Notes
to Condensed Consolidated Financial Statements
September
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 Segways
and bicycles, dual wheels self-balancing electric scooters and related safety equipment. Following the acquisition of OZOP Surgical,
Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and 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
then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders
transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of
our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock
pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the
Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group,
owning 96.9% of such shares. 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 were and will be replaced with the historical financial statements of OZOP prior to the reverse merger,
in all future filings with the U.S. Securities and Exchange Commission (the “SEC”).
In
connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij
for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant
to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company's Chief Executive
Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry 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, 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 is secured by
Spinus’s assets and is due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum
of a $3,000,000 equity raise. OZOP acquired Spinus to gain control of a license rights agreement for exclusive rights to intellectual
property related to minimally invasive spine surgery techniques.
The
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 September 30, 2018, and the results
of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September
30, 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. All intercompany accounts and transactions have been eliminated
in consolidation.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally
insured limits
Sales
Concentration and credit risk
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine
months ended September 30, 2018, and 2017, and their accounts receivable balance as of September 30, 2018:
|
|
Sales
% Three Months Ended September 30, 2018
|
|
Sales
% Three Months Ended September 30, 2017
|
|
Sales
% Nine Months Ended September 30, 2018
|
|
Sales
% Nine
Months Ended
September 30, 2017
|
|
Accounts
receivable balance September 30, 2018
|
Customer
A
|
|
|
93.9
|
%
|
|
|
—
|
|
|
|
72.4
|
%
|
|
|
—
|
|
|
$
|
42,787
|
|
Customer
B
|
|
|
6.1
|
%
|
|
|
—
|
|
|
|
27.6
|
%
|
|
|
—
|
|
|
|
—
|
|
Customer
C
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69.9
|
%
|
|
|
—
|
|
Customer
D
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30.1
|
%
|
|
|
—
|
|
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,
consisting of finished goods, is valued at the lower of cost or net realizable value. Cost is determined using the first in first
out (FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management analysis or inventory
levels and future sales forecasts. The Company has not recorded any loss during the periods presented.
Purchase
concentration
The
principal purchases by the Company is comprised of finished goods that the Company sells to its customers. Following is a summary
of suppliers who accounted for more than ten percent (10%) of the Company’s purchases for the three and nine months ended
September 30, 2018, and 2017:
|
|
Purchase
% Three Months Ended September 30, 2018
|
|
Purchase
% Three Months Ended September 30, 2017
|
|
Purchase
% Nine Months Ended September 30, 2018
|
|
Purchase
% Nine
Months Ended
September 30, 2017
|
Supplier
A
|
|
|
100
|
%
|
|
|
—
|
|
|
|
60.4
|
%
|
|
|
—
|
|
Supplier
B
|
|
|
—
|
|
|
|
—
|
|
|
|
39.6
|
%
|
|
|
100
|
%
|
Management
believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause
a delay and a possible loss of sales, which would adversely affect the Company's business, financial position and results of operations.
Property,
plant and equipment
Property
and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets.
Office
equipment
The Company
reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying
amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:
|
|
September
30, 2018
|
|
December
31, 2017
|
Office equipment
|
|
$
|
6,885
|
|
|
$
|
1,944
|
|
Less: Accumulated Depreciation
|
|
|
(1,629
|
)
|
|
|
(621
|
)
|
Property and Equipment, Net
|
|
$
|
5,256
|
|
|
$
|
1,323
|
|
Depreciation
expense was $573 and $1,008 for the three and nine months ended September 30, 2018, and $162 and $459 for the three and nine months
ended September 30, 2017.
Intangible
Assets
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 evaluates long-lived assets for impairment whenever events or changes in
circum
stances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measure by a comparison of the carrying amount of the assets to future undiscounted cash flows to
be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as
the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not recognized
impairment losses for any long-lived assets.
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 nine
months ended September 30, 2018 and 2017.
