NOTE
2 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. On
January 16, 2020, the Company received from SRI notice that the Agreement dated August 23, 2019, between SRI and the Company has
been revoked, as the Company did not cure a payment default within the cure period. As of
March 31, 2020, the Company had a stockholders’ deficit of $9,702,996 and a working capital deficit of $10,062,742. In addition,
the Company has generated losses since inception. These factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to most other countries
and infections have been reported globally. Because COVID-19 infections have been reported throughout the United States, certain
federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing
the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will
depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the
COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional
preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued
business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it
may have a material adverse impact on our business, financial condition and results of operations. Management expects that its
business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business
and the duration for which it may have an impact cannot be determined at this time.
Management’s
Plans
As
a public company, management believes it will be able to access the public equities market
for fund raising for product development and regulatory approvals, sales and marketing and as we expand our distribution in the
US market, we will need to meet increasing inventory requirements.
On
February 28, 2020, the Company entered into the LOI with PCTI, and Chis, PCTI’s CEO and its sole shareholder (see Note 1).
The
accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting
only of normal recurring accruals) to present the financial position of the Company as of March 31, 2020, and the results of operations
and cash flows for the periods presented. The results of operations for the three months ended March 31, 2020, 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 May 14, 2020.
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, LLC (“Spinus”). All intercompany accounts and
transactions have been eliminated in consolidation.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally
insured limits
Sales
Concentration and credit risk
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three months ended
March 31, 2020, and 2019, and their accounts receivable balance as of March 31, 2020:
|
|
Sales % Three
Months Ended
March 31, 2020
|
|
|
Sales % Three
Months Ended
March 31, 2019
|
|
|
Accounts
receivable balance
March 31, 2020
|
|
Customer A
|
|
|
N/A
|
|
|
|
100
|
%
|
|
$
|
-0-
|
|
Accounts
Receivable
The
Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through
a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes
collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated
losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience.
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 months ended March 31,
2020, and 2019:
|
|
Purchase % Three
Months Ended
March 31, 2020
|
|
|
Purchase % Three
Months Ended
March 31, 2019
|
|
Supplier A
|
|
|
N/A
|
|
|
|
100
|
%
|
Property,
plant and equipment
Property
and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets.
The
Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the
carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Office equipment
|
|
$
|
9,590
|
|
|
$
|
9.590
|
|
Less: Accumulated Depreciation
|
|
|
(6,253
|
)
|
|
|
(5,589
|
)
|
Property and Equipment, Net
|
|
$
|
3,337
|
|
|
$
|
4,001
|
|
Depreciation
expense was $664 and $799 for the three months ended March 31, 2020, and 2019, respectively.
Intangible
Assets
Intangible
assets primarily represent purchased patent and license rights. The Company amortizes these costs over the shorter of the legal
life of the patent or its estimated economic life using the straight-line method. The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets. For the year ended December 31, 2019,
the Company impaired $44,200 of tradenames as management has decided not to go forward with the use of the trade name Spinus.
For the three months ended March 31, 2020, and
2019, the Company recorded amortization expense of $10,418 and $10,417, respectively. In accordance with ASC 350, “Intangibles—Goodwill
and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are
tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.
Goodwill
Goodwill
is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and
liabilities assumed in a business acquisition. During the year ended December 31, 2019, the Company recorded goodwill of $2,277,168,
included in assets of discontinued operations in the accompanying balance sheet at December 31, 2019, related to the SRI transaction.
The Company reviews the goodwill allocated to each of our reporting units for possible impairment annually and whenever events
or changes in circumstances indicate carrying amount may not be recoverable. When assessing goodwill for impairment, the Company
has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination
that it is more likely than not that the fair value of a reporting unit is less than its’ carrying amount. If, after assessing
the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting
unit is less than its’ carrying amount, then the Company performs a two-step impairment test. If the Company concludes otherwise,
then no further action is taken. The Company also has the option to bypass the qualitative assessment and only perform a quantitative
assessment, which is the first step of the two-step impairment test. In the two-step impairment test, the Company measures the
recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value
of the reporting unit. During the year ended December 31, 2019. the Company recorded an
impairment of goodwill of $274,854, for the termination of the SRI License Agreement due to no known future cash flows being provided
by the assets, and as of January 16, 2020, the Company wrote off the remaining Goodwill balance associated with SRI transaction
of $2,002,314.
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.
Discontinued
Operations
In
accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of
an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents
a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components
of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued
operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported
as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the
results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income
(loss) separate from the net income (loss) of continuing operations. .
On
January 16, 2020, the Company pursuant to the termination of the SRI transaction Agreement (see Note 1) which meets the definition
of a discontinued operation. Accordingly, the operating results of the SRI business are reported as a gain from discontinued operations
in the accompanying condensed consolidated financial statements for the three months ended March 31, 2020. For additional information,
see Note 12- Discontinued Operations.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance
obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance
obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. Under ASC 606, revenue
is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service
has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable;
and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of its’ customers.
Revenues from Spinus were $47,602 for the three months ended March 31, 2019, and are recognized as an agent and are recorded at
net. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three months ended
March 31, 2020, and 2019.
Advertising
and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the three months ended March 31, 2020, and 2019, the Company
recorded $-0- and $56,802, respectively, of advertising and marketing expenses.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended
March 31, 2020, and 2019, the Company recorded $-0- and $53,204 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 this note transaction and the effective conversion price embedded in this note. Debt discounts
under these arrangements are amortized over the term of the related debt to their stated date of redemption.
The
Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment
standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at
their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting
liabilities.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
●
|
Level
1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
●
|
Level
3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine
fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets,
accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values
because of the short maturity of these instruments.
The
following table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as
of March 31, 2020, and December 31, 2019, for each fair value hierarchy level:
March 31, 2020
|
|
Derivative
Liabilities
|
|
|
Total
|
|
Level I
|
|
$
|
-
|
|
|
$
|
-
|
|
Level II
|
|
$
|
-
|
|
|
$
|
-
|
|
Level III
|
|
$
|
6,534,591
|
|
|
$
|
6,534,591
|
|
December
31, 2019
|
|
Derivative
Liabilities
|
|
|
Total
|
|
Level
I
|
|
$
|
-
|
|
|
$
|
-
|
|
Level
II
|
|
$
|
-
|
|
|
$
|
-
|
|
Level
III
|
|
$
|
2,462,940
|
|
|
$
|
2,462,940
|
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers
it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax
benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred
as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of
the reporting periods presented.
Foreign
Currency Translation
The
accounts of the Company’s Hong Kong subsidiary are maintained in Hong Kong dollars and the accounts of the U.S. companies
are maintained in USD. The accounts of the Hong Kong subsidiary were translated into USD in accordance with Accounting Standards
Codification (“ASC”) Topic 830, Foreign Currency Matters. According to Topic 830, all assets and liabilities were
translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and statement
of comprehensive income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments
are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting
from the foreign currency transactions are reflected in the statements of comprehensive income.
Relevant
exchange rates used in the preparation of the consolidated financial statements are as follows for the periods ended March 31,
2020 and December 31, 2019, (Hong Kong dollar per one U.S. dollar):
|
|
March
31,2020
|
|
|
December
31,2019
|
|
Balance sheet date
|
|
|
.1290
|
|
|
|
.1284
|
|
Average rate for statements of operations and comprehensive loss
|
|
|
.1287
|
|
|
|
.1276
|
|
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during
each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of March 31, 2020, and 2019,
the Company’s dilutive securities are convertible into approximately 469,312,620 and 2,045 shares of common stock, respectively.
This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. The following
table represents the classes of dilutive securities as of March 31, 2020, and December 31, 2019:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Common stock to be issued
|
|
|
1,350
|
|
|
|
450
|
|
Convertible preferred stock
|
|
|
50,000
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
469,261,270
|
|
|
|
4,035,679
|
|
|
|
|
469,312,620
|
|
|
|
4,036,129
|
|
Recent
Accounting Pronouncements
There
have no recent accounting pronouncements or changes in accounting pronouncements during the period ended March 31, 2020, that
are of significance or potential significance to the Company.
NOTE
4 – INTANGIBLE ASSETS
Patents
as of March 31, 2020, and December 31, 2019, consist of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Patents and license rights
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Accumulated amortization
|
|
|
(88,543
|
)
|
|
|
(78,125
|
)
|
Net carrying amount
|
|
$
|
161,457
|
|
|
$
|
171,875
|
|
Amortization
expense for the three months ended March 31, 2020, and 2019, was $10,418 and $10,417, respectively.
