Notes
to Condensed Consolidated Financial Statements
June
30, 2018
(Unaudited)
NOTE
1 - ORGANIZATION
Business
Ozop
Surgical Corp. (“the Company”, “we”, “us” or “our”) was originally incorporated
as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of the renting different kind of Segway
and bicycles, dual wheels self-balancing electric scooter and related safety equipment. Following the acquisition of OZOP Surgical,
Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and globally
distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused
on spine, neurological and pain management procedures and specialties.
Reverse
Merger
On
April 13, 2018, we entered into and completed a share exchange agreement (the "Share Exchange Agreement") with OZOP
Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the
holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders transferred
and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of our common stock
(the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock pursuant to
the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the Share Exchange
Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group, owning 96.9%
of such shares. Our executive officers and directors, as a group, own 19,900,000 of our shares representing 77.1% of our issued
and outstanding shares of common stock. The merger was accounted for as a reverse merger, whereby OZOP was considered the accounting
acquirer and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment for a “reverse
merger” or a “reverse acquisition,” the Company’s historical financial statements prior to the reverse
merger will be replaced with the historical financial statements of OZOP prior to the reverse merger, in all future filings with
the U.S. Securities and Exchange Commission (the “SEC”).
In
connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij
for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant
to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company's Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry and Eric Siu were named
as directors of the Company.
On
May 8, 2018, we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to
Ozop Surgical Corp.
in
order to
reflect
more
accurately the
name
of our core
service
offering
and operations. The
Amendment
also
increased
our
authorized shares of capital stock to 300,000,000, of
which
290,000,000
has been designated as common stock, par
value
$0.001, and 10,000,000 shares
have
been
designated as preferred stock, par
value
$0.001 (the “Preferred Stock”).
The
Preferred Stock
shall
be
issuable
in
such series, and with such designations, rights and preferences as the Board of Directors
may
determine
from
time
to
time.
OZOP
OZOP
was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”).
On July 19, 2016, Mr. Eric Siu (“Siu”), one of our 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, a private limited Company incorporated in Hong Kong.
On
February 16, 2018, the Company 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”). The Company 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 is
secured by Spinus’s assets and is due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing
a minimum of a $3,000,000 equity raise. The Company acquired Spinus to gain control of a license rights agreement for exclusive
rights to intellectual property related to minimally invasive spine surgery techniques.
The
following table summarizes the preliminary value of the consideration issued and the preliminary purchase price allocation of
the fair value of assets acquired and liabilities assumed in the acquisition:
|
|
Purchase
Price Allocation
|
Fair
value of consideration issued
|
|
$
|
250,000
|
|
Liabilities
assumed
|
|
|
532,289
|
|
Total
purchase consideration
|
|
$
|
782,289
|
|
Assets
acquired
|
|
$
|
543,138
|
|
Intellectual
Property/Technology
|
|
|
239,151
|
|
|
|
$
|
782,289
|
|
The
total purchase price of $782,289 has been allocated on a preliminary basis to the tangible and intangible assets acquired and
liabilities assumed based on preliminary estimated fair values as of the completion of the Acquisition. These allocations reflect
various preliminary estimates that are currently available and are subject to change upon the valuation being finalized within
the measurement period. The final fair value of Spinus’s identifiable intangible assets will be determined primarily using
the income approach which requires an estimate or forecast of all the expected future cash flows, either through the use of the
relief-from-royalty method or the multi-period excess earnings method. The Company will record amortization expense assuming a
straight-line basis over the expected life of the finite lived intangible assets, which approximates expected future cash flows.
Goodwill,
if any, represents the amount by which the estimated consideration transferred exceeds the historical costs of the assets the
Company acquired and the liabilities the Company assumed. The Company will not amortize the goodwill, but will instead test the
goodwill for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting
only of normal recurring accruals) to present the financial position of the Company as of June 30, 2018, and the results of operations
and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2018, 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 8-K/A filed on June 29, 2018.
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. Also included in the consolidation is Ozop Medical AG, a company registered in
Munich, Germany (“Ozop Medical”). Officers owning approximately 86% of our common stock, own 100% of Ozop Medical.
