amount of $442,175 (the “Note”), pursuant to a Securities Purchase Agreement we entered
into with an investor dated April 1, 2018. The Note bears interest at the rate of 12% per annum and is due and payable on April
13, 2019. The note is convertible at any time following the funding of the note into a variable number of the Company's common
stock, based on a conversion ratio of 55% of the average of the lowest trading price for the 25 days prior to conversion. The note
was funded on April 13, 2018, when the Company received proceeds of $350,000, after OID of $57,675, and disbursements for the lender’s
transaction costs, fees and expenses of $34,500, of which $25,000 were recorded as discounts against the debt to be amortized into
interest expense through maturity. Periodic payments are due by us on the Note at the rate of $850 per day (the “Repayment
Amount”) via direct withdrawal from our bank account, beginning on April 27, 2018 and to last for a 30-day period. Following
this period, the Repayment Amount increased to $1,100 per day until the Note is satisfied in full. On June 28, 2018, the Note was
amended to increase the Repayment Amount to $1,750 per day. On August 29, 2018, the parties agreed to stop the Repayment Amount,
and on November 20, 2018, the parties agreed to restart the Repayment Amount at $1,000 per day. From time to time the investor
waives any Repayment Amount for a period of time as agreed upon. During the nine months ended September 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 nine months ended September 30, 2019, amortization
of the debt discounts of $53,896 was charged to interest expense. During the nine months ended September 30, 2019, the investor
sold $30,000 of the note to another investor (see below). As of September 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 September 30, 2019, and December 31, 2018,
of $52,375 and $78,479, net of unamortized discounts of $53,896 as of December 31, 2018. The Note is currently in default.
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 nine months ended September 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 nine months September 30, 2019, amortization of the
debt discounts of $222,397 was charged to interest expense. For the nine months ended September 30, 2019, the investor converted
a total of $70,766 of the face value and $22,896 of accrued interest into 10,148,126 shares of common stock. As of September 30,
2019, and December 31, 2018, the outstanding principal balance of the note was $140,484 and $261,250, respectively, with a carrying
value as of September 30, 2019, and December 31, 2018, of $140,484 and $38,853, net of unamortized discounts of $222,397 as of
December 31, 2018. The Note is currently in default.
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 nine months ended September 30, 2019, amortization of the debt discounts of $17,112 was
charged to interest expense. For the nine months ended September 30, 2019, the investor converted a total of $33,619 of the face
value into 1,780,300 shares of common stock. As of September 30, 2019, and December 31, 2018, the outstanding principal balance
of the note was $21,381 and $55,000, respectively with a carrying value as of September 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 nine months ended September 30, 2019,
the investor converted a total of $26,960 of the face value into 2,326,783 shares of common stock. For the nine months ended September
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 September 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, 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 nine months ended September 30, 2019, amortization of
the debt discounts of $303,458 was charged to interest expense. For the nine months ended September 30, 2019, the investor converted
a total of $4,759 of the face value and $33,091 of accrued interest into 4,167,000 shares of common stock. As of September 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 September 30, 2019, and December 31, 2018, of $445,693 and $146,994, respectively, net of unamortized discounts of
$49,548 and $353,006, respectively.
On December 5, 2018, the Company issued a 12%
convertible promissory note, (the “Note”) in the principal amount of $63,000, pursuant to a Securities Purchase Agreement
we entered into with the investor. The Note matures 12 months after the date of issuance. The Note is convertible into shares of
the Company’s common stock beginning on the date which is 180 days from the issuance date of the Note, at a conversion price
equal to 65% multiplied by the average of the lowest two trading prices during the 15- trading day period ending on the last completed
trading date in the OTC Markets prior to the date of conversion. The note was funded on December 10, 2018, when the Company received
proceeds of $60,000 after disbursements for the lender’s transaction costs, fees and expenses of $3,000, which were recorded
as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included
in the note resulted in an initial debt discount and derivative liability of $47,170. 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 nine months ended September 30, 2019,
amortization of the debt discounts of $46,330 was charged to interest expense. As of September 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 nine months ended September 30, 2019, amortization of the debt discounts
of $93,678 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note was $150,000
with a carrying value as of September 30, 2019, of $115,428, net of unamortized discounts of $34,572.