NOTE
5 - CONVERTIBLE NOTES PAYABLE
During
the year ended December 31, 2017, OZOP issued 19 convertible promissory notes (the “2017 Notes”), in amounts of $10,000
to $50,000. OZOP received proceeds of $710,000 in the aggregate. The 2017 Notes matured on their one- year anniversary and bear
interest at ten percent (10%). The initial conversion feature allowed the holders to convert this 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 this notes represented an embedded derivative since this note
were convertible into a variable number of shares upon conversion. Accordingly, on April 13, 2018, this note 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 this 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 this note. Such
discount was amortized from the date of issuance to the maturity dates of this 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 this note resulted in an initial debt discount of $620,075, interest expense
of $14,000 and initial derivative liability of $634,075. On August 29, 2019, pursuant to a Debt Purchase Agreement, one investor
sold the principal balance of $15,000, accrued and unpaid interest of $2,624 and a repayment balance of $5,250 to third party
investor, for a total purchase price of $22,874 (see below). Also, on August 29, 2019, pursuant to a Debt Purchase Agreement,
a second investor sold the principal balance of $25,000, accrued and unpaid interest of $4,248 and a repayment balance of $8,750
to third party investor, for a total purchase price of $37,998 (see below). On February 18, 2020, an investor purchased two $50,000
convertible notes from investors (see below). As of March 31, 2020, and December 31, 2019, the outstanding principal balance of
the 2017 Notes was $75,000 and $175,000, respectively.
On
April 13, 2018, we issued a convertible promissory note in the principal amount of $442,175, pursuant to a Securities Purchase
Agreement we entered into with an investor dated April 1, 2018. This note bears interest at the rate of 12% per annum and is due
and payable on April 13, 2019. This note is convertible at any time following the funding of this 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. This 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 this
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
this note is satisfied in full. On June 28, 2018, this 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. The embedded conversion feature included in this note resulted in an initial debt discount of $359,500 interest expense
of $150,730 and an initial derivative liability of $510,230. During the year ended December 31, 2019, the investor sold $30,000
of this note to another investor. This note is in default and during the year ended December 31, 2019, the Company recorded additional
interest expense of $26,188 and added that amount to the principal amount outstanding. As of March 31, 2020, and December 31,
2019, the outstanding principal balance and carrying value of this note was $78,563. The balance of this note was converted during
the three months ended June 30, 2020.
In
connection with our obligations under this note, our executive officers at the time, and the Company entered into a Pledge Agreement
(the “Pledge Agreement”) whereby they pledged as collateral for this note an aggregate of 19,900 shares of our common
stock and we pledged the shares of our subsidiary OZOP Surgical, Inc. (collectively, the “Collateral”). Upon a default
under the terms of this note, the investor may, among other things, collect or take possession of the Collateral, proceed with
the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
On
August 29, 2018, we issued a convertible promissory note in the principal amount of $339,250, pursuant to a Securities Purchase
Agreement we entered into with the investor. This note bears interest at the rate of 12% per annum and is due and payable on August
29, 2019. This note is convertible at any time following the funding of this 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.
This 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 this 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 this note is
satisfied in full. From time to time the investor waives any Repayment Amount for a period of time as agreed upon. The embedded
conversion feature included in this note resulted in an initial debt discount of $280,000 interest expense of $112,403 and an
initial derivative liability of $392,403. This note is in default and during the year ended December 3, 2019, the Company recorded
additional interest expense of $87,390 and added that amount to the principal amount outstanding. For the three months ended March
31, 2020, the investor converted a total of $10,044 of the face value and $2,899 of accrued interest into 428,477 shares of common
stock. As of March 31, 2020, and December 31, 2019, the outstanding principal balance and carrying value of this note was $177.086
and $187,130, respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
November 15, 2018, the Company issued a 12% convertible promissory note, in the principal amount of $500,000, pursuant to a Securities
Purchase Agreement we entered into with the investor. This note matures November 15, 2019. This note is convertible into shares
of the Company’s common stock beginning on the date which is 180 days from the issuance date of this 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 this 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 this note. Pursuant to this note, the Company agreed to include on its next registration statement filed with
the Securities and Exchange Commission, all shares issuable upon conversion of this note. Pursuant to the Security Agreement,
all of the obligations under this 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. This 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 this note resulted in an initial debt discount and derivative liability of $363,806. For the three months
ended March 31, 2020, the investor converted a total of $12,446 of the face value and $32,879 of accrued interest and fees into
695,877 shares of common stock. As of March 31, 2020, and December 31, 2019, the outstanding principal balance and carrying value
of this note was $432,914 and $445,360, respectively. The balance of this note was converted during the three months ended June
30, 2020.
On
January 7, 2019, the Company issued an 8% convertible promissory note, in the principal amount of $150,000, pursuant to a Securities
Purchase Agreement we entered into with the investor. This note matured January 7, 2020. This note is convertible into shares
of the Company’s common stock beginning on the date which is 180 days from the issuance date of this 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 this 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 this note. This 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 this note
resulted in an initial debt discount and derivative liability of $111,500. For the three months ended March 31, 2020, amortization
of the debt discounts of $2,416 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding
principal balance of this note was $150,000 with a carrying value of $150,000 and $147,584, as of March 31, 2020, and December
31, 2019, respectively.net of unamortized discounts of $2,416. The balance of this note was converted during the three months
ended June 30, 2020.
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 this note. On February 8, 2019, the
Investor funded the first tranche under the Master Note, with a maturity date of February 8, 2020, and the Company received $49,500
($47,500 after payment of $2,000 of the Investor’s legal fees) for this first tranche of $55,000 under the Master Note and
on the same date, the Company issued this note to the Investor. This 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 three months ended March 31, 2020, amortization of the debt discounts of $4,496 was
charged to interest expense. For the three months ended March 31, 2020, the investor converted a total of $4,905 of the face value
and $1,500 of fees into 349,000 shares of common stock. As of March 31, 2020, and December 31, 2019, the outstanding principal
balance of the Master Note was $6,735 and $11,640, respectively, with a carrying value as of March 31, 2020, and December 31,
2019, of $6,735 and $7,144, respectively. The balance of this note was converted during the six months ended June 30, 2020. In
connection with the issuance of this Note, the Company issued warrants to acquire 55,000 shares of common stock, for a three-year
period with an exercise price of $1,50 per share, subject to price adjustments. For the three months ended March 31, 2020, the
Company valued the warrant on the Black Shoals option pricing model at $12,962 and recorded the amount as derivative expense with
the offset to derivative liabilities.
On
March 7, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $85,000, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This 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 this
note is received by the Company. This 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 this note
resulted in an initial debt discount and derivative liability of $77,394. For the three months ended March 31, 2020, amortization
of the debt discounts of $15,714 was charged to interest expense. For the three months ended March 31, 2020, the investor converted
a total of $31,800 of the face value and $4.327 of accrued interest into 446,416 shares of common stock. As of March 31, 2020,
and December 31, 2019, the outstanding principal balance of this note was $-0- and $31,800, respectively, with a carrying value
as of December 31, 2019, of $16,086, net of unamortized discounts of $15,714.
On
May 29, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $80,000, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This 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 this
note is received by the Company. This 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 this note
resulted in an initial debt discount and derivative liability of $70,418. For the three months ended March 31, 2020, amortization
of the debt discounts of $19,280 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding
principal balance of this note was $80,000 with a carrying value of $67,259 and $47,979, net of unamortized discounts of $12,741
and $32,021, respectively. During the three months ended June 30, 2020, the investor converted a portion and sold the balance
of this note to a third party.
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. The Purchaser paid $93,391 to acquire this note. This note matures 12 months after the date
of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days
from the issuance date of this 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. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $93,391. During
the three months ended June 30, 2020, the Purchaser sold this note to a third-party investor.
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. The Purchaser paid $77,000 to acquire this note. This note matures 12 months after the date
of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days
from the issuance date of this 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. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $77,000. During
the three months ended June 30, 2020, the Purchaser sold this note to a third-party investor.
On
July 22, 2019, the Company issued a 10% convertible promissory note, in the principal amount of $38,900, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This 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 this note is received by the
Company. This 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 this note resulted in an initial
debt discount and derivative liability of $31.452. For the three months ended March 31, 2020, amortization of the debt discounts
of $10,088 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of
this note was $38,900 with a carrying value of $26,401 and $16,313, net of unamortized discounts of $12,499 and $22,587, respectively.
The balance of this note was converted during the three months ended June 30, 2020.
On
August 2, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $157,500, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible
into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this 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. This 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 this note resulted in an initial debt discount and derivative liability of $125,982. For the three
months ended March 31, 2020, amortization of the debt discounts of $33,371 was charged to interest expense. For the three months
ended March 31, 2020, the investor converted a total of $17,650 of the face value and $1,303 of accrued interest into 788,350
shares of common stock. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of this note was $139,850
and $157,500, respectively, with a carrying value of $95,377 and $79,656, net of unamortized discounts of $44,473 and $77,844,
respectively.