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
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
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.
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 estimated useful lives of office equipment is 3 years.
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 Company’s property consisted of the following at June 30,
2018 and December 31, 2017.
|
|
June 30,
2018
|
|
December 31,
2017
|
Office equipment
|
|
$
|
6,885
|
|
|
$
|
1,944
|
|
Less: Accumulated Depreciation
|
|
|
(1,056
|
)
|
|
|
(621
|
)
|
Property and Equipment, Net
|
|
$
|
5,829
|
|
|
$
|
1,323
|
|
Depreciation
expense was $273 and $435 for the three and six months ended June 30, 2018, and $162 and $297 for the three and six months ended
June 30, 2017.
Patents
Intangible
assets primarily represent legal costs and filings associated with obtaining patents on the Company’s new discoveries. 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 tests intangible assets with finite lives upon significant changes in the Company’s business environment
and any resulting impairment charges are recorded at that time. When the Company acquires patents from related parties, the patents
are recorded at the historical cost when available or the estimated legal and filing costs.
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, licensing agreements and contracts to perform pilot studies by applying the following
steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to each performance obligation in the contract; 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. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and six
months ended June 30, 2018 and 2017.
Advertising
and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the six months ended June 30, 2018, the Company recorded $35,355
of advertising and marketing expenses, and $954 for the six months ended June 30, 2017.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the six months
ended June 30, 2018, the Company recorded $10,565 of research and development expenses and $41,856 and $84,237 for the three and
six months ended June 30, 2017, respectively.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
•
|
Level
1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level
3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts
payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of
the short maturity of these instruments.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
June 30, 2018, for each fair value hierarchy level:
June 30, 2018
|
|
Derivative
Liabilities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
659,895
|
|
|
$
|
659,895
|
|
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 unaudited condensed financial statements are as follows for the periods ended June
30, 2018 and December 31, 2017 (Hong Kong dollar per one U.S. dollar):
|
|
June 30,
2018
|
|
December 31,
2017
|
Balance sheet date
|
|
|
0.1275
|
|
|
|
0.128
|
|
Average rate for unaudited condensed statements of operations and comprehensive loss
|
|
|
0.1276
|
|
|
|
0.1283
|
|
Earnings
(Loss) Per Share
The
Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation
of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using
the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS,
the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive.
Recent
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This
guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors
are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the
financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is
effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that
reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently
evaluating the impact of the adoption of this standard will have on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic 805) Clarifying the Definition of a Business
”
(“ASU 2017-01”). The Amendments in this Update clarify the definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation.
The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods.
Early adoption of this standard is permitted. The Company adopted ASU 2017-01 on January 1, 2018, with no significant impact on
the condensed consolidated financial statements.
With
the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting
pronouncements during the six months ended June 30, 2018, that are of significance or potential significance to the
Company.
NOTE
3 – INTANGIBLE ASSETS
Patents
as of June 30, 2018 consist of the following:
Patents and trademarks
|
|
$
|
138,934
|
|
License rights
|
|
|
500,000
|
|
Accumulated amortization
|
|
|
(12,500
|
)
|
Net carrying amount
|
|
$
|
626,434
|
|
Amortization
expense for the three and six months ended June 30, 2018 was $2,206 and $4,412, respectively.
NOTE
4 - CONVERTIBLE NOTES PAYABLE
During
the year ended December 31, 2017, OZOP issued 19 convertible promissory notes (the “2017 Notes”), in amounts of $10,000
to $50,000. OZOP received proceeds of $710,000 in the aggregate. The 2017 Notes mature(d) on their one- year anniversary and bear
interest at ten percent (10%). The holders can convert the notes and any unpaid interest due, into shares of the Company’s
common stock on the 15
th
business day that the Company becomes listed, at conversion prices equal to discounts of 35%-50%
of the average of the three lowest closing prices of the common stock. OZOP also issued $25,500 of convertible notes for consulting
fees. During the six months ended June 30, 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.