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 nine months ended September 30, 2019, amortization
of the debt discounts of $29,964 was charged to interest expense. For the nine months ended September 30, 2019, the investor converted
a total of $25,920 of the face value and $1,500 of fees into 5,720,000 shares of common stock. As of September 30, 2019, the outstanding
principal balance of the Master Note was $29,080 with a carrying value as of September 30, 2019, of $13,042, net of unamortized
discounts of $16,038.
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 nine months ended September
30, 2019, amortization of the debt discounts of $47,331 was charged to interest expense. For the nine months ended September 30,
2019, the investor converted a total of $53,000 of the face value and $3,180 of accrued interest into 9,179,824 shares of common
stock. As of September 30, 2019, the outstanding principal balance of the note was $-0-.
On March 7, 2019, the Company issued a 12%
convertible promissory note, (the “Note”) in the principal amount of $85,000, pursuant to a Securities Purchase Agreement
we entered into with an investor. The Note matures 12 months after the date of issuance. The Note is convertible into shares of
the Company’s common stock, at a conversion price equal to 58% of the average of the two lowest trading prices of the Company’s
common stock for the previous 20 trading day period ending on the date the notice of conversion of the Note is received by the
Company. The note was funded on March 11, 2019, when the Company received proceeds of $77,900 after OID of $3,000, and disbursements
for the lender’s transaction costs, fees and expenses of $4,100, which were recorded as discounts against the debt to be
amortized into interest expense through maturity. The embedded conversion feature included in the note resulted in an initial debt
discount and derivative liability of $77,394. For the nine months ended September 30, 2019, amortization of the debt discounts
of $47.617 was charged to interest expense. For the nine months ended September 30, 2019, the investor converted a total of $17,750
of the face value and $1,143 of accrued interest into 3,641,075 shares of common stock. As of September 30, 2019, the outstanding
principal balance of the note was $67,250 with a carrying value as of September 30, 2019, of $30,373, net of unamortized discounts
of $36,878.
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 nine months ended September 30, 2019, amortization of
the debt discounts of $20,597 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the
note was $58,000 with a carrying value as of September 30, 2019, of $29,105, net of unamortized discounts of $28,895.
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 nine months ended September 30, 2019, amortization of the debt discounts
of $27,046 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note was $52,500
with a carrying value as of September 30, 2019, of $28,389, net of unamortized discounts of $24,111.
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 nine months ended September 30, 2019, amortization of the debt discounts of $8,818
was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the Second Tranche of the Master
Note was $27,500 with a carrying value as of September 30, 2019, of $14,056, net of unamortized discounts of $13,444.
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 nine months ended September 30, 2019, amortization of the debt discounts of $25,780
was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note was $80,000 with a carrying
value as of September 30, 2019, of $28,662, net of unamortized discounts of $51,338.
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 nine months ended September 30, 2019, amortization
of the debt discounts of $49,924 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of
assigned note was $93,391, with a carrying value as of September 30, 2019, of $83,406, net of unamortized discounts of $9,985.
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 nine months ended September 30, 2019, amortization
of the debt discounts of $46,457 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of
assigned note was $77,000, with a carrying value as of September 30, 2019, of $74,122, net of unamortized discounts of $2,878.
On July 22, 2019, the Company issued a 10%
convertible promissory note, (the “Note”) in the principal amount of $38,900, pursuant to a Securities Purchase Agreement
we entered into with an investor. The Note matures 12 months after the date of issuance. The Note is convertible into shares of
the Company’s common stock, at a conversion price equal to 60% of the lowest closing bid price of the Company’s common
stock for the previous 20 trading day period ending on the date the notice of conversion of the Note is received by the Company.
The note was funded on July 24, 2019, when the Company received proceeds of $30,000 after OID of $3,900, and disbursements for
the lender’s transaction costs, fees and expenses of $5,000, which were recorded as discounts against the debt to be amortized
into interest expense through maturity. The embedded conversion feature included in the note resulted in an initial debt discount
and derivative liability of $31.452. For the nine months ended September 30, 2019, amortization of the debt discounts of $7,628
was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note was $38,900 with a carrying
value as of September 30, 2019, of $6,176, net of unamortized discounts of $32,724.