On
August 21, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $55,125, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible
into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this 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. This 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 this note resulted in an initial debt discount and derivative liability of $47,117.
For the three months ended March 31, 2020, amortization of the debt discounts of $33,479 was charged to interest expense. For
the three months ended March 31, 2020, the investor converted a total of $3,825 of the face value and $247 of accrued interest
into 77,144 shares of common stock, and on March 9, 2020, sold the remining portion of this note to a third part investor (see
below) for $76,000. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $55,125,
respectively, with a carrying value of $21,646, as of December 31, 2019, net of unamortized discounts of $33,479. The Company
also issued a warrant for $25,000 to the investor in consideration of the sale of this note. The Company valued the warrant based
on the Back Scholes option pricing model of $56,049 and recorded the amount to derivative expense with the offset to derivative
liabilities.
On
August 19, 2019, the Company issued an 8% convertible promissory note, in the principal amount of $85,000, pursuant to a Securities
Purchase Agreement we entered into with the investor. This note matures May 19, 2020. This note is convertible into shares of
the Company’s common stock beginning on the date which is 180 days from the issuance date of this 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 this 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 this note. This 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 this note
resulted in an initial debt discount and derivative liability of $54,802. For the three months ended March 31, 2020, amortization
of the debt discounts of $21,601 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding
principal balance of this note was $85,000 with a carrying value of $72,945 and $51,344, net of unamortized discounts of $12,055
and $33,656, respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
August 23, 2019, the Company issued to a third-party investor a convertible redeemable promissory note with a face value of $37,800,
including an original issue discount of $1,800. This note matures on May 23, 2020, has a stated interest of 10% and is convertible
into a variable number of the Company’s common stock, based on a conversion ratio of 58% of the average of the two lowest
trading prices for the 20 days prior to conversion. This 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
this note resulted in an initial debt discount and derivative liability of $32,229. For the three months ended March 31, 2020,
amortization of the debt discounts of $12,176 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the
outstanding principal balance of this note was $37,800 with a carrying value of $30,737 and $18,561, net of unamortized discounts
of $7,063 and $19,239, respectively. During the three months ended June 30, 2020, the investor converted a portion of this note
and sold the balance of this note to a third party.
On
August 29, 2019, the Company issued a 10% convertible promissory note, in the principal amount of $45,000, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible
into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this 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. This 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 this note resulted in an initial debt discount and derivative liability of $35,794. For the three
months ended March 31, 2020, amortization of the debt discounts of $10,199 was charged to interest expense. As of March 31, 2020,
and December 31, 2019, the outstanding principal balance of this note was $45,000 with a carrying value of $28,632 and $18,434,
net of unamortized discounts of $16,368 and $26,566, respectively. The balance of this note was converted during the three months
ended June 30, 2020.
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 this note. This note, as amended,
is convertible into common stock at a conversion price equal to a 35% discount to the average of the 3 lowest closing prices of
the common stock for fifteen prior trading days including the day upon which a notice of conversion is received. The embedded
conversion feature pursuant to the Assignment Agreement resulted in an initial debt discount and derivative liability of 13,793.
For the year ended December 31, 2019, amortization of the debt discounts of $13,793 was charged to interest expense. For the three
months ended March 31, 2020, the investor converted a total of $15,874 of the face value and $968 of accrued interest into 217,331
shares of common stock. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $-0-
and $15,874, respectively.
On
August 29, 2019, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note
issued by the Company on October 2, 2017 (see above). The Purchaser paid $37,998 to acquire this note. This note, as amended,
is convertible into common stock at a conversion price equal to a 35% discount to the average of the 3 lowest closing prices of
the common stock for fifteen prior trading days including the day upon which a notice of conversion is received. The embedded
conversion feature pursuant to the Assignment Agreement resulted in an initial debt discount and derivative liability of $22,953.
For the three months ended March 31, 2020, the investor converted a total of $5,000 of the face value into 117,494 shares of common
stock As of March 31, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $32,998 and $37,998,
respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
October 1, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $68,000, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible
into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at
a conversion price equal to 61% multiplied by the lowest closing bid price during the 20- trading day period ending on the last
completed trading date in the OTC Markets prior to the date of conversion. This note was funded on October 2, 2019, when the Company
received proceeds of $65,000 after disbursements for the lender’s transaction costs, fees and expenses of $3,000, which
were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature
included in this note resulted in an initial debt discount and derivative liability of $52,457. For the year ended December 31,
2019, amortization of the debt discounts of $13,864 was charged to interest expense. As of March 31, 2020, and December 31, 2019,
the outstanding principal balance of this note was $68,000 with a carrying value of $40,280 and $26,416, net of unamortized discounts
of $27,720 and $41,584, respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
October 8, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $66,000, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible
into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the two lowest trading prices
of the Company’s common stock for the previous 20 trading day period ending on the date the notice of conversion of this
note is received by the Company. This note was funded on October 10, 2019, when the Company received proceeds of $57,000 after
OID of $6,000, and disbursements for the lender’s transaction costs, fees and expenses of $2,300, which were recorded as
discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in
this note resulted in an initial debt discount and derivative liability of $52,281. For the three months ended March 31, 2020,
amortization of the debt discounts of $15,320 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the
outstanding principal balance of this note was $66,000 with a carrying value of $33,772 and $18,452, net of unamortized discounts
of $32,228 and $47,548, respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
October 24, 2019, the Company issued a convertible promissory note in the principal amount of $248,400, pursuant to a Securities
Purchase Agreement we entered into with the investor. This note bears interest at the rate of 12% per annum and matures 12 months
after the date of issuance. This note is convertible at any time following the funding of this note into a variable number of
the Company’s common stock, based on a conversion ratio of 60% of the lowest trading price for the 25 days prior to conversion.
This note was funded on October 28, 2019, when the Company received proceeds of $200,000, after OID of $32,400, and disbursements
for the lender’s transaction costs, fees and expenses of $16,000, which were recorded as discounts against the debt to be
amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in an initial
debt discount and derivative liability of $203,637. For the three months March 31, 2020, amortization of the debt discounts of
$63,009 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of this
note was $248,400, with a carrying value of $89,277 and $26,717, net of unamortized discounts of $158,673 and $221,683, respectively.
During the three months ended June 30, 2020, the investor converted a portion of this note and sold the balance of this note to
a third party.
On
October 24, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $225,000, pursuant to a Securities
Purchase Agreement we entered into with the investor. This note matures October 24, 2020. This note is convertible into shares
of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion
price equal to the lesser of (1) $0.05 and (2) 58% multiplied by the average of the 2 lowest trading prices of the Company’s
common stock during the 20 day trading period ending on the latest completed trading day of the common stock prior to the date
of conversion of this note. This note was funded on October 31, 2019, when the Company received proceeds of $202,250 after OID
of $20,000, and disbursements for the lender’s transaction costs, fees and expenses of $2,750, which were recorded as discounts
against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note
resulted in an initial debt discount and derivative liability of $144,302. For the three months ended March 31, 2020, amortization
of the debt discounts of $41,738 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding
principal balance of this note was $225,000 with a carrying value of $119,049 and $77,311, net of unamortized discounts of $105,951
and $147,689, respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
October 25, 2019, the Company issued a convertible promissory note in the principal amount of $36,750, pursuant to a Securities
Purchase Agreement we entered into with the investor. This note bears interest at the rate of 12% per annum and matures 12 months
after the date of issuance. This note is convertible at any time following the funding of this note into a variable number of
the Company’s common stock, based on a conversion ratio of 58% of the average of the two lowest closing bid prices for the
20 days prior to conversion. This note was funded on October 25, 2019, when the Company received proceeds of $33,000, after OID
of $1,750, and disbursements for the lender’s transaction costs, fees and expenses of $2,000, which were recorded as discounts
against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note
resulted in an initial debt discount and derivative liability of $31,316. For the three months March 31, 2020, amortization of
the debt discounts of $8,767 was charged to interest expense. As of March 31, 2020, and December 31, 2019, the outstanding principal
balance of this note was $36,750, with a carrying value of $14,411 and $5,644, net of unamortized discounts of $22,340 and $31,106,
respectively. The balance of this note was converted during the three months ended June 30, 2020.
On
November 27, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $53,000, pursuant to a Securities
Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible
into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at
a conversion price equal to 56% multiplied by the lowest closing bid price during the 20- trading day period ending on the last
completed trading date in the OTC Markets prior to the date of conversion. This note was funded on December 2, 2019, when the
Company received proceeds of $50,000 after disbursements for the lender’s transaction costs, fees and expenses of $3,000,
which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion
feature included in this note resulted in an initial debt discount and derivative liability of $49,808. For the three months ended
March 31, 2020, amortization of the debt discounts of $13,202 was charged to interest expense. As of March 31, 2020, and December
31, 2019, the outstanding principal balance of this note was $53,000 with a carrying value of $17,828 and $4,626, net of unamortized
discounts of $35,172 and $48,374, respectively. During the three months ended June 30, 2020, the investor sold this note a third-party
investor.