Advertising
and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the three and nine months ended September 30, 2018, the Company
recorded $7,321 and $42,676 of advertising and marketing expenses, and $18,520 and $19,474 for the three and nine months ended
September 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 three and
nine months ended September 30, 2018, the Company recorded $47,657 and $58,222 of research and development expenses and $116,405
and $200,642 for the three and nine months ended September 30, 2017, respectively.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives
and Hedging Activities.
Applicable
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The
Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated
from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized over the term of the related debt to their stated date of redemption.
The
Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment
standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at
their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting
liabilities.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assu
mptions
that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
•
|
Level
1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level
3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value.
These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts
payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of
the short maturity of these instruments.
The
following table represents the Company’s financial instruments that
are
measured at fair value on a recurring basis as of September 30, 2018, for each fair value hierarchy level:
September
30, 2018
|
|
Derivative
Liabilities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,002,530
|
|
|
$
|
1,002,530
|
|
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 consolidated financial statements are as follows for the periods
ended September 30, 2018 and December 31, 2017 (Hong Kong dollar per one U.S. dollar):
|
|
September
30,
2018
|
|
December
31,
2017
|
Balance sheet date
|
|
|
.1276
|
|
|
|
.1280
|
|
Average rate for unaudited condensed statements
of operations and comprehensive loss
|
|
|
.1275
|
|
|
|
.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 nine months ended September 30, 2018, that are of significance or potential significance to
the Company.
NOTE
3 – INTANGIBLE ASSETS
Patents
as of September 30, 2018, and December 31, 2017, consist of the following:
|
|
September
30, 2018
|
|
December
31, 2017
|
Patents and trademarks
|
|
$
|
163,183
|
|
|
$
|
149,783
|
|
License rights
|
|
|
489,151
|
|
|
|
—
|
|
Accumulated
amortization
|
|
|
(14,706
|
)
|
|
|
(8,088
|
)
|
Net carrying
amount
|
|
$
|
637,628
|
|
|
$
|
141,695
|
|
Amortization
expense for the three and nine months ended September 30, 2018 was $2,206 and $6,618, respectively. There was no amortization
expense for the three and nine months ended September 30, 2017.
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 nine months ended September 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.
On
April 13, 2018, the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes
were convertible into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered
to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for
as a derivative liability. Accordingly, the fair value of the derivative instruments of the Notes that occurred prior to April
13, 2018, were recorded as a liability on April 13, 2018, 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 nine months ended September 30, 2018, amortization of the debt
discounts of $385,688 was charged to interest expense. During the nine months ended September 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 September 30, 2018, the outstanding principal balance of the 2017 Notes was $215,000. The March 2018 Note was part of the above
conversions, and the balance of the March 2018 Note as of September 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. On August 29, 2018, the parties agreed to stop the Repayment Amount. During the nine months ended September 30, 2018, principal
payments of $97,800 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 nine months ended September 30, 2018, amortization
of the debt discounts of $208,805 was charged to interest expense. As of September 30, 2018, the outstanding principal balance
of the note was $344,375 with a carrying value as of September 30, 2018, of $111,005, net of unamortized discounts of $233,370.
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 Note an aggregate of 19,900,000 shares of our common stock and we
pledged the shares of our subsidiary OZOP Surgical, Inc. (collectively, the “Collateral”). Upon a default under the
terms of the Note, Carebourn may, among other things, collect or take possession of the Collateral, proceed with the foreclosure
of the security interest in the Collateral or sell, lease or dispose of the Collateral.