On August 2, 2019, the Company issued a
12% convertible promissory note, (the “Note”) in the principal amount of $157,500, pursuant to a Securities
Purchase Agreement we entered into with an investor. The Note matures 12 months after the date of issuance. The Note is
convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of
the Note, at a conversion price equal to 60% multiplied by the average of the lowest two trading prices during the 20 trading
day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The note was funded
on August 2, 2019, when the Company received proceeds of $150,000 after disbursements for the lender’s transaction
costs, fees and expenses of $7,500, which were recorded as discounts against the debt to be amortized into interest expense
through maturity. The embedded conversion feature included in the note will be recorded as an initial debt discount and
derivative liability upon the occurrence of the 180 days, when the Note becomes convertible. For the nine months ended September 30,
2019, amortization of the debt discounts of $1,229 was charged to interest expense. As of September 30, 2019, the
outstanding principal balance of the note was $157,500.
On August 21, 2019, the Company issued
a 12% convertible promissory note, (the “Note”) in the principal amount of $55,125, pursuant to a
Securities Purchase Agreement we entered into with an investor. The Note matures 12 months after the date of issuance. The
Note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to 58% multiplied by the average of the lowest two trading prices during the
20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The note
was funded on August 21, 2019, when the Company received proceeds of $50,000 after OID of $2,625, and disbursements for
the lender’s transaction costs, fees and expenses of $2,500, which were recorded as discounts against the debt to
be amortized into interest expense through maturity. The embedded conversion feature included in the note will be recorded as
an initial debt discount and derivative liability upon the occurrence of the 180 days, when the Note becomes convertible. For the nine months ended September 30, 2019, amortization of
the debt discounts of $570 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of
the note was $55,125.
On August 19, 2019, the Company issued an 8%
convertible promissory note, (the “Note”) in the principal amount of $85,000, pursuant to a Securities Purchase Agreement
we entered into with the investor. The Note matures May 19, 2020. The Note is convertible into shares of the Company’s common
stock at a conversion price equal to the lesser of
(1) the lowest trading price during the previous 20 trading day period ending on the last completed trading date prior to the date
of the Note and (2) 65% multiplied by the average of the 3 lowest trading prices of the Company’s common stock during the
20 day trading period ending on the latest completed trading day of the common stock prior to the date of conversion of the Note.
The note was funded on August 22, 2019, when the Company received proceeds of $75,000 after OID of $7,250, and disbursements for
the lender’s transaction costs, fees and expenses of $2,750, which were recorded as discounts against the debt to be amortized
into interest expense through maturity. The embedded conversion feature included in the note resulted in an initial debt discount
and derivative liability of $54,802. For the nine months ended September 30, 2019, amortization of the debt discounts of $9,471
was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note was $85,000 with a carrying
value as of September 30, 2019, of $29,669, net of unamortized discounts of $55,331.
On August 23, 2019, the Company issued to a
third-party investor a convertible redeemable promissory note (the “Note”) with a face value of $37,800, including
an original issue discount of $1,800. The note matures on May 23, 2020, has a stated interest of 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 August 26, 2019, when the Company received proceeds of $33,500, after
disbursements for the lender’s transaction costs, fees and expenses of $2,500, which were recorded as discounts against the
debt to be amortized into interest expense through maturity. The embedded conversion feature included in the note resulted in an
initial debt discount and derivative liability of $32,229. For the nine months ended September 30, 2019, amortization of the debt
discounts of $5,081 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note was
$37,800 with a carrying value as of September 30, 2019, of $6,352, net of unamortized discounts of $31,448.
On August 29, 2019, the Company issued
a 10% convertible promissory note, (the “Note”) in the principal amount of $45,000, pursuant to a
Securities Purchase Agreement we entered into with an investor. The Note matures 12 months after the date of issuance. The
Note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of the Note, at a conversion price equal to 60% multiplied by the average of the lowest two trading prices during the 20
trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The note was
funded on September 4, 2019, when the Company received proceeds of $40,000 after disbursements for the lender’s
transaction costs, fees and expenses of $5,000, which were recorded as discounts against the debt to be amortized into
interest expense through maturity. The embedded conversion feature included in the note will be recorded as an initial debt
discount and derivative liability upon the occurrence of the 180 days, when the Note becomes convertible. For the nine months ended September 30, 2019, amortization of the debt
discounts of $593 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of the note
was $45,000.