The
Company became a public company on April 13, 2018, and on that date the Company determined the conversion feature of the Notes
represented an embedded derivative since the Notes were convertible into a variable number of shares upon conversion. Accordingly,
on April 13, 2018, the Notes were not considered to be conventional debt under ASC 815 and the embedded conversion feature was
bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments
of the Notes that occurred prior to April 13, 2018, were recorded as a liability on April 13, 2018, on the unaudited condensed
consolidated balance sheet with the corresponding amount recorded as a discount to the Note. Such discount is being amortized
from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts
are recorded in other income or expenses in the unaudited condensed consolidated statements of operations at the end of each quarter,
with the offset to the derivative liability on the balance sheet. The embedded feature included in the Notes resulted in an initial
debt discount of $620,075, interest expense of $14,000 and initial derivative liability of $634,075. For the six months ended
June 30, 2018, amortization of the debt discounts of $398,886 was charged to interest expense. During the six months ended June
30, 2018, investors converted $570,500 of principal and $19,857 of accrued interest into 1,180,768 shares of common stock. Due
to the conversions prior to the maturity of the converted notes, the Company recorded additional interest expense and a loss on
extinguishment of debt of $234,386. As of June 30, 2018, the outstanding principal balance of the 2017 Notes was $215,000 with
a carrying value as of June 30, 2018, of $196,750, net of unamortized discounts of $18,250. The March 2018 Note was part of the
above conversions, and the balance of the March 2018 Note as of June 30, 2018 is $-0-.
On
April 13, 2018, we issued a convertible promissory note in the principal amount of $442,175 (the “Note”), pursuant
to a Securities Purchase Agreement we entered into with an investor dated April 1, 2018. The Note bears interest at the rate of
12% per annum and is due and payable on April 13, 2019. The note is convertible at any time following the funding of the note
into a variable number of the Company's common stock, based on a conversion ratio of 55% of the average of the lowest trading
price for the 25 days prior to conversion. The note was funded on April 13, 2018, when the Company received proceeds of $350,000,
after OID of $57,675, and disbursements for the lender’s transaction costs, fees and expenses of $34,500, of which $25,000
were recorded as discounts against the debt to be amortized into interest expense through maturity. Periodic payments are due
by us on the Note at the rate of $850 per day (the “Repayment Amount”) via direct withdrawal from our bank account,
beginning on April 27, 2018 and to last for a 30-day period. Following this period, the Repayment Amount increased to $1,100 per
day until the Note is satisfied in full. On June 28, 2018, the Note was amended to increase the Repayment Amount to $1,750 per
day. During the six months ended June 30, 2018, principal payments of $41,800 were made. The embedded conversion feature included
in the note resulted in an initial debt discount of $407,675 interest expense of $408,280 and an initial derivative liability
of $815,955. For the six months ended June 30, 2018, amortization of the debt discounts of $106,243 was charged to interest expense.
As of June 30, 2018, the outstanding principal balance of the note was $400,375 with a carrying value as of June 30, 2018, of
$16,268, net of unamortized discounts of $384,107.
We
may prepay in full the unpaid principal and interest on the Note, with at least 20 trading days’ notice, (a) any time prior
to the 180th day after the issuance date, by paying 130% of the principal amount of the Note together with accrued interest thereon;
and (b) any time beginning on the 181st day after the issuance date and ending on the 364th day after the issuance date, by paying
150% of the principal amount of the Note together with accrued interest thereon. After the expiration of the 364th day after the
issuance date, we have no right of prepayment.
In
connection with our obligations under the Note, our executive officers and the Company entered into a Pledge Agreement (the “Pledge
Agreement”) whereby they pledged as collateral for the Loan an aggregate of 19,900,000 shares of our common stock and we
pledged the shares of our subsidiary OZOP Surgical, Inc. (collectively, the “Collateral”). Upon a default under the
terms of the Note, Carebourn may, among other things, collect or take possession of the Collateral, proceed with the foreclosure
of the security interest in the Collateral or sell, lease or dispose of the Collateral.