On
January 8, 2020, the Company entered into a securities purchase agreement (the “SPA”) with an investor (the “Investor”),
pursuant to which the Company agreed to issue to the Investor a 12% Convertible Promissory Note, in the principal amount of $38,000
in exchange for a purchase price of $35,000. This note was funded by the Investor on January 13, 2020, and on such date pursuant
to the SPA, the Company reimbursed the Investor for expenses for legal fees and due diligence of $3,000. This note proceeds will
be used by the Company for general working capital purposes. The SPA includes customary representations, warranties and covenants
by the Company and customary closing conditions. The embedded conversion feature included in this note resulted in an initial
debt discount and derivative liability of $29,063. For the three months ended March 31, 2020, amortization of the debt discounts
of $7,348 was charged to interest expense. As of March 31, 2020, the outstanding principal balance of this note was $38,000 with
a carrying value of $13,285, net of unamortized discounts of $24,715. During the three months ended June 30, 2020, the investor
sold this note a third-party investor.
On
February 18, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note
issued by the Company on August 18, 2017 (see above). The Purchaser agreed to pay $50,000 to acquire this note. This note, as
amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common
stock for thirty prior trading days including the day upon which a notice of conversion is received. For the three months ended
March 31, 2020, the Company recorded additional interest expense of $111,350 due to various defaults of this note and the amount
was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to the Assignment Agreement resulted
in interest expense of $607,950 with the offset recorded to derivative liabilities. For the three months ended March 31, 2020,
the investor converted a total of $29,249 accrued interest and fees into 1,533,400 shares of common stock. As of March 31, 2020,
the outstanding principal balance of assigned note was $161,350. A portion of the balance of this note was converted during the
three months ended June 30, 2020.
Also,
on February 18, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible
note issued by the Company on August 18, 2017 (see above). The Purchaser agreed to pay $50,000 to acquire this note. This note,
as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the
common stock for thirty prior trading days including the day upon which a notice of conversion is received. For the three months
ended March 31, 2020, the Company recorded additional interest expense of $111,350 due to various defaults of this note and the
amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to the Assignment Agreement
resulted in interest expense of $607,950 with the offset recorded to derivative liabilities. As of March 31, 2020, the outstanding
principal balance of assigned note was $161,350. A portion of the balance of this note was converted during the three months ended
June 30, 2020.
On
February 26, 2020, the Company entered into a securities purchase agreement (the “SPA”) with an investor (the “Investor”),
pursuant to which the Company agreed to issue to the Investor a 12% secured convertible promissory note in the aggregate principal
amount of $132,750 in exchange for a purchase price of $117,750. Pursuant to the SPA, the Company agreed to pay the Investor $15,000
to cover the Investor’s due diligence expenses incurred in connection with the SPA and Note, which is to be offset against
the proceeds of this note. This note was funded by the Investor on February 26, 2020, and on such date pursuant to the SPA, the
Company reimbursed the Investor for expenses for legal fees and due diligence of $2,750. This note proceeds will be used by the
Company for general working capital purposes. The SPA includes customary representations, warranties and covenants by the Company
and customary closing conditions. The embedded conversion feature included in this note resulted in an initial debt discount and
derivative liability of $86,001. For the three months ended March 31, 2020, amortization of the debt discounts of $8,646 was charged
to interest expense. As of March 31, 2020, the outstanding principal balance of this note was $132,750 with a carrying value of
$37,645, net of unamortized discounts of $95,105.
On
February 26, 2020, the Company and an investor (the “Investor”) agreed to convert $330,000 of notes payable into a
12% convertible note with a face value of $330,000. This note is convertible into common stock at a conversion price equal to
a 44% discount to the lowest trading price of the common stock for the 20 prior trading days including the day upon which a notice
of conversion is received. The embedded conversion feature included in this note resulted in an initial derivative expense of
$365,757 with the offset to derivative liabilities. On March 3, 2020, a third-party investor (the “Purchaser”), pursuant
to a Debt Purchase Agreement, purchased this note. This note, as amended, is convertible into common stock at a conversion price
equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon
which a notice of conversion is received. For the three months ended March 31, 2020, the Company recorded additional interest
expense of $25,000 due to a default of this note and the amount was added to the principal balance owed the Purchaser. The embedded
conversion feature pursuant to the Assignment Agreement resulted in an initial derivative expense of $1,321,618 with the offset
recorded to derivative liabilities. As of March 31, 2020, the outstanding principal balance of assigned note was $355,000.
On
March 9, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note issued
by the Company on August 21, 2019 (see above). The Purchaser paid $76,000 to acquire this note. This note, as amended, is convertible
into common stock at a conversion price equal to a 50% discount to the lowest closing prices of the common stock for thirty 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 76,000. For the three months ended March
31, 2020, amortization of the debt discounts of $6,365 was charged to interest expense. For the three months ended March 31, 2020,
the investor converted a total of $4,403 of the face value and $2,000 of fees into 285,901 shares of common stock. As of March
31, 2020, the outstanding principal balance of assigned note was $71,597, with a carrying value of $1,962, net of unamortized
discounts of $69,635. The balance of this note was converted during the three months ended June 30, 2020.
On
March 9, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, in the principal amount
of $80,000, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s
common stock beginning on the Issuance Date at $.25 for the first three months after the Issuance Date. After the first three
months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.25 or 50% of the lowest trading price
for the thirty trading days prior to the conversion. The embedded conversion feature included in this note resulted in an initial
debt discount and derivative liability of $57,000. For the three months ended March 31, 2020, amortization of the debt discounts
of $8,933 was charged to interest expense. As of March 31, 2020, the outstanding principal balance of this note was $80,000 with
a carrying value of $8,933, net of unamortized discounts of $71,067.
A
summary of the convertible note balance as of March 31, 2020, and December 31, 2019, is as follows:
|
|
March 31, 2020
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Principal balance
|
|
$
|
3,247,433
|
|
|
$
|
2,500,230
|
|
Unamortized discount
|
|
|
(747,806
|
)
|
|
|
(806,003
|
)
|
Ending balance, net
|
|
$
|
2,499,627
|
|
|
$
|
1,694,227
|
|
NOTE
6 – DERIVATIVE LIABILITIES
The
Company determined the conversion feature of this notes, which contain a variable conversion rate, represented an embedded derivative
since the notes were convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to
be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for as
a derivative liability.
The
Company valued the derivative liabilities at March 31, 2020, and December 31, 2019, at $6,534,591 and $2,462,490, respectively.
The Company used the Monte Carlo simulation valuation model with the following assumptions as of March 31, 2020, risk free interest
rates from 0.15% to 0.17%, and volatility of 67% to 75% and as of December 31, 2019, risk-free interest rates from 1.57% to 1.77%
and volatility of 31% to 36%. The initial derivative liabilities for convertible notes issued during the three months ended March
31, 2020, used the following assumptions; risk-free interest rates from 0.12% to 1.57% and volatility of 36% to 70%.
A
summary of the activity related to derivative liabilities for the three months ended March 31, 2020, and the year ended December
31, 2019, is as follows:
Balance- January 1, 2019
|
|
$
|
1,199,514
|
|
Issued during period
|
|
|
1,460,123
|
|
Converted or paid
|
|
|
(850,248
|
)
|
Change in fair value recognized in operations
|
|
|
653,551
|
|
Balance- December 31, 2019
|
|
|
2,462,940
|
|
Issued during the period
|
|
|
3,295,095
|
|
Converted or paid
|
|
|
(757,617
|
)
|
Change in fair value recognized in operations
|
|
|
1,534,173
|
|
Balance December 31, 2019
|
|
$
|
6,534,591
|
|
NOTE
7 – NOTES PAYABLE
The
Company has the following note payables outstanding:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Note payable, interest at 8%, matured September 6, 2018, in default
|
|
$
|
-
|
|
|
$
|
330,033
|
|
Notes payable, interest at 8%, matures January 5, 2020, currently in default
|
|
|
45,000
|
|
|
|
45,000
|
|
Other, due on demand, interest at 6%
|
|
|
50,000
|
|
|
|
50,000
|
|
Total notes payable
|
|
$
|
95,000
|
|
|
$
|
425,033
|
|
On
February 26, 2020, the Company and this noteholder agreed to convert $330,033 of principal note balances to a 12% convertible
note with a face value of $330,000 (see Note 5).
NOTE
8 – RELATED PARTY TRANSACTIONS
Employment
Agreement
On
February 28, 2020, the Company and Mr. Conway entered into an employment agreement (the “Employment Agreement”). Pursuant
to the terms of the Employment Agreement, Mr. Conway is to receive an annual salary of $120,000, for his position of CEO of the
Company, payable monthly. Mr. Conway was also issued 2,500 shares of Series C Preferred Stock. The Company valued the shares at
$5,000.