On
August 29, 2019, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note
issued by the Company on September 1, 2017 (see above). The Purchaser paid $22,874 to acquire the note. The Note, as amended, is
convertible into common stock at a conversion price equal to a 35% discount to the average
of the 3 lowest closing prices of the common stock for fifteen prior trading days including the day upon which a notice of conversion
is received. The embedded conversion feature pursuant to the Assignment Agreement resulted
in an initial debt discount and derivative liability of 13,793. For the nine months ended September 30, 2019, amortization of the
debt discounts of $13,793 was charged to interest expense. As of September 30, 2019, the outstanding principal balance of assigned
note was $22,874.
A summary of the convertible note balance as
of September 30, 2019, and December 31, 2018, including the related party note disclosed in Note 7, is as follows:
|
|
September 30,
2019
|
|
December 31,
2018
|
Principal balance
|
|
$
|
1,986,401
|
|
|
$
|
1,254,625
|
|
Unamortized discount
|
|
|
(582,231
|
)
|
|
|
(740,523
|
)
|
Ending balance, net
|
|
$
|
1,404,170
|
|
|
$
|
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 September 30, 2019, and December 31, 2018, at $2,050,469 and $1,199,514, respectively. The Company used the Monte Carlo simulation
valuation model with the following assumptions as of September 30, 2019, risk-free interest rates from 1.65% to 1.83% and volatility
of 30% to 38%, 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 nine months ended September 30, 2019, used the following assumptions;
risk-free interest rates from 1.65% to 2.58% and volatility of 30% to 63%.
A summary of the activity related to derivative
liabilities for the nine months ended September 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
|
|
|
903,469
|
|
Converted or paid
|
|
|
(506,284
|
)
|
Change in fair value recognized in operations
|
|
|
453,770
|
|
Balance September 30, 2019
|
|
$
|
2,050,469
|
|
|
|
|
|
|
NOTE 6 – NOTES PAYABLE
The Company has the following note payables
outstanding:
|
|
September 30,
2019
|
|
December 31,
2018
|
Note payable, interest at 8%, matured September 6, 2018, in default
|
|
$
|
330,033
|
|
|
$
|
330,033
|
|
Note payable, interest at 6%, matures February 26, 2021
|
|
|
768,844
|
|
|
|
—
|
|
Bank line of credit, interest at 5.83%, matured November 13, 2019 (Company
negotiating renewal)
|
|
|
460,079
|
|
|
|
—
|
|
Equity line of credit, interest at 5.5%, matures
August 5, 2022
|
|
|
60,000
|
|
|
|
—
|
|
Notes payable, interest at 8%, matures January 5, 2020
|
|
|
45,000
|
|
|
|
—
|
|
Other, due on demand
|
|
|
—
|
|
|
|
2,805
|
|
Total notes payable
|
|
|
1,663,956
|
|
|
|
332,838
|
|
Less long-term portion
|
|
|
272,368
|
|
|
|
—
|
|
Current portion
|
|
$
|
1,391,588
|
|
|
$
|
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 (at that date) of the Company in exchange for $50,000. The
note originally matured November 25, 2017, and was extended until November 25, 2018. As of September 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 (at that date) 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 15th business
day that the Company becomes listed, at conversion prices equal to discounts of 35%-50% of the average of the three lowest
closing prices of the common stock. In August 2018, the Company offered any noteholder to convert their principal and
interest into shares of common stock at $0.50 per share. As of September 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 nine months ended September
30, 2019, and 2018, the Company recorded expenses to its officers in the following amounts:
|
|
Three months ended
September
30,
|
|
Nine months ended
September
30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
CEO, parent
|
|
$
|
45,000
|
|
|
$
|
35,886
|
|
|
$
|
178,000
|
|
|
$
|
95,886
|
|
Former CEO, Subsidiary
|
|
|
—
|
|
|
|
30,000
|
|
|
|
—
|
|
|
|
90,015
|
|
Former CCO
|
|
|
—
|
|
|
|
30,000
|
|
|
|
—
|
|
|
|
90,000
|
|
Former COO
|
|
|
45,000
|
|
|
|
—
|
|
|
|
135,000
|
|
|
|
—
|
|
CFO
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Total
|
|
$
|
120,000
|
|
|
$
|
125,886
|
|
|
$
|
403,000
|
|
|
$
|
365,901
|
|
As of September 30, 2019, and December 31,
2018, included in accounts payable and accrued expenses, related party is $526,927 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.