On
August 29, 2018, we issued a convertible promissory note in the principal amount of $339,250 (the “Note”), pursuant
to a Securities Purchase Agreement we entered into with the investor. The Note bears interest at the rate of 12% per annum and
is due and payable on August 29, 2019. The note is convertible at any time following the funding of the note into a variable number
of the Company's common stock, based on a conversion ratio of 55% of the average of the lowest trading price for the 25 days prior
to conversion. The note was funded on August 29, 2018, when the Company received proceeds of $280,000, after OID of $44,250, and
disbursements for the lender’s transaction costs, fees and expenses of $15,000, which were recorded as discounts against
the debt to be amortized into interest expense through maturity. Periodic payments are due by us on the Note at the rate of $1,000
per day (the “Repayment Amount”) via direct withdrawal from our bank account, beginning on August 30, 2018, until
the Note is satisfied in full. During the nine months ended September 30, 2018, principal payments of $19,000 were made. The embedded
conversion feature included in the note resulted in an initial debt discount of $280,000 interest expense of $112,403 and an initial
derivative liability of $392,403. For the nine months ended September 30, 2018, amortization of the debt discounts of $30,155
was charged to interest expense. As of September 30, 2018, the outstanding principal balance of the note was $320,250 with a carrying
value as of September 30, 2018, of $11,155, net of unamortized discounts of $309,095.
On
August 29, 2018, we issued a convertible promissory note in the principal amount of $55,000 (the “Note”), pursuant
to a Securities Purchase Agreement we entered into with the investor. The Note bears interest at the rate of 12% per annum and
is due and payable on March 1, 2019. The note is convertible at any time following the funding of the note into a variable number
of the Company's common stock, based on a conversion ratio of 58% of the average of the lowest trading price for the 20 days prior
to conversion. The note was funded on August 29, 2018, when the Company received proceeds of $50,000, after disbursements for
the lender’s transaction costs, fees and expenses of $5,000, which were recorded as discounts against the debt to be amortized
into interest expense through maturity. The embedded conversion feature included in the note resulted in an initial debt discount
of $50,000 interest expense of $5,272 and an initial derivative liability of $55,272. For the nine months ended September 30,
2018, amortization of the debt discounts of $9,778 was charged to interest expense. As of September 30, 2018, the outstanding
principal balance of the note was $55,000 with a carrying value as of September 30, 2018, of $9,778, net of unamortized discounts
of $45,222.
A
summary of the convertible note balance as of September 30, 2018, and December 31, 2017, is as follows:
|
|
September 30, 2018
|
|
December 31, 2017
|
Principal balance
|
|
$
|
934,625
|
|
|
$
|
735,500
|
|
Unamortized discount
|
|
|
(587,687
|
)
|
|
|
-0-
|
|
Ending balance, net
|
|
|
346,938
|
|
|
$
|
735,500
|
|
NOTE 5 – DERIVATIVE
LIABILITIES
On
April 13, 2018, the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes
were convertible into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered
to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for
as a derivative liability.
The
Company valued the derivative liabilities at September 30, 2018, and April 13, 2018, at $1,002,530 and $1,450,030, respectively.
The Company used the Monte Carlo simulation valuation model with the following assumptions as of September 30, 2018; risk-free
interest rates from 2.36% to 2.56% and volatility of 64% to 72%, 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 nine months ended September 30, 2018, used the following assumptions; risk-free interest rates from 1.89% to 2.59% and volatility
of 75% to 81%.