Management
Fees and related party payables
For
the three months ended March 31, 2020, and 2019, the Company recorded expenses to its officers in the following amounts:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
CEO (incudes $5,000 stock-based compensation)
|
|
$
|
15,000
|
|
|
$
|
-
|
|
CEO, former
|
|
|
22,505
|
|
|
|
45,000
|
|
COO, former
|
|
|
-
|
|
|
|
45,000
|
|
CFO, former
|
|
|
20,000
|
|
|
|
30,000
|
|
Total
|
|
$
|
57,505
|
|
|
$
|
120,000
|
|
As
of March 31, 2020, and December 31, 2019, included in accounts payable and accrued expenses, related party is $456,185 and $470,886,
respectively, for the following amounts owed the Company’s former officers for accrued fees, accounts payable and loans
made. The loans have no terms of repayment.
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Former CEO, former (1)
|
|
$
|
9,630
|
|
|
$
|
125
|
|
Former CEO, subsidiary (2)
|
|
|
145,370
|
|
|
|
144,639
|
|
Former COO and CCO (3)
|
|
|
162,085
|
|
|
|
162,085
|
|
Former COO (4)
|
|
|
112,500
|
|
|
|
112,500
|
|
Former CFO (5)
|
|
|
26,500
|
|
|
|
51,537
|
|
CEO
|
|
|
100
|
|
|
|
-
|
|
Total
|
|
$
|
456,185
|
|
|
$
|
470,866
|
|
(1)The
former CEO, parent resigned February 28, 2020, pursuant to the LOI with PCTI.
(2)
The former CEO, subsidiary resigned on March 4, 2019.
(3)
The Former COO and CCO resigned from those positions on October 1, 2018, and March 4, 2019, respectively.
(4)
The former COO resigned on October 23, 2019.
(5)
The former CFO resigned effective February 28, 2020, pursuant to the LOI with PCTI.
Other
On
February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the
issuance of 7,600,000 shares of common stock.
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Licenses
On
February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The
Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms
of the Licensing Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive
rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The Company paid
the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of net sales on any product sold utilizing any of
the patents. There have not been any sales of the licensed products and accordingly, no royalties have been incurred.
Consulting
Agreements
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. As of March 31, 2020, and December 31, 2019, the balance owed Mr. Chaudhry
is $162,085.
On
March 24, 2019, the Company and Newbridge Securities Corporation (“Newbridge”) entered into an Investment Banking
Engagement Agreement (the “Agreement”). Under the terms of the Agreement, Newbridge will provide investment banking
and financial advisory services to the Company, including, but not limited to assisting the Company with an up-listing process
to a national exchange in the United States, introducing the Company to other investment banking firms focused on servicing emerging
growth companies; rendering advice related to capital structures, capital market opportunities, evaluating potential capital raise
transactions and assisting the Company to develop growth optimization strategies. The term of the Agreement is 12 months from
the date of the Agreement, however either party may terminate the Agreement anytime upon 15 days written notice. As compensation
for its services under the Agreement, Newbridge and its assignees received 172 shares of the Company’s common stock. The
Agreement contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes
customary representations, warranties and covenants by the Company. The Company valued the shares at $77,130, based on the market
price of the common stock on the date of the agreement, to be amortized over the one-year term of the contract. For the three
months ended March 31, 2020, the Company amortized $17,783 as stock-based compensation expense. As of March 31, 2020, the expense
has been fully recognized.
On
September 2, 2019, the Company entered Consulting Agreement (the “Agreement”) with a consultant to act as the Company’s
Executive Vice President, Sales and Marketing (the “EVP”) through December 31, 2019, and to provide the Company with
customary services of an EVP. The Company has agreed to compensate the consultant $10,000 per month. Either party may terminate
the Agreement in its sole and absolute discretion. The parties have agreed that they will negotiate follow up agreement with terms
and conditions to include salary, commission, bonuses and stock and or option grants or awards, to be consistent with industry
standards for like size companies prior to the termination of the Agreement. For the year ended December 31, 2019, the Company
has expensed $30,000. As of March 31, 2020, and December 31, 2019, the Company owes the EVP $10,000, included in liabilities of
discontinued operations.
On
September 3, 2019, the Company entered into an Investor Relations Agreement (the “Agreement”) with a consultant. Under
the terms of the Agreement, the consultant will provide consulting services to the Company, including, but not limited to assisting
the Company in the conception and implementation of the Company’s corporate and business development plan. The term of the
Agreement is 6 months from the date of the Agreement. As compensation for its services under the Agreement, the consultant received
1,250 shares of the Company’s common stock. The Agreement contains customary terms relating to payment of expenses, indemnification
and other matters. The Agreement also includes customary representations, warranties and covenants by the Company. The Company
valued the shares at $46,875, based on the market price of the common stock on the date of the agreement, to be amortized over
the term of the contract. For the three months ended March 31, 2020, the Company amortized $15,625 as stock-based compensation
expense. As of March 31, 2020, the expense has been fully recognized.
On
September 3, 2019, the Company entered into a Consulting Agreement (the “Agreement”) with a consultant. Under the
terms of the Agreement, the consultant will provide consulting services to the Company, including, but not limited to assisting
the Company in its general strategy for corporate communications. The term of the Agreement is 6 months from the date of the Agreement.
As compensation for its services under the Agreement, the consultant received 1,250 shares of the Company’s common stock.
The Agreement contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also
includes customary representations, warranties and covenants by the Company. The Company valued the shares at $46,875, based on
the market price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the three
months ended March 31, 2020, the Company amortized $15,625 as stock-based compensation expense. As of March 31, 2020, the expense
has been fully recognized.
NOTE
10 - INCOME TAXES
The
Company was incorporated in the United States and has operations in two tax jurisdictions - the United States and Hong Kong. The
Company’s HK subsidiary is subject to a 16.5% profit tax based on its taxable net profit. The Company’s U.S. operations
are subject to income tax according to U.S. tax law.
A
reconciliation of the provision for income taxes determined at the U.S. statutory rate to the Company’s effective income
tax rate is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Pre-tax loss
|
|
$
|
(5,672,070
|
)
|
|
$
|
(904,155
|
)
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Expected U.S. income tax credit
|
|
|
(1,191,935
|
)
|
|
|
(189,873
|
)
|
Tax rate difference between U.S. and foreign operations
|
|
|
-
|
|
|
|
231
|
|
Permanent differences
|
|
|
1,145163
|
|
|
|
111,325
|
|
Change of valuation allowance
|
|
|
45,972
|
|
|
|
78,317
|
|
Effective tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company had deferred tax assets as follows:
|
|
March
31, 2020
|
|
|
December 31, 2019
|
|
Net operating losses carried forward
|
|
$
|
1,068,042
|
|
|
$
|
1,022,071
|
|
Less: Valuation allowance
|
|
|
(1,068,042
|
)
|
|
|
(1,022,071
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of March 31, 2020, the Company has approximately $4,618,000 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 March 31, 2020, and December 31, 2019, the Company has no material unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods, and does not believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed
on the Company during the three months ended March 31, 2020, and 2019, and no provision for interest and penalties is deemed necessary
as of March 31, 2020, and 2019.
Since
the Company’s foreign subsidiaries have not generated income since inception, the Company believes that Tax Act will not
have significant impact on the Company’s consolidated financial statements.
NOTE
11 – STOCKHOLDERS’ EQUITY
On
January 21, 2020, the Company filed an amendment to its Certificate of Incorporation, with the Nevada Secretary of State, for
1-for-1,000 reverse stock split of our common stock (the “Reverse Stock Split”) effective February 10, 2020. The number
of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of
one- thousand and no fractional shares were issued. All historical share in this report have been adjusted to reflect the Reverse
Stock Split. There were no changes to the authorized number of shares and the par value of our common stock.
Common
stock
On
July 5, 2019, the Company entered into an Equity Financing Agreement (the “Equity Agreement”) with GHS Investments,
LLC, a Nevada limited liability company (the “Investor”), with the Investor committing to purchase up to $7,000,000
of the Company’s common stock in tranches of up to $400,000, following an effective registration of the shares and subject
to restrictions regarding the timing of each sale and total percentage stock ownership held by the Investor. The purchase price
for the shares will be 85% of the lowest closing price during the 10-day period prior to each sale, and with each sale, the Investor
will receive an issuance premium of 5% to cover the Investor’s transaction costs associated with selling the shares and
payable by the Company to the Investor in registered shares. The obligation of the Investor to purchase shares pursuant to the
Equity Agreement is subject to several conditions, including (i) that the Company has filed a registration statement (the “Registration
Statement”) with the United States Securities and Exchange Commission (the “SEC”) registering the shares to
be sold to the Investor within 30 calendar days from the date of the Equity Agreement, with the Registration Statement being declared
effective prior to sale of any shares to the Investor; and (ii) that the purchase of shares by the Investor pursuant to the Equity
Agreement shall not cause the Investor to own more than 4.99% of the outstanding shares of the Company’s common stock.