|
|
September 30, 2019
|
|
December 31, 2018
|
CEO, parent
|
|
$
|
5,886
|
|
|
$
|
22,825
|
|
Former CEO, subsidiary
|
|
|
139,759
|
|
|
|
162,215
|
|
Former COO and CCO
|
|
|
187,785
|
|
|
|
236,905
|
|
Former COO
|
|
|
122,500
|
|
|
|
45,000
|
|
CFO
|
|
|
71,037
|
|
|
|
58,037
|
|
Non-officer affiliate
|
|
|
—
|
|
|
|
27,824
|
|
Total
|
|
$
|
526,967
|
|
|
$
|
552,806
|
|
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. On September 19,
2019, the Company issued 50,000 shares of its Series C Preferred Stock (see note 10) to the Company’s CEO and Director, in
consideration of the cancellation and return of 1,000,000 shares of the Company’s Series B Preferred Stock.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Licenses
On February 1, 2018, Spinus entered into an
Intellectual Property Licensing Agreement (the “Licensing Agreement”). The Company assumed the obligations under the
Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms of the Licensing Agreement, in consideration
of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive rights to other patents. The patents surround
mechanical or inflatable expandable interbody implant products. The Company paid the $250,000 on November 20, 2018. The Company
also will pay a royalty of 7% of net sales on any product sold utilizing any of the patents. There have not been any sales of
the licensed products and accordingly, no royalties have been incurred.
On August 23, 2019, the Company entered into an Exclusive License
Agreement (the “License Agreement”) with Spinal Resources, Inc. (“SRI”). Pursuant to the License Agreement,
SRI granted to the Company an exclusive license, for products, as defined in the License Agreement, and utilized in spine and
related surgical procedures. As consideration for the licensed rights under the License Agreement, the Company agreed to pay license
fees equal to $1,500,000, over the eighteen- month term of the License Agreement. Additionally, the Company has agreed to issue
6,000,000 shares of restricted common stock on a quarterly basis, pursuant to the terms of the License Agreement. The Company
also issued a Promissory Note (the “Note”) to SRI for $768,844 (subject to adjustments) for the purchase of the inventory
of the Licensed Products (as defined in the License Agreement). The Note has a stated interest rate of six percent (6%) and payment
terms of the Note are in eighteen equal installments, beginning on October 1, 2019. Either party may terminate the License Agreement
upon written notice if the other party has failed to remedy a material breach within 30 days (or 15 days in the case of a breach
of a payment obligation). During the nine months ended September 30, 2019, the Company paid $200,000 of the license fees. The
balance of $1,300,000 is due as follows:
January 6, 2020
|
|
$
|
200,000
|
|
April 1, 2020
|
|
$
|
300,000
|
|
July 1, 2020
|
|
$
|
300,000
|
|
October 1, 2020
|
|
$
|
250,000
|
|
January 4, 2021
|
|
$
|
250,000
|
|
Balance due
|
|
$
|
1,300,000
|
|
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 nine months ended September 30, 2019, the Company amortized $216,667
as stock- based compensation expense.
On October 19, 2018, the Company entered into
a consulting agreement (the “Consulting Agreement”) with Draper Inc., a Nevada corporation (“Draper”).
Pursuant to the Consulting Agreement the Company engaged Draper as an independent consultant and Draper agreed to provide the Company
with consulting services. In exchange for the services to be provided by Draper pursuant to the Consulting Agreement, the Company
agreed to issue Draper a total of 1,800,000 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 nine months ended September 30, 2019, the Company amortized $52,500 as stock-based compensation
expense. For the nine months ended September 30, 2019, the Company recorded 1,350,000 shares of common stock to be issued, and
valued the shares at $410,370, based on the market price of the common stock on the date of the shares being issued. For the nine
months ended September 30, 2019, the company amortized $461,440 as stock-based compensation expense. As of September 30, 2019,
there remains $1,430 of deferred stock compensation on the condensed consolidated balance sheet, to be amortized in October, 2019.
On February 27, 2019, the Company entered into
a Mutual Agreement of Understanding (the “Agreement”) with Eric Siu pursuant to which the Company agreed to approve
and ratify all of Mr. Sui’s and his related parties’ efforts at pursuing medical device sales and manufacturing in
greater China. Additionally, pursuant to the Agreement, the Company and Mr. Siu agreed to confirm and settle amounts owed to Mr.