A
summary of the activity related to derivative liabilities for the nine months ended September 30, 2018, is as follows:
Beginning balance
|
|
$
|
-0-
|
|
Issued during period
|
|
|
1,897,705
|
|
Converted
|
|
|
(659,981
|
)
|
Change in fair value recognized in operations
|
|
|
(235,194
|
)
|
Ending balance
|
|
$
|
1,002,530
|
|
NOTE
6 – NOTES PAYABLE
The
Company has the following note payables outstanding:
|
|
September 30,
2018
|
|
December
31,
2017
|
Note payable, interest at 8%, matures September 6, 2018, in default
|
|
$
|
330,000
|
|
|
$
|
370,000
|
|
Other, due on demand
|
|
|
2,805
|
|
|
|
—
|
|
Total notes payable
|
|
$
|
332,805
|
|
|
$
|
370,000
|
|
NOTE
7 – RELATED PARTY TRANSACTIONS
Management
Fees and related party payables
For
the three and nine months ended September 30, 2018, and 2017, the Company recorded expenses to its officers in the following amounts:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
CEO, parent
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
CEO, subsidiary
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
COO
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
CFO
|
|
|
30,000
|
|
|
|
—
|
|
|
|
90,000
|
|
|
|
—
|
|
Total
|
|
$
|
120,000
|
|
|
$
|
90,000
|
|
|
$
|
360,000
|
|
|
$
|
270,000
|
|
As
of September 30, 2018, and December 31, 2017, included in accounts payable and accrued expenses, related party is $445,397
(includes $20,095 of expenses) and $220,012 (includes $61,382 of expenses), respectively, for the following amounts owed the
Company’s officers:
|
|
September 30, 2018
|
|
December 31, 2017
|
CEO, parent
|
|
$
|
101,683
|
|
|
$
|
46,631
|
|
CEO, subsidiary
|
|
|
73,248
|
|
|
|
-0-
|
|
COO
|
|
|
226,905
|
|
|
|
158,381
|
|
CFO
|
|
|
43,561
|
|
|
|
15,000
|
|
Total
|
|
$
|
445,397
|
|
|
$
|
220,012
|
|
On October 25, 2017, the Company issued a
$60,000 promissory note to the wife of an officer and director of the Company in exchange for $50,000. The note originally
matured on November 25, 2017 and was extended until November 25, 2018.
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. There have not
been any sales of the licensed products and accordingly, no royalties have been incurred.
NOTE
9– COMMITMENTS AND CONTINGENCIES
Consulting
Agreement
On
August 31, 2018, we entered into an investor relations consulting agreement with Kingdom Building, Inc. (“Kingdom”)
whereby Kingdom agreed to provide us with investor relations, public relations and financial media relations consulting services.
The term of the agreement is for a period of 12 months. We may terminate the agreement after the initial six months on 60 days’
notice. We agreed to pay Kingdom $8,500 per month which amount is deferred until we complete a financing transaction with a minimum
raise of $1,500,000 in gross proceeds. In addition, we agreed to issue Kingdom 650,000 shares of our unregistered common stock
and reimburse them for certain out of pocket expenses.
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:
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2018
|
|
2017
|
Pre-tax loss
|
|
$
|
(1,462,467
|
)
|
|
$
|
(855,588
|
)
|
U.S. federal corporate income tax rate
|
|
|
21
|
%
|
|
|
35
|
%
|
Expected U.S. income tax credit
|
|
|
(307,118
|
)
|
|
|
(299,456
|
)
|
Tax rate difference between U.S. and foreign operations
|
|
|
3,745
|
|
|
|
65,888
|
|
Change of valuation allowance
|
|
|
303,373
|
|
|
|
233,568
|
|
Effective tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company had deferred tax assets as follows:
|
|
September 30,
2018
|
|
December 31,
2017
|
Net operating losses carried forward
|
|
$
|
471,455
|
|
|
$
|
306,000
|
|
Less: Valuation allowance
|
|
|
(471,455
|
)
|
|
|
(306,000
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of September 30, 2018, the Company has approximately $1,803,000 and $562,000 net operating loss carryforwards available in
the United States and Hong Kong, respectively, to reduce future taxable income. The net operating loss from Hong Kong
operations can be carried forward with no time limit from the year of the initial loss pursuant to relevant Hong Kong tax
laws and regulations.
For
U.S. purposes the NOL deduction for a tax year is equal to the lesser of (1) the aggregate of the NOL carryovers to such
year, plus the NOL carry-backs to such year, or (2) 80% of taxable income (determined without regard to the deduction).
Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely. The special extended
carryback provisions are generally repealed, except for certain farming and insurance company losses. The amendments
incorporating the 80% limitation apply to losses arising in tax years beginning after Dec. 31, 2017.