In
connection with the Equity Agreement, on July 5, 2019, the Company also entered into a Registration Rights Agreement with
the Investor (the “Registration Rights Agreement”). On October 1, 2019, the SEC issued a Notice of Effectiveness of
the Company’s Registration Statement.
During
the three months ended March 31, 2020, holders of an aggregate of $105,947 in principal and $75,373 of accrued interest and fees
of convertible notes issued by the Company, converted their debt into 4,939,400 shares of our common stock at an average conversion
price of $0.0367 per share.
As
of March 31, 2020, the Company has 4,990,000,000 shares of $0.001 par value common stock authorized and there are 5,158,493 shares
of common stock issued and outstanding.
Common
stock to be issued
For
the year ended December 31, 2019, the Company recorded 1,350 shares of common stock to be issued, and valued the shares at $410,370,
based on the market price of the common stock on the date of the shares being earned. For the year ended December 31, 2019, the
company amortized $410,370 as stock-based compensation expense. As of March 31, 2020, and December 31, 2019, there are 1,350 shares
of common stock to be issued.
Preferred
stock
As
of March 31, 2020, 10,000,000 shares have been authorized as preferred stock, par value $0.001 (the “Preferred Stock”),
which such Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of
Directors may determine from time to time.
On
March 28, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 1,000,000 shares
as Series B Preferred Stock. The Series B Preferred Stock is not convertible into common stock, nor does the Series B Preferred
Stock have any right to dividends and any liquidation preference. The Series B Preferred Stock entitles its holder to a number
of votes per share equal to 50 votes. On April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the
Company’s CEO at the time. This resulted in a change in control of the Company.
On
September 18, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 50,000 shares
as Series C Preferred Stock. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof,
at any time after the date of issuance, into one share of fully paid and non-assessable share of common stock. Each share of Series
C Preferred Stock shall entitle the holder thereof to ten thousand (10,000) votes on all matters submitted to a vote of the stockholders
of the Company.
On
September 19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock to the Company’s CEO and Director,
at the time, in consideration of the cancellation and return of 1,000,000 shares of the Company’s Series B Preferred Stock.
On September 20, 2019, the Company filed a Certificate of Withdrawal of Certificate of Designation
(the “Certificate of Withdrawal”) for the Company’s Series B Preferred Stock, pursuant to which the prior designation
of the Company’s Series B Stock was cancelled. As of March 31, 2020, and December 31, 2019, there are 50,000 shares of Series
C Preferred Stock outstanding and no shares of Series B Preferred Stock outstanding.
On
February 4, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s
Series C Preferred Stock. The voting rights associated with the Series C Preferred Stock were amended whereby each share of Series
C Preferred Stock shall entitle the holder thereof to have voting rights equal to two times the sum of all the number of shares
of other classes of Company capital stock eligible to vote on all matters submitted to a vote of the stockholders of the Company,
divided by the number of shares of Preferred Stock issued and outstanding at the time of voting.
On
February 28, 2020, pursuant to a share redemption agreement between the Company and Mr. Chermak pursuant to which, the Company
agreed to redeem his 50,000 shares of Series C Preferred Stock for $100,000, ($2 per share), the Company redeemed 2,500 shares
of series C Preferred Stock from Mr. Chermak, and issued 2,500 shares of Series C Preferred Stock to Mr. Conway, pursuant to Mr.
Conway’s employment agreement. The Company valued the 2,500 shares issued to Mr. Conway at $5,000 ($2 per share).
Stock
subscription receivable
On
February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the
issuance of 7,600 shares of common stock.
NOTE
12 – DISCONTINUED OPERATIONS
ASC
205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group
of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results. As a result, the component’s results
of operations have been reclassified as discontinued operations on a retrospective basis for all periods presented. Accordingly,
the assets and liabilities of this component are separately reported as “assets and liabilities held for disposal”
as of December 31, 2019. The results of operations of this component, for all periods, are separately reported as “discontinued
operations”. There have been no transactions between the Company and SRI since the termination.
A
reconciliation of the major classes of line items constituting the gain from discontinued operations, net of income taxes as is
presented in the Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020, are summarized
below; there was no activity of the SRI business for the three months ended March 31, 2019.
Cost of goods sold
|
|
$
|
4,326
|
|
Operating expenses:
|
|
|
|
|
Depreciation expense
|
|
|
13,805
|
|
Rent expense
|
|
|
2,222
|
|
Interest expense
|
|
|
8.794
|
|
Total operating expenses
|
|
|
24,821
|
|
Loss from discontinued operations
|
|
$
|
(29,147
|
)
|
|
|
|
|
|
Gain from license termination
|
|
$
|
86,856
|
|
Liabilities
of discontinued operations at March 31, 2020, of $75,270 consist of accounts payable and accrued expenses related to SRI.
The
following table presents the reconciliation of carrying amounts of major classes of assets and liabilities of the Company classified
as discontinued operations in the condensed consolidated balance sheet at December 31, 2019:
Carrying amounts of major classes of assets
included as part of assets held for discontinued operations
|
|
|
|
Inventory
|
|
$
|
378,061
|
|
Prepaid expenses
|
|
|
2,987
|
|
Property and equipment, net
|
|
|
353,985
|
|
License rights, net
|
|
|
2,724,848
|
|
Goodwill
|
|
|
2,002,314
|
|
Total assets included in the assets of discontinued operations
|
|
$
|
5,462,195
|
|
Carrying amounts of major classes of liabilities
included as part of liabilities of discontinued operations
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
88,178
|
|
Liability for common stock payable
|
|
|
245,000
|
|
Current portion of notes payable
|
|
|
1,131,771
|
|
Current portion of license fee payable
|
|
|
984,089
|
|
Long term portion of notes payable
|
|
|
1,440
|
|
Long term portion of license fee payable
|
|
|
250,000
|
|
Put option payable
|
|
|
2,892,228
|
|
Total liabilities included in the liabilities of discontinued operations
|
|
$
|
5,592,706
|
|
NOTE
13 – SUBSEQUENT EVENTS
From
April 1, 2020, through June 30, 2020, the Company has issued 1,416,298,485 shares of common stock upon the conversion
of $3,261,774 of principal, accrued interest and fees of convertible notes. The Company also issued 67,606,186
shares of common stock upon the cashless exercise of warrants.
On
April 27, 2020, the Company issued a 15% convertible redeemable note in the principal amount of $60,000. This note matures on
April 27,2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for
the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. The Company received
proceeds of $50,000 on April 27, 2020, and this note included an original issue discount of $10,000. This note proceeds will be
used by the Company for general working capital purposes.
On
April 28, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $53,000,
pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance.
This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the 20- trading day period
ending on the last completed trading date in the OTC Markets prior to the date of conversion. The Company received proceeds of
$50,000 (including direct payments from the lender to certain Company vendors) on May 4, 2020, and the Company reimbursed the
investor for expenses for legal fees and due diligence of $3,000. This note proceeds will be used by the Company for general working
capital purposes.
On
May 4, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $110,000,
pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance.
This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of this note, at a conversion price equal to the lower of $0.50 or 58% multiplied by the average of the two lowest closing
trading price or bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior
to the date of conversion. The Company received proceeds of $96,250 on May 6, 2020, and the Company reimbursed the investor for
expenses for legal fees and due diligence of $13,750. This note proceeds will be used by the Company for general working capital
purposes.
On
May 5, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, (the “Note”)
in the principal amount of $162,000, to an investor. This note matures 6 months after the Issuance Date. This note is convertible
into shares of the Company’s common stock beginning on the Issuance Date at $03 for the first three months after the Issuance
Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.03 or 50%
of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $100,000
on May 13, 2020, and this note included an original issue discount of $62,000. This note proceeds will be used by the Company
for general working capital purposes.
On
May 7, 2020, the Company issued a 15% convertible redeemable note in the principal amount of $30,000. This note matures on May
7,2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five
prior trading days including the day upon which a conversion notice is received by the Company. The Company received proceeds
of $25,000 on May 7, 2020, and this note included an original issue discount of $5,000. This note proceeds will be used by the
Company for general working capital purposes.
On
May 26, 2020, the Company paid $100,000 to PCTI, pursuant to the LOI with PCTI.
On
May 28, 2020, the Company issued a 15% convertible redeemable note in the principal amount of $30,000. This note matures on May
28, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the
twenty-five prior trading days including the day upon which a conversion notice is received by the Company. The Company received
proceeds of $25,000 on May 28, 2020, and this note included an original issue discount of $5,000. This note proceeds will be used
by the Company for general working capital purposes.