A
summary of the convertible note balance as of June 30, 2018 and December 31, 2017 is as follows
|
|
June 30,
2018
|
|
December 31,
2017
|
Principal balance
|
|
$
|
615,375
|
|
|
$
|
735,500
|
|
Unamortized discount
|
|
|
(402,357
|
)
|
|
|
-0-
|
|
Ending balance, net
|
|
|
213,018
|
|
|
$
|
735,500
|
|
NOTE
5 – DERIVATIVE LIABILITIES
The
Company became a public company on April 13, 2018, and on that date the Company determined the conversion feature of the Notes
represented an embedded derivative since the Notes were convertible into a variable number of shares upon conversion. Accordingly,
on April 13, 2018, the Notes were not considered to be conventional debt under ASC 815 and the embedded conversion feature was
bifurcated from the debt host and accounted for as a derivative liability.
The
Company valued the derivative liabilities at June 30, 2018, and April 13, 2018, at $659,895 and $1,450,030, respectively. The
Company used the Monte Carlo simulation valuation model with the following assumptions as of June 30, 2018; risk-free interest
rates from 2.06% to 2.24% and volatility of 121% to 164%, and the following assumptions at April 13, 2018, risk-free interest
rates from 1.06% to 1.28% and volatility of 140% to 260%. The initial derivative liabilities for convertible notes issued during
the six months ended June 30, 2018, used the following assumptions; risk-free interest rates from 1.89% to 2.29% and volatility
of 120% to 331%.
A
summary of the activity related to derivative liabilities for the six months ended June 30, 2018, is as follows:
Beginning balance
|
|
$
|
-0-
|
|
Issued during period
|
|
|
1,450,030
|
|
Converted
|
|
|
(534,666
|
)
|
Change in fair value recognized in operations
|
|
|
(255,469
|
)
|
Ending balance
|
|
$
|
659,895
|
|
NOTE
6 – NOTES PAYABLE
The
Company has the following note payables outstanding:
|
|
June 30, 2018
|
Note payable, interest at 8%, matures September 6, 2018
|
|
$
|
370,000
|
|
Note payable, includes $10,000 original issue discount, matures October 30, 2018
|
|
|
60,000
|
|
Note payable, interest
|
|
|
230,000
|
|
Other, due on demand
|
|
|
2,805
|
|
Total notes payable
|
|
$
|
662,805
|
|
On
June 28, 2018, the Company issued a $230,000 principal amount Promissory note for a purchase price of $200,000 due on August 27,
2018 (the “June 2018 Note”). The June 2018 Note provides for standard and customary events of default such as failing
to timely make payments under the June 2018 Note when due. In addition, a default under the June 2018 Note will result in a default
under the April 2018 Note (see Note 5). We may prepay in full the unpaid principal on the June 2018 Note. The June 2018 Note also
contains customary positive and negative covenants.
NOTE
7 – RELATED PARTY TRANSACTIONS
Management
Fees and related party payables
For
the three and six months ended June 30, 2018, the Company (including the Company’s subsidiaries) recorded expenses to its
officers in the following amounts:
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30, 2018
|
|
June 30, 2018
|
CEO, parent
|
|
$
|
30,000
|
|
|
$
|
60,000
|
|
CEO, subsidiary
|
|
|
30,000
|
|
|
|
60,000
|
|
COO
|
|
|
30,000
|
|
|
|
60,000
|
|
CFO
|
|
|
30,000
|
|
|
|
60,000
|
|
Total
|
|
$
|
120,000
|
|
|
$
|
240,000
|
|
As
of June 30, 2018, and December 31, 2017, included in accounts payable and accrued expenses, related party is $404,379 and $220,012,
respectively, for the following amounts owed the Company’s officers:
|
|
June 30,
2018
|
|
December 31,
2017
|
CEO, parent
|
|
$
|
80,989
|
|
|
$
|
46,631
|
|
CEO, subsidiary
|
|
|
63,899
|
|
|
|
-0-
|
|
COO
|
|
|
208,905
|
|
|
|
158,381
|
|
CFO
|
|
|
50,586
|
|
|
|
15,000
|
|
Total
|
|
$
|
404,379
|
|
|
$
|
220,012
|
|
NOTE
8 – LICENSE FEE PAYABLE
On
February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The
Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms
of the Licensing Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive
rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The $250,000 is
due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum of a $3,000,000 equity
raise. The Company also will pay a royalty of 7% of net sales on any product sold utilizing any of the patents.
NOTE
9 – STOCKHOLDERS’ EQUITY
Common
stock
On
April 13, 2018, the Company completed the reverse merger with Newmarkt (see Note 1) and issued 2,797,500 shares of common stock.
Also on April 13, 2018, the Company purchased and redeemed 2,000,000 shares of common stock for a purchase price of $350,000 pursuant
to the Redemption Agreement.
During
the six months ended June 30, 2018, we sold 500,000 shares of our common stock at a price of $0.50 per share to seven investors
and received proceeds of $250,000.
During
the six months ended June 30, 2018, holders of an aggregate of $590,357 in principal and accrued interest of convertible debt
issued by OZOP converted their debt and accrued interest into 1,180,768 shares of our common stock at a conversion price of $0.50
per share. These shares have not been certificated and are included in common stock to be issued on the June 30, 2018, balance
sheet presented herein.
As
of June 30, 2018, the Company has 290,000,000 shares of $0.001 par value common stock authorized and there are 26,297,500 shares
of common stock issued and outstanding and 1,180,768 shares of common stock to be issued.
Preferred
stock
As
of June 30, 2018, 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. As of June 30, 2018, there are no shares of preferred stock issued and outstanding.
Stock
subscription receivable
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
10 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying 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. At June 30, 2018, the Company had a stockholders’ deficit
of $1,381,076 and a working capital deficit of $2,013,339. In addition, the Company has generated losses since inception. These
factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern.
Management’s
Plans
In
April 2018, OZOP entered into and completed a share exchange agreement with Newmarkt Corp., a Nevada corporation (see Note 1),
a publicly traded company. As a public company, management believes it will be able to access the public equities market for fund
raising for product development and regulatory approvals, sales and marketing and as we expand our distribution in the US market,
we will need to meet increasing inventory requirements.
On
June 11, 2018, the Company entered into an engagement letter with an Underwriter, with respect to the sale of shares of our preferred
stock and warrants to purchase our common stock. Under the terms and subject to the conditions contained in the engagement letter,
we have agreed to issue and sell to certain investors through the Underwriter, and the Underwriter has agreed to offer and sell,
a minimum of 750,000 and up to 5,000,000 Units, at $2.00 per unit on a best efforts basis. Each Unit consists of one (1) share
of Series A 6% Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) and one (1)
Common Stock Purchase Warrant (the “Warrants”). Each share of Series A Preferred Stock is entitled to dividends at
the rate of 6% per annum, accrued quarterly, is redeemable by the holders three (3) years after issuance and converts into shares
of our Common Stock at a rate of $1.00 per share at the option of the holder. Each Warrant entitles the holder to purchase our
Common Stock at an exercise price of $1.50 per share for a period of five (5) years after their issuance.
NOTE
11 – SUBSEQUENT EVENTS
On
July 23, 2018, the Company, through its wholly owned subsidiary, OZOP (Guangdong) Medical Technology Co., Ltd., a wholly owned
foreign enterprise in China, acquired a 100% ownership interest in Yijingtong (Beijing) Technology Development Ltd (“Yijingtong”)
from its shareholders who are unrelated parties pursuant to the terms of an Equity Transfer Agreement dated July 23, 2018 (the
“Equity Transfer Agreement”). Yijington is a China based distributor of minimally invasive surgical (MIS) products
to the orthopedic and neurosurgical markets in China.
Pursuant
to the terms of the Equity Transfer Agreement, we agreed to pay the sellers of the Yijingtong equity interest RMB 1,000,000 (approximately
US$147,815) payable in cash within 120 days of closing, in addition to inventory valued at RMB 4,072,719 (approximately US$ 602,009),
which the parties will separately agree to payment and delivery terms. The sellers of Yijingtong will begin the registration change
process upon execution of the Equity Transfer Agreement. In the event either party breaches the agreement, the non-breaching party
shall have the right to request termination of the agreement and claim compensation from the breaching party for all economic
losses.