It
is more likely than not that the deferred tax assets cannot be utilized in the future because there will not be significant
future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full valuation
allowance on its deferred tax assets.
As
of September 30, 2018, and December 31, 2017, the Company has no material unrecognized tax benefits which would favorably affect
the effective income tax rate in future periods, and does not believe that there will be any significant increases or decreases
of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Company during the nine months ended September 30, 2018 and 2017, and no provision for interest and penalties is
deemed necessary as of September 30, 2018 and December 31, 2017.
The
U.S. Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law.
Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced
earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base
erosion tax, respectively. The Tax Act requires the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings
not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets
and 8% on the remaining earnings. Due to the timing of the enactment and the complexity involved in applying the provisions of
the Tax Act, the Company has not recorded any adjustments according to Tax Act. As the Company collects and prepares necessary
data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting
bodies, the Company may make adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be
completed in 2018.
Since
the Company’s foreign subsidiaries have not generated income since inception, the Company believes that Tax Act will not
have significant impact on the Company’s consolidated financial statements.
NOTE
11 – STOCKHOLDERS’ EQUITY
Common
stock
On
April 13, 2018, the Company completed the reverse merger (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 nine months ended September 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 nine months ended September 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, of which, 51,967 shares have not been certificated and are included in common stock to be issued on the September
30, 2018, balance sheet presented herein.
On
July 1, 2018, the Company recorded the issuance of 30,000 of common stock for legal services. The shares were certificated on
October 25, 2018.
On
September 30, 2018, the company recorded the issuance of 650,000 shares of common stock pursuant to a consulting agreement. The
shares were certificated on October 25, 2018.
As
of September 30, 2018, the Company has 290,000,000 shares of $0.001 par value common stock authorized and there are 28,076,302
shares of common stock issued and outstanding and 81,967 shares of common stock to be issued.
Preferred
stock
As
of September 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 September 30, 2018, there are no shares of preferred stock issued and outstanding.
Stock
subscription receivable
On
February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to
the issuance of 7,600,000 shares of common stock.
NOTE
12 – SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
The
Company operates in two geographic segments, the United States and Hong Kong. Set out below are the revenues, gross profits and
total assets for each segment.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
53,730
|
|
|
$
|
-0-
|
|
|
$
|
126,566
|
|
|
$
|
-0-
|
|
Hong Kong
|
|
$
|
3,466
|
|
|
$
|
-0-
|
|
|
$
|
48,320
|
|
|
$
|
56,771
|
|
|
|
$
|
57,196
|
|
|
$
|
-0-
|
|
|
$
|
174,886
|
|
|
$
|
56,771
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
28,230
|
|
|
$
|
-0-
|
|
|
$
|
69,616
|
|
|
$
|
-0-
|
|
Hong Kong
|
|
$
|
3,476
|
|
|
$
|
-0-
|
|
|
$
|
10,952
|
|
|
$
|
17,901
|
|
|
|
$
|
31,706
|
|
|
$
|
-0-
|
|
|
$
|
80,568
|
|
|
$
|
17,901
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Total Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,031,009
|
|
|
$
|
240,606
|
|
Hong Kong
|
|
|
2,282
|
|
|
|
31,375
|
|
Total Assets
|
|
$
|
1,033,291
|
|
|
$
|
271,981
|
|
NOTE
13 – 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 September 30, 2018, the Company had a stockholders’
deficit of $1,939,646 and a working capital deficit of $2,582,530. In addition, the Company has generated losses since inception.
These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern.
Management’s
Plans
In
April 2018, OZOP entered into and completed a share exchange agreement with the Company (see Note 1), a publicly traded company.
As a public company, management believes it will be able
to access the public equities market
for fund raising for product development and regulatory approvals, sales and marketing and as we expand our distribution in the
US market, we will need to meet increasing inventory requirements.
The
Company is currently offering through a Private Placement Memorandum (the “PPM”) a minimum of $50,000 and up to $3,000,000
of up to 6,000,000 units (a “Unit”), for a price of $0.50 per Unit (the “Purchase Price”) with each Unit
consisting of one (1) share of Common Stock and a warrant (a “Warrant”) to purchase one (1) share of Common Stock,
with each Warrant having a three year term and an exercise price of $1.00 per share of Common Stock. On October 23, 2018, the
Company approved a Subscription Agreement for 100,000 Units for $50,000 which was received on October 12, 2018.
NOTE
14 – SUBSEQUENT EVENTS
On
October 13, 2018, the Board of Directors of the Company authorized a Private Placement Memorandum (the “PPM”) offering
of a minimum of $50,000 and up to $3,000,000 of up to 6,000,000 units (a “Unit”), for a price of $0.50 per Unit (the
“Purchase Price”) with each Unit consisting of one (1) share of Common Stock and a warrant (a “Warrant”)
to purchase one (1) share of Common Stock, with each Warrant having a three year term and an exercise price of $1.00 per share
of Common Stock. On October 23, 2018, the Company approved a Subscription Agreement for 100,000 Units for $50,000 which was received
on October 12, 2018.
On
October 19, 2018, the Company entered into a consulting agreement (the “Consulting Agreement”) with Draper Inc., a
Nevada corporation (“Draper”). Pursuant to the Consulting Agreement the Company agreed to engage Draper as an independent
consultant and Draper agreed to provide the Company with consulting services. In exchange for the services to be provided by Draper
pursuant to the Consulting Agreement, the Company agreed to pay Draper a total of 1,800,000 unregistered shares of the Company’s
$0.001 par value per share, common stock, with 450,000 shares to be issued upon execution of the Consulting Agreement, and with
150,000 shares be issued and delivered each month at the beginning of the fourth month to the beginning of the twelve month, until
the total amount of shares is issued. Either party can terminate the Consulting Agreement by giving 30 days written notice to
the other party.
On
October 19, 2018, the Company entered into a securities purchase agreement (the “SPA”) with Power Up Lending Group
Ltd., a Virginia corporation (the “Investor”), pursuant to which the Company agreed to issue a 12% Convertible Promissory
Note, (the “Note”) in the principal amount of $78,000 in exchange for a purchase price of $78,000. The Note matures
12 months after the date of issuance. The Note is convertible into shares of the Company’s common stock beginning on the
date which is 180 days from the issuance date of the Note, at a conversion price equal to 65% multiplied by the average of the
lowest two trading prices during the 15 trading day period ending on the last completed trading date in the OTC Markets prior
to the date of conversion, provided, however, that the Investor may not convert the Note to the extent that such conversion would
result in the Investor’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common
stock together with all shares owned by the Investor and its affiliates. Note carries a pre-payment penalty if the Note is paid
off in 30, 60, 90,120,150, or 180 days following the issue date. The pre-payment penalty is based on the then outstanding principal
at the time of pay off plus accrued and unpaid interest multiplied by 110%, 115%, 120%,125%,130%, and 135% respectively. After
the expiration of 180 days following the issue date, the Company shall have no right of prepayment.
On
October 23, 2018, the Company received a conversion notice for the issuance of 19,138 shares of common stock for conversion of
$15,000 of principal on the convertible note issued April 13, 2018.
On
October 24, 2018, the Company entered into a consulting agreement (the “Consulting Agreement”) with Jeffrey Patchen,
(“Patchen”). Pursuant to the Consulting Agreement the Company agreed to engage Patchen as an independent consultant
and Patchen agreed to provide the Company with consulting services for sixty (60) days. In exchange for the services to be provided
by Patchen pursuant to the Consulting Agreement, the Company agreed to pay Patchen a total of 20,000 unregistered shares of the
Company’s $0.001 par value per share, common stock.
On
October 29, 2018, the Company received a conversion notice for the issuance of 63,795 shares of common stock for conversion of
$50,000 of principal on the convertible note issued April 13, 2018.
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.