On
June 1, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, (the “Note”)
in the principal amount of $127,500, to an investor. This note matures 6 months after the Issuance Date. This note is convertible
into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the
Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025
or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of
$100,000 on June 1, 2020, and this note included an original issue discount of $27,500. This note proceeds will be used by the
Company for general working capital purposes.
On
June 11, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $53,000,
pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance.
This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the twenty trading day
period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The Company received proceeds
of $50,000 on June 12, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $3,000.
This note proceeds will be used by the Company for general working capital purposes.
On
June 23, 2020 (the “Execution Date”), the Company issued a 18% promissory note to an investor in the principal amount
of $210,000. This note matures on the twenty forth month following the Execution Date. For the first nine months of this note,
interest can be paid or added to the principal balance. Commencing on the tenth month following the Execution Date, all accrued
interest is due and payable on a monthly basis (the “Monthly Interest Payment”). If any default arises from non-payment
of the Monthly Interest Payment this note automatically converts to an 18% convertible debenture. The Company received proceeds
of $175,000 on June 24, 2020, and this note included an original issue discount of $35,000. This note proceeds will be used by
the Company for general working capital purposes.
On
June 25, 2020, (the “Issuance Date”) the Company issued a 12% promissory note to an investor in the principal amount
of $203,000. The maturity date of this note is June 25, 2021. Principal payments are due in six installments of $33,833 each,
beginning 180 days after the Issuance Date. The investor has the right to convert any part of this note at the lower of i) the
Trading Price (as defined in the agreement) during the previous five trading days prior to the Issuance Date or ii) the volume
weighted average price during the five trading days ending on the day preceding the conversion date. The Company received proceeds
of $176,000 on June 26, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $27,000.
This note proceeds will be used by the Company for general working capital purposes.
On
June 26, 2020, the Company signed the SPA with PCTI and Chis (See Note 1) and paid $300,000 ($400,000 in the aggregate
with the May 26, 2020 $100,000 paid) to PCTI pursuant to the terms of the LOI with PCTI. The Acquisition is scheduled to
close July 10, 2020.
The
Company has evaluated subsequent events through the date the financial statements were issued. The Company has determined that
there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
quarterly report and other reports filed by Ozop Surgical Corp. (“we,” “us,” “our,” or the
“Company”), from time to time contain or may contain forward-looking statements and information that are based upon
beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by
Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only
predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,”
“estimate,” “expect,” “future,” “intend,” “plan” or the negative of
these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements.
Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although
the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities
laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements
to actual results.
Our
financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments,
and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments,
and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities
as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.
Our financial statements would be affected to the extent there are material differences between these estimates.
The
following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere
in this Quarterly Report on Form 10-Q.
THE
COMPANY
Ozop
Surgical Corp. (the “Company,” “we,” “us” or “our”) was originally incorporated
as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of renting out Segways and bicycles.
Following the acquisition of OZOP Surgical, Inc., we have been engaged in the business of inventing, designing, developing, manufacturing
and globally distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies,
focused on spine, neurological and pain management procedures and specialties. On May 8, 2018, we amended our Articles of Incorporation
(the “Amendment”) to change our name from Newmarkt Corp. to Ozop Surgical Corp. in order to reflect more accurately
the name of our core service offering and operations.
On
January 21, 2020, the Company filed an amendment to its Certificate of Incorporation, with the Nevada Secretary of State, for
1-for-1,000 reverse stock split of our common stock (the “Reverse Stock Split”) effective February 10, 2020. The number
of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of
one- thousand and no fractional shares were issued. All historical share in this report have been adjusted to reflect the Reverse
Stock Split. There were no changes to the authorized number of shares and the par value of our common stock.
On
February 4, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s
Series C Preferred Stock (the “Preferred Stock”). The voting rights associated with the Preferred Stock were amended
whereby each share of Preferred Stock shall entitle the holder thereof to have voting rights equal to two times the sum of all
the number of shares of other classes of Company capital stock eligible to vote on all matters submitted to a vote of the stockholders
of the Company, divided by the number of shares of Preferred Stock issued and outstanding at the time of voting.
OZOP
OZOP
was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”).
On July 19, 2016, Mr. Eric Siu (“Siu”), one of our directors purchased 100% of the outstanding capital stock of Perma
and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled as
a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, Ozop formed as the sole member, Ozop Surgical,
LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, Ozop acquired 100% of Ozop Surgical Limited
(“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong
Kong.
On
February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas
limited liability company (“Spinus”), from RWO Medical Consulting LLC (“RWO”), a Texas limited
liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000
shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant
to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt was paid in
November 2018.
On
August 23, 2019, the Company entered into the License Agreement (see note 1) with 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. Under the License Agreement, SRI will continue to market the Swedge
platform along with the existing portfolio to existing US and International customers. Ozop purchased all existing inventory
of SRI instruments and implants and will utilize SRI as a distributor. On January 16, 2020, the Company received via email from
SRI notice that the Agreement dated August 23, 2019, between SRI and the Company has been revoked, as the Company did not cure
a payment default within the cure period.
On
February 28, 2020, the Company entered into a Binding Letter of Intent (the “LOI”) with Power Conversion Technologies,
Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer
(“CEO”) and its sole shareholder. Pursuant to the terms of the LOI, the Company will acquire 100% of the issued and
outstanding shares of PCTI (the “PCTI Shares”) from Chis in consideration of (a) the issuance by the Company to
Chis of (i) 47,500 shares of the Company’s Series C Preferred Stock, (ii) 18,667 shares of the Company’s Series D
Preferred Stock (pursuant to a certificate of designation to be filed prior to closing), (iii) 500 shares of the Company’s
Series E Preferred Stock (pursuant to a certificate of designation to be filed prior to closing); and (b) the Company paying $400,000
to PCTI by execution date of a definitive purchase agreement or at such other date as shall be agreed to by the parties (the
“Acquisition”). PCTI operates in the very high-power niche of the power electronics
market, designing and manufacturing leading edge equipment for use in power conversion applications. PCTI serves clients in several
industries including energy storage, shore power, DEWs, microgrid, telecommunications, military, transportation, renewable energy,
aerospace and mission critical defense systems. PCTI’s clients include Fortune 500 companies, all branches of the US Department
of Defense including the US Army and the US Air Force, NASA as well as other global military organizations. On June 26, 2020,
the Company, PCTI and Chis signed a Stock Purchase Agreement (the “SPA”). Pursuant to the SPA, the Acquisition is
to close by July 10, 2020, and is in the best interests of the Company and its’ shareholders.
Results
of Operations for the three months ended March 31, 2020 and 2019:
Revenue
For
the three months ended March 31, 2020, and 2019, the Company generated total revenue of $-0- and $47,602, respectively. For the
three months ended March 31, 2020, the Company did not recognize any revenues due to the termination of the agreements with SRI
(see above).The 2019 revenues are from the sale of Spinus’s spine surgery products. Revenues from Spinus are recognized
as an agent and are recorded at net.
Operating
expenses
Total
operating expenses for the three months ended March 31, 2020, and 2019, were $178,740 and $768,569, respectively. The operating
expenses were comprised of:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2019
|
|
Management fees- related parties
|
|
$
|
57,505
|
|
|
$
|
120,000
|
|
Professional and consulting fees
|
|
|
25,425
|
|
|
|
47,256
|
|
Stock based compensation
|
|
|
49,033
|
|
|
|
395,720
|
|
Research and development
|
|
|
-
|
|
|
|
53,204
|
|
General and administrative
|
|
|
46,777
|
|
|
|
152,389
|
|
Total
|
|
$
|
178,740
|
|
|
$
|
768,569
|
|
On
February 28, 2020, pursuant to the LOI with PCTI (see above) our CEO and CFO at the time resigned and Mr. Brian Conway was named
CEO. Through that date the former CEO and CFO were compensated $22,205 and $20,000, respectively. The Company entered into an
employment agreement with Mr. Conway, which includes a monthly salary of $10,000 and the immediate issuance of 2,500 shares of
Series C Preferred Stock. The Company valued the Series C Preferred stock at $5,000 and is included in management fees for the
three months ended March 31, 2020, along with his monthly compensation of $10,000. For the three months ended March 31, 2019,
management fees consisted of monthly fees to our CEO, COO and CFO of $15,000, $15,000 and $10,000, respectively.