Siu and related parties by the Company upon the completion of the audit of the Company as of December 31, 2018. On March 5, 2019,
Eric Sui resigned from his position as a member of the Board.
On March 4, 2019, the Company entered
into a Separation Agreement (the “Separation Agreement”) with Salman J. Chaudhry, pursuant to which Mr. Chaudry resigned
immediately from his positions as the CCO and Secretary of the Company and as a member of the Board and from all positions with
the Company effective immediately and pursuant to which the Company agreed to pay Mr. Chaudry $227,200 (the “Outstanding
Fees”) in certain increments as set forth in the Separation Agreement. Mr. Chaudry’s resignation was not
the result of any disagreement with the Company on any matter relating to the Company's operations, policies or practices. During
the nine months ended September 30, 2019, the Company paid Mr. Chaudhry $39,415, and the balance owed is $187,785.
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 nine months ended September 30, 2019, the Company amortized $40,065 as stock-based compensation
expense. As of September 30, 2019, there remains $37,065 of deferred stock compensation on the condensed consolidated balance sheet,
to be amortized over the remaining term of the agreement.
On May 20, 2019, the Company entered
into a Consulting Agreement (the “Agreement”) with a consultant. Under the terms of the one-year Agreement, the
consultant will provide consulting services to the Company, including, but not limited to reviewing, analyzing and assessing
the Company’s financial requirements and assisting the Company in financial arrangements. Pursuant to the Agreement,
the Company issued 100,00 shares upon execution of the Agreement and has agreed to issue an additional 100,000 shares at the
beginning of months four, seven and ten. As of September 30, 2019, the Company has issued 200,000 shares of common stock.
On September 2, 2019, the Company entered
into a Consulting Agreement (the “Agreement”) with a consultant to act as the Company’s Executive Vice
President, Sales and Marketing (the “EVP”) through December 31, 2019, and to provide the Company with customary
services of an EVP. The Company has agreed to compensate the consultant $10,000 per month. Either party may terminate the
Agreement in its sole and absolute discretion. The parties have agreed that they will negotiate follow up agreement with
terms and conditions to include salary, commission, bonuses and stock and or option grants or awards, to be consistent with
industry standards for like size companies prior to the termination of the Agreement. For the three and nine months ended
September 30, 2019, the Company has expensed $10,000, included in general and administrative, other.
On September 1, 2019, the Company entered
into an Investor Relations Agreement (the “Agreement”) with a consultant. Under the terms of the Agreement, the consultant
will provide consulting services to the Company, including, but not limited to assisting the Company in the conception and implementation
of the Company’s corporate and business development plan. The term of the Agreement is 6 months from the date of the Agreement.
As compensation for its services under the Agreement, the consultant received 1,250,000 shares of the Company’s common stock.
The Agreement contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes
customary representations, warranties and covenants by the Company. The Company valued the shares at $46,875, based on the market
price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the nine months ended
September 30, 2019, the Company amortized $7,812 as stock-based compensation expense. As of September 30, 2019, there remains $39,063
of deferred stock compensation on the condensed consolidated balance sheet, to be amortized over the remaining term of the Agreement.
On September 1, 2019, the Company entered
into a Consulting Agreement (the “Agreement”) with a consultant. Under the terms of the Agreement, the consultant will
provide consulting services to the Company, including, but not limited to assisting the Company in its general strategy for corporate
communications. The term of the Agreement is 6 months from the date of the Agreement. As compensation for its services under the
Agreement, the consultant received 1,250,000 shares of the Company’s common stock. The Agreement contains customary terms
relating to payment of expenses, indemnification and other matters. The Agreement also includes customary representations, warranties
and covenants by the Company. The Company valued the shares at $46,875, based on the market price of the common stock on the date
of the agreement, to be amortized over the term of the contract. For the nine months ended September 30, 2019, the Company amortized
$7,812 as stock-based compensation expense. As of September 30, 2019, there remains $39,063 of deferred stock compensation on the
condensed consolidated balance sheet, to be amortized over the remaining term of the Agreement.
On September 25, 2019, the Company
entered into a Consulting Agreement (the “Agreement”) with a consultant. Under the terms of the
one-year Agreement, the consultant will provide consulting services to the Company, including, but not limited to reviewing,
analyzing and assessing the Company’s financial requirements and assisting the Company in financial arrangements.
Pursuant to the Agreement, the Company issued 300,000 shares upon the execution of the Agreement and has agreed to issue an
additional 300,000 shares at the beginning of months four, seven and ten. As of September 30, 2019, the Company has issued
300,000 shares of common stock.
NOTE 9 - INCOME
TAXES
The
Company was incorporated in the United States and has operations in two tax jurisdictions - the United States and Hong Kong. The
Company’s HK subsidiary is subject to a 16.5% profit tax based on its taxable net profit. The Company’s U.S. operations
are subject to income tax according to U.S. tax law.
A
reconciliation of the provision for income taxes determined at the U.S. statutory rate to the Company’s effective income
tax rate is as follows:
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2019
|
|
2018
|
Pre-tax loss
|
|
$
|
(4,437,326
|
)
|
|
$
|
(1,462,467
|
)
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Expected U.S. income tax credit
|
|
|
(931,838
|
)
|
|
|
(307,118
|
)
|
Tax rate difference between U.S. and foreign operations
|
|
|
289
|
|
|
|
3,745
|
|
Permanent differences
|
|
|
678,682
|
|
|
|
137,918
|
|
Change of valuation allowance
|
|
|
252,867
|
|
|
|
165,455
|
|
Effective tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company had
deferred tax assets as follows:
|
|
September 30,
2019
|
|
December 31,
2018
|
Net operating losses carried forward
|
|
$
|
822,689
|
|
|
$
|
569,822
|
|
Less: Valuation allowance
|
|
|
(822,689
|
)
|
|
|
(569,822
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of September 30, 2019, the Company has approximately $3,489,000 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 September 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 nine months ended September 30, 2019, and 2018, and no provision for interest and penalties is deemed
necessary as of September 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. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the
Company has not recorded any adjustments according to Tax Act. As the Company collects and prepares necessary data, and interprets
the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the
Company may make adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be completed in
2018.
Since
the Company’s foreign subsidiaries have not generated income since inception, the Company believes that Tax Act will not
have significant impact on the Company’s consolidated financial statements.
NOTE 10 – STOCKHOLDERS’ EQUITY
Common stock
On July 5, 2019, the Company entered into an
Equity Financing Agreement (the “Equity Agreement”) with GHS Investments, LLC, a Nevada limited liability company
(the “Investor”), with the Investor committing to purchase up to $7,000,000 of the Company’s common stock in
tranches of up to $400,000, following an effective registration of the shares and subject to restrictions regarding the timing
of each sale and total percentage stock ownership held by the Investor. The purchase price for the shares will be 85% of the lowest
closing price during the 10-day period prior to each sale, and with each sale, the Investor will receive an issuance premium of
5% to cover the Investor’s transaction costs associated with selling the shares and payable by the Company to the Investor
in registered shares. The obligation of the Investor to purchase shares pursuant to the Equity Agreement is subject to several
conditions, including (i) that the Company has filed a registration statement (the “Registration Statement”) with the
United States Securities and Exchange Commission (the “SEC”) registering the shares to be sold to the Investor within
30 calendar days from the date of the Equity Agreement, with the Registration Statement being declared effective prior to sale
of any shares to the Investor; and (ii) that the purchase of shares by the Investor pursuant to the Equity Agreement shall not
cause the Investor to own more than 4.99% of the outstanding shares of the Company’s common stock.
In connection with the Equity Agreement, on
July 5, 2019, the Company also entered into a Registration Rights Agreement with the Investor (the “Registration Rights
Agreement”). On October 1, 2019, the SEC issued a Notice of Effectiveness of the Company’s Registration Statement.
On October 13, 2018, the Board of Directors
of the Company authorized a Private Placement Memorandum (the “October PPM”) offering of a minimum of $50,000 and up
to $3,000,000 of up to 6,000,000 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 nine
months ended September 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 nine months ended September 30,
2019, holders of an aggregate of $262,773 in principal and $61,810 of accrued interest and fees of convertible notes issued by
the Company, converted their debt into 37,118,952 shares of our common stock at an average conversion price of $0.00874 per share.
On March 24, 2019, the Company recorded the
issuance of 171,400 shares 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 April 29, 2019, the Company recorded the
issuance of 100,000 shares 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 May 20, 2019, the Company recorded
the issuance of 100,000 shares of common stock for consulting services. The shares were valued at $0.12 per share (the market
price on the date of the agreement) and $12,000 was recorded as stock-based compensation expense.
On August 23, 2019, the Company issued 1,000,000
shares pursuant to the Exclusive License Agreement (see note 1). The shares were valued at $0.049 per share (the market price on
the date of the agreement) and $49,000 was recorded as part of the consideration of the acquisition of the license.
On September 1, 2019, the Company issued in
the aggregate 2,500,000 shares of common stock for consulting services to third parties, each receiving 1,250,000 shares (see note
8). The shares were valued at $0.0375 per share (the market price on the date of the agreement) and $93,750 was recorded deferred
stock-based compensation.
On September 3, 2019, the Company issued 200,000
shares of common stock for web-site development services. The shares were valued at $0.02 per share (the market price on the date
of the agreement) and $4,000 was recorded as stock-based compensation expense.
On September 20, 2019, the Company issued 100,000
shares of common stock for consulting services. The shares were valued at $0.0142 per share (the market price on the date of the
agreement) and $1,420 was recorded as stock-based compensation expense.
On September 25, 2019, the Company issued 300,000
shares of common stock for consulting services. The shares were valued at $0.009 per share (the market price on the date of the
agreement) and $2,700 was recorded as stock-based compensation expense.
As of September 30, 2019, the Company has
990,000,000, which was increased from 290,000,000 shares on August 25, 2019, (increased to 2,490,000,000 on October 29,
2019) shares of $0.001 par value common stock authorized and there are 70,858,554 shares of common stock issued
and outstanding.
Common stock to be issued
On October 19, 2018, the Company entered into
a consulting agreement Draper (see note 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 nine months ended September 30, 2019, the Company recorded 1,350,000 shares of common stock to be issued, and valued
the shares at $410,370, based on the market price of the common stock on the date of the shares being earned. For the nine months
ended September 30, 2019, the company amortized $461,440 as stock-based compensation expense. As of September 30, 2019, there are
1,350,000 shares of common stock to be issued.
Preferred stock
As of September 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.
On September 18, 2019, the Company filed a
Certificate of Designation with the Secretary of State of Nevada to designate 50,000 shares as Series C Preferred Stock. Each share
of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance,
into one share of fully paid and non-assessable share of common stock. Each share of Series C Preferred Stock shall entitle the
holder thereof to ten thousand (10,000) votes on all matters submitted to a vote of the stockholders of the Company.
On September 19, 2019, the Company issued 50,000
shares of its Series C Preferred Stock to the Company’s CEO and Director, in consideration of the cancellation and return
of 1,000,000 shares of the Company’s Series B Preferred Stock. On September 20, 2019,
the Company filed a Certificate of Withdrawal of Certificate of Designation (the “Certificate of Withdrawal”) for the
Company’s Series B Preferred Stock, pursuant to which the prior designation of the Company’s Series B Stock was cancelled.
As of September 30, 2019, there are 50,000 shares of Series C Preferred Stock outstanding and no shares of Series B Preferred Stock
outstanding.
Stock subscription receivable
On February 9, 2018, the Company recorded a
stock subscription receivable from its officers and directors of $7,600 related to the issuance of 7,600,000 shares of common stock.
NOTE 11 – SEGMENT REPORTING, GEOGRAPHICAL
INFORMATION
For
the three and nine months ended September 30, 2019, the Company operated only in the United States. For the three and nine months
ended September 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
September 30,
2018
|
|
Nine months ended
September 30,
2018
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
28,240
|
|
|
$
|
69,616
|
|
Hong Kong
|
|
$
|
3,466
|
|
|
$
|
48,320
|
|
|
|
$
|
31,706
|
|
|
$
|
117,936
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
28,240
|
|
|
$
|
69,616
|
|
Hong Kong
|
|
$
|
3,466
|
|
|
$
|
10,952
|
|
|
|
$
|
31,706
|
|
|
$
|
80,568
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Total Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,255,507
|
|
|
$
|
658,350
|
|
Hong Kong
|
|
|
371
|
|
|
|
869
|
|
Total Assets
|
|
$
|
6,255,878
|
|
|
$
|
659,219
|
|