Stock
based compensation for the three months ended March 31, 2020 is comprised of:
|
●
|
On
March 24, 2019, the Company signed a one-year consulting agreement with a consultant. As compensation for its services under
the agreement, the consultant and its assignees received 171 shares of the Company’s common stock. The Company valued
the shares at $77,130, based on the market price of the common stock on the date of the agreement, to be amortized over the
one-year term of the contract. For the three months ended March 31, 2020, the Company amortized $17,783 as stock-based compensation
expense.
|
|
|
|
|
●
|
On
September 3, 2019, the Company signed a six- month consulting agreement with a consultant. As compensation for its services
under the agreement, the consultant received 1,250 shares of the Company’s common stock. 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 three months ended March 31, 2020, the Company amortized $15,625 as stock-based compensation expense.
|
|
|
|
|
●
|
On
September 3, 2019, the Company signed a six- month consulting agreement with a consultant. As compensation for its services
under the agreement, the consultant received 1,250 shares of the Company’s common stock. 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 three months ended March 31, 2020, the Company amortized $15,525 as stock-based compensation expense.
|
Stock
based compensation for the three months ended March 31, 2019 is comprised of:
|
●
|
Amortization
of $81,250 related to a one-year consulting agreement effective on August 31, 2018, pursuant to the issuance of 650,000 shares
of common stock. The Company valued the shares at $0.50 per share (the price the Company was selling shares of common stock
on the date of the agreement). The Company recorded $325,000 as deferred stock compensation to be amortized over the term
of the agreement, and accordingly has included $81,250 in stock-based compensation for the three months ended March 31, 2019.
|
|
|
|
|
●
|
On
October 19, 2018, the company recorded the issuance of 450,000 shares of common stock, as the first tranche of a one- year
consulting agreement requiring a total of 1,800,000 shares. The Company valued the shares issued at $0.50 per share (the price
the Company was selling shares of common stock on the date of the agreement). The Company recorded $225,000 as deferred stock
compensation to be amortized over the first three months of the agreement, and accordingly has included $52,500 in stock-based
compensation for the three months ended March 31, 2019.
|
|
|
|
|
●
|
For
the three months ended March 31, 2019, the Company recorded 450,000 shares of common stock to be issued pursuant to the one-year
agreement above to issue 1,800,000 shares. The 450,000 shares were valued at $344,970, based on the market price of the common
stock on their respective date of issuances, and the Company expensed $260,470 s stock-based compensation for the three months
ended March 31, 2019.
|
|
|
|
|
●
|
On
March 24, 2019, the Company signed a one-year consulting agreement with Newbridge. As compensation for its services under
the Agreement, Newbridge and its assignees received 171,400 shares of the Company’s common stock. The Company valued
the shares at $77,130, based on the market price of the common stock on the date of the agreement, to be amortized over the
one-year term of the contract. For the three months ended March 31, 2019, the Company amortized $1,500 as stock-based compensation
expense
|
Research
and development costs of $-0- and $53,204 for the three months ended March 31, 2020, and 2019, respectively, were all costs related
to development of new product.
General
and administrative expenses, other
Total
general and operating expenses, other, were $46,777 and $152,389 for the three months ended March 31, 2020, and 2019, respectively,
and were comprised of:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Travel expenses
|
|
$
|
109
|
|
|
$
|
26,023
|
|
Advertising and marketing
|
|
|
-
|
|
|
|
25,779
|
|
Meals and entertainment
|
|
|
-
|
|
|
|
3,822
|
|
Commissions
|
|
|
-
|
|
|
|
8,100
|
|
Investor relations
|
|
|
12,505
|
|
|
|
62,756
|
|
Depreciation and amortization
|
|
|
11,081
|
|
|
|
11,216
|
|
Transfer agent
|
|
|
12,734
|
|
|
|
2,250
|
|
Other
|
|
|
10,348
|
|
|
|
12,443
|
|
Total
|
|
$
|
46,777
|
|
|
$
|
152,389
|
|
Other
Income (Expenses)
Other
expenses, net, for the three months ended March 31, 2020, and 2019, were $5,551,040 and $183,189, respectively, and were as follows.
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest expense
|
|
$
|
3,473,314
|
|
|
$
|
48,792
|
|
Loss (Gain) on change in fair value of derivatives
|
|
|
1,534,173
|
|
|
|
(47,610
|
)
|
Amortization of debt discounts
|
|
|
350,111
|
|
|
|
318,682
|
|
Loss (Gain) on extinguishment of debt
|
|
|
195,542
|
|
|
|
(136,675
|
)
|
Total other expense (income), net
|
|
$
|
5,551,040
|
|
|
$
|
183,189
|
|
The
increase in other expense is primarily a result of increases in losses on changes in fair values of derivatives, interest expense
and amortization of debt discounts and losses on extinguishment of debt for the three months ended March 31, 2020.
Net
loss
The
net loss for the three months ended March 31, 2020, and 2019, was $5,672,071 and $904,156 respectively. The increases are a result
of the changes discussed above.
Liquidity
and Capital Resources
Currently,
we have limited operating capital. The Company anticipates that it will require a minimum of $1,000,000 of working capital to
complete substantially all of its desired business activity for the next twelve months, including the closing of the PCTI transaction
and bringing new products to market. The Company currently is not generating any revenues from its business operations. Our current
capital and our other existing resources will be sufficient only to provide a limited amount of working capital, and, to date,
the revenues generated from our business operations have not been sufficient to fund our operations or planned growth. As noted
above, we will require additional capital to continue to close the PCTI transaction, to operate our business, and to further expand
our business. We may be unable to obtain the additional capital required. Our inability to generate capital or raise additional
funds when required will have a negative impact on our operations, business development and financial results.
For
the three months ended March 31, 2020, we primarily funded our business operations with $207,000 of proceeds from the issuances
of convertible note financings as well as $80,000 from the sale of 160,000 shares of common stock at $0.50 per share. Of the proceeds
$50,000 was used to redeem 2,500 shares of Series C Preferred Stock from the Company’s former CEO and for working capital.
We may continue to rely on the issuance of convertible promissory notes to fund our business operations.
As
of March 31, 2020, we had cash of $35,209 as compared to $10,877 at December 31, 2019. As of March 31, 2020, we had current liabilities
of $10,101,743 (including $6,534,591 of non-cash derivative liabilities), compared to current assets of $39,001, which resulted
in a working capital deficit of $10,062,742. The current liabilities are comprised of accounts payable, accrued expenses, convertible
debt, derivative liabilities, liabilities of discontinued operations and notes payable.
Operating
Activities
For
the three months ended March 31, 2020, net cash used in operating activities from continuing operations was $221,253, compared
to $286,717 for the three months ended March 31, 2019. For the three months ended March 31, 2020, our net cash used in operating
activities from continuing operations was primarily attributable to the net loss of $5,729,780, adjusted by the non-cash expenses
of interest and amortization and depreciation of $3,699,843, losses on the fair value changes in derivatives and on extinguishment
of debt of $1,534,173 and $195,509, respectively and stock-based compensation of $54,033, partially offset by the gain on the
license termination of $86,856. Net changes of $111,825 in operating assets and liabilities reduced the cash used in operating
activities.
For
the three months ended March 31, 2019, our net cash used in operating activities was primarily attributable to the net loss of
$904,156, a gain of $47,610 on the change in fair value of derivative liabilities and gains of $136,675 in extinguishment of debt,
adjusted by the non-cash expenses of interest and amortization and depreciation of $342,898 and stock-based compensation of $395,720.
Net changes of $63,106 in operating assets and liabilities reduced the cash used in operating activities.
Investing
Activities
There
were no investing activities for the three months ended March 31, 2020 and 2019.
Financing
Activities
For
the three months ended March 31, 2020, the net cash provided by financing activities was $157,000, compared to $291,650 for the
three months ended March 31, 2019. During the three months ended March 31, 2020, we received $207,000 of proceeds from the issuances
of convertible note financings and the Company purchased 2,500 shares of Series C Preferred Stock for $50,000.
During
the three months ended March 31, 2019, we received $295,650 of proceeds from the issuances of convertible note financings, as
well as $80,000 from the sale of 160,000 shares of common stock at $0.50 per share. The Company made payments on convertible debt
of $84,000.
OFF
BALANCE SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk
support and credit risk support or other benefits.
Critical
Accounting Policies
Our
significant accounting policies are described in more details in this notes to our financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q. We believe the following accounting policies to be most critical to the judgement and estimates
used in the preparation of our unaudited financial statements:
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting
only of normal recurring accruals) to present the financial position of the Company as of March 31, 2020, and the results of operations
and cash flows for the periods presented. The results of operations for the three months ended March 31, 2020, are not necessarily
indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s
Annual Report on Form 10-K filed on Ma 14, 2020.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance
obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance
obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. For the comparative
periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605,
revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and
determinable; and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of
is’ customers. Revenues from Spinus of $47,602 for the three months ended March 31, 2020, are recognized as an agent and
are recorded at net. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the
three months ended March 31, 2020 and 2019.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the three months
ended March 31, 2019, the Company recorded $53,204 of research and development expenses.
Earnings
(Loss) Per Share
The
Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation
of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using
the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive.