OZOP ENERGY SOLUTIONS, INC. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended: September 30, 2020

OR

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

For the Transition Period from ___________ to____________

Commission File Number: 000-55976

OZOP ENERGY SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

7 Katelyn Ct

Warwick, NY 10990

(Address of principal executive offices) (zip code)

(845) 544-5112

(Registrant’s telephone number, including area code)

Ozop Surgical Corp.

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

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

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

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

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

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

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

As of November 20, 2020, there were 3,263,811,170 shares outstanding of the registrant’s common stock, $0.001 par value per share.

Ozop Energy Solution, Inc.

OZOP ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

See notes to condensed consolidated financial statements.

OZOP ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Unaudited)

See notes to condensed consolidated financial statements.

OZOP ENERGY SOLUTIONS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

(Unaudited)

OZOP ENERGY SOLUTIONS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

(Unaudited)

See notes to condensed consolidated financial statements. 

OZOP ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

See notes to condensed consolidated financial statements.

OZOP ENERGY SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020

NOTE 1 - ORGANIZATION

Business

Ozop Energy Solutions, Inc. (the” Company,” “we,” “us” or “our”) was originally incorporated as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada.

On October 29, 2020, the Company formed a new wholly owned subsidiary, Ozop Surgical Name Change Subsidiary, Inc., a Nevada corporation (“Merger Sub”). The Merger Sub was formed under the Nevada Revised Statutes for the sole purpose and effect of changing the Company’s name to “Ozop Energy Solutions, Inc.” That same day the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with the Merger Sub and filed Articles of Merger (the “Articles of Merger”) with the Nevada Secretary of State, merging the Merger Sub into the Company, which were stamped effective as of November 3, 2020. As permitted by the Section 92.A.180 of the Nevada Revised Statutes, the sole purpose and effect of the filing of Articles of Merger was to change the name of the Company to “Ozop Energy Solutions, Inc.”

Stock Purchase Agreement

On July 10, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Under the terms of the SPA, the Company acquired one thousand (1,000) shares of PCTI, which represents all of the outstanding shares of PCTI, from Chis in exchange for the issuance of 47,500 shares of the Company’s Series C Preferred Stock, 18,667 shares of the Company’s Series D Preferred Stock, and 500 shares of the Company’s Series E Preferred Stock to Chis. The Acquisition is being accounted for as a business combination and was treated as a reverse acquisition for accounting purposes with PCTI as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). In accordance with the accounting treatment for 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 PCTI prior to the reverse merger, in all future filings with the U.S. Securities and Exchange Commission (the “SEC”). The consolidated financial statements after completion of the reverse merger have and will include the assets, liabilities and results of operations of the combined company from and after the closing date of the reverse merger.

PCTI designs, develops, manufactures and distributes standard and custom power electronic solutions. PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid, telecommunications, military, transportation, renewable energy, aerospace and mission critical defense systems. Customers include the United States military, other global military organizations and many of the world’s largest industrial manufacturers. All of its products are manufactured in the United States. Because of the Company’s product scope and the high-power niche that their products occupy, the Company is aggressively targeting the rapidly growing renewable and energy storage markets. The Company’s mission is to be a global leader for high power electronics with a standard of continued innovation.

The Company utilized the Option Pricing Method (the “OPM”) to value the transaction. The OPM method treats all equity linked instruments as call options on the enterprise value, with exercise prices and liquidation preferences based on the terms of the various common, preferred, options, warrants, and convertible debt. Under this method, the common stock only has value if the funds available for distribution to the shareholders exceed the liquidation preferences of the preferred stock and face value of the convertible debt. The timing of a liquidity event is required to utilize this method. The OPM considers the various terms of the stockholder agreements—including the level of seniority among the securities, dividend policy, conversion ratios, and cash allocations—upon liquidation of the enterprise. In addition, the method implicitly considers the effect of the liquidation preference as of the future liquidation date, not as of the valuation date. A feature of the OPM is that it explicitly recognizes the option-like payoffs of the various share classes utilizing information in the underlying asset (that is, estimated volatility) and the risk-free rate to adjust for risk by adjusting the probabilities of future payoffs. The following table summarizes the preliminary value of the consideration issued and the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the transaction . The company preliminarily recorded the excess as goodwill and will analyze within the measurement period if there should be an allocation to identifiable intangible assets:

Included in the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 2020, are the results of Ozop, the accounting acquiree, of revenues of $-0- and a loss before income taxes of $6,228,022.The following table provides unaudited pro forma results of operations for the nine months ended September 30, 2020, and 2019, as if the acquisition had been consummated as of the beginning of that period presented. The pro forma results include the effect of certain purchase accounting adjustments, such as the estimated changes in depreciation and amortization expense on the acquired intangible assets. However, pro forma results do not include any anticipated cost savings (if any) of the combined companies. Accordingly, such amounts are not necessarily indicative of the results if the acquisition has occurred on the date indicated, or which may occur in the future.

Corporate History

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”), a former director 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.

NOTE 2 – GOING CONCERN AND MANAGEMENT’S PLANS

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2020, the Company had an accumulated deficit of $8,173,098 and a working capital deficit of $4,635,877. In addition, the Company has generated losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern.

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to most other countries and infections have been reported globally. Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it may have a material adverse impact on our business, financial condition and results of operations. Management expects that its business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.

Management’s Plans

As a public company, management believes it will be able to access the public equities market for fund raising for product development and regulatory approvals, sales and marketing and as we expand our distribution in the US market, we will need to meet increasing inventory requirements.

On July 10, 2020, the Company entered into the SPA with PCTI, and Chis, PCTI’s CEO and its sole shareholder (see Note 1). This transaction takes PCTI public, and allows us to drive future investments into the energy storage market, which Forbes estimates will grow from $59 billion in 2019 to $546 billion by 2035, PCTI’s products, technologies and expertise are a linchpin of this emerging industry.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2020, 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, 2020, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Current Report on Form 8-K/A filed on September 25, 2020, which includes the historical financial information of PCTI.

The unaudited condensed consolidated financial statements include the accounts of the Company and PCTI and the Company’s other wholly owned subsidiaries Ozop LLC, Ozop HK and Spinus, LLC (“Spinus”). All intercompany accounts and transactions have been eliminated in consolidation.

Emerging Growth Companies

The Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of the benefits of this extended transition period.

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally insured limits

Sales Concentration and credit risk

Following is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine months ended September 30, 2020, and 2019, and their accounts receivable balance as of September 30, 2020:

As disclosed in the above table, PCTI, historically does not have year to year many recurring clients as the Company produces capital equipment for its’ customers.

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

Inventories are valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Inventory costs include material, labor and manufacturing overhead. In evaluating the net realizable value of inventory, management also considers, if applicable, other factors, including known trends, market conditions, currency exchange rates and other such issues.

The components of inventories at September 30, 2020, and December 31, 2019, are as follows:

Purchase concentration

The principal purchases by the Company is comprised of parts and raw materials that the Company assembles and manufactures and 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, 2020, and 2019:

Suppliers to the Company vary from period to period dependent upon our customer’s order specifications. In any specific reporting period, we may be relying on certain vendors, however these vendors will vary dependent on the parts and materials needed. The Company believes its relationships with all of the above vendors is good, and we are not reliant on any particular vendor for future needs.

Property, plant and equipment

Property and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets.

The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:

Depreciation expense was $3,562 and $6,784 for the three and nine months ended September 30, 2020, respectively, and $1,815 and $5,445 for the three and nine months ended September 30, 2019, respectively.

Intangible Assets

Intangible assets primarily represent purchased patent and license rights. The Company amortizes these costs over the shorter of the legal life of the patent or its estimated economic life using the straight-line method. The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. For the three and nine months ended September 30, 2020, the Company recorded amortization expense of $10,417. In accordance with ASC 350, “Intangibles—Goodwill and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.

Goodwill

Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. The Company reviews the goodwill allocated to each of our reporting units for possible impairment annually and whenever events or changes in circumstances indicate carrying amount may not be recoverable. When assessing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its’ carrying amount.

Goodwill is tested annually for impairment on January 1, and at any time upon occurrence of certain events or changes in circumstances. In assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.

The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.

The transaction with PCTI resulted in recognizing goodwill of $11,201,145 (see Note 1).

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. Under ASC 606, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. Other than The Company has no outstanding contracts with any of its’ customers. The Company recognizes revenue when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product and is based on the applicable shipping terms.

For contracts with customers, ownership of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Advance payments are typically required for commercial customers and are recorded as current liability until revenue is recognized. Advance payments are not required for government customers. The majority of contracts typically require payment within 30 to 60 days after transfer of ownership to the customer.

For the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection, or other similar privileges.

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, 2020, and 2019.

Advertising and Marketing Expenses

The Company expenses advertising and marketing costs as incurred. For the nine months ended September 30, 2020, and 2019, the Company recorded $47,325 and $232, respectively, of advertising and marketing expenses.

Research and Development

Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the three and nine months ended September 30, 2020, and 2019, the Company did not record any research and development expenses.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of this note transaction and the effective conversion price embedded in this note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.

Fair Value of Financial Instruments

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

The following are the hierarchical levels of inputs to measure fair value:

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments.

The following table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as of September 30, 2020, for each fair value hierarchy level:

Leases

Effective July 10, 2020, the Company began accounting for leases under ASU 2016-02 (see Note 14), applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Operating lease ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate of 7.5%, based on the information available at the adoption date in determining the present value of future payments. Operating lease expense is recognized pursuant to on a straight-line basis over the lease term and is included in rent in the condensed consolidated statements of operations.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented.

Foreign Currency Translation

The accounts of the Company’s Hong Kong subsidiary are maintained in Hong Kong dollars and the accounts of the U.S. companies are maintained in USD. The accounts of the Hong Kong subsidiary were translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters. According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and statement of comprehensive income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting from the foreign currency transactions are reflected in the statements of comprehensive income.

Relevant exchange rates used in the preparation of the consolidated financial statements are as follows for the period ended September 30, 2020, (Hong Kong dollar per one U.S. dollar):

Earnings (Loss) Per Share

The Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of September 30, 2020, and 2019, the Company’s dilutive securities are convertible into approximately 9,744,058,757 shares of common stock. There were no dilutive securities as of September 30, 2019. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. The following table represents the classes of dilutive securities as of September 30, 2020:

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018.

In January 2017, the FASB issued ASU No. 217-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The amendments simplify the subsequent measurement of goodwill and eliminate the two-step goodwill impairment test. The Company will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment losses on goodwill cannot be reversed once recognized. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate any material impact on the condensed consolidated financial statements.

Other than the above there have no recent accounting pronouncements or changes in accounting pronouncements during the period ended September 30, 2020, that are of significance or potential significance to the Company.

NOTE 4 – INTANGIBLE ASSETS

Patents as of September 30, 2020, consist of the following:

Amortization expense for the three and nine months ended September 30, 2020, was $10,417.

NOTE 5 - CONVERTIBLE NOTES PAYABLE

Since the transaction with PCTI is being accounted for as a business combination and was treated as a reverse acquisition for accounting purposes with PCTI as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). In accordance with the accounting treatment for 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 PCTI prior to the reverse merger. The consolidated financial statements after completion of the reverse merger have and will include the assets, liabilities and results of operations of the combined company from and after the closing date of the reverse merger. Accordingly, as of July 10, 2020, PCTI assumed the liabilities of the Company, including the convertible note balances.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 15% convertible note issued by the Company on August 18, 2017, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, dated February 18, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for the thirty prior trading days including the day upon which a notice of conversion is received. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $2,086.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 15% convertible note issued by the Company on September 13, 2017. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of this note was $25,000.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible note issued by the Company on February 26, 2020, pursuant to a Securities Purchase Agreement. The SPA includes customary representations, warranties and covenants by the Company and customary closing conditions. In conjunction with this note, the Company issued a warrant to purchase 2,212,500 shares of common stock at an exercise price of $0.03, subject to adjustments and expiring on the five-year anniversary of the Issuance Date. As of July 10, 2020, the outstanding principal balance of this note was $132,750 with a carrying value of $66,176, net of unamortized discounts of $66,574. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $66,574 was charged to interest expense. For the period from July 11, 2020 to September 30, 2020, the investor converted a total of $132,750 of the face value and $7,943 of accrued interest into 83,214,457 shares of common stock at an average conversion price of $0.0017. As of September 30, 2020, the outstanding principal balance of this note was $-0-.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible note issued by the Company on February 26, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, dated March 3, 2020 with a maturity date of February 26, 2021. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $798,750. For the period from July 11, 2020 to September 30, 2020, the investor converted a total of $798,750 of the face value and $147,549 of accrued interest into 496,756,528 shares of common stock at an average conversion price of $0.0019. As of September 30, 2020, the outstanding principal balance of this note was $-0-.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible note issued by the Company on August 21, 2019, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, with a maturity date of August 21, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $155,632. For the period from July 11, 2020 to September 30, 2020, the investor converted a total of $155,632 of the face value and $48,306 of accrued interest into 219,963,737 shares of common stock at an average conversion price of $0.0009. As of September 30, 2020, the outstanding principal balance of this note was $-0-.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on March 9, 2020, (the “Issuance Date”) to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $.25 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.25 or 50% of the lowest trading price for the thirty trading days prior to the conversion. As of July 10, 2020, the outstanding principal balance of this note was $80,000 with a carrying value of $53,333, net of unamortized discounts of $26,667. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $26,667 was charged to interest expense. As of September 30, 2020, the outstanding principal balance and carrying value of this note was $80,000.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 22% convertible note issued by the Company on December 5, 2018, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on April 17, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $352,695. For the period from July 11, 2020 to September 30, 2020, the investor converted a total of $352,695 of the face value and $89,295 of accrued interest into 273,028,909 shares of common stock at an average conversion price of $0.0016. As of September 30, 2020, the outstanding principal balance of this note was $-0-.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 22% convertible note issued by the Company on October 19, 2018, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on April 24, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $67.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on April 27, 2020, (the “Issuance Date”) to an investor. This note matures on April 27, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. As of July 10, 2020, the outstanding principal balance of this note was $60,000 with a carrying value of $11,500, net of unamortized discounts of $48,500. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $13,500 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $60,000 with a carrying value of $25,000, net of unamortized discounts of $35,000.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a convertible note issued by the Company on August 23, 2019, with a maturity date of May 23, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on April 28, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $14,831.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on April 28, 2020, (the “Issuance Date”) to an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. As of July 10, 2020, the outstanding principal balance of this note was $53,000 with a carrying value of $10,158, net of unamortized discounts of $42,842. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $11,925 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $53,000 with a carrying value of $22,083, net of unamortized discounts of $30,917.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on May 4, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to the lower of $0.50 or 58% multiplied by the average of the two lowest closing trading price or bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. In conjunction with this note, the Company issued a warrant to purchase 3,666,666 shares of common stock at an exercise price of $0.015, subject to adjustments and expiring on the five-year anniversary of the Issuance Date. As of July 10, 2020, the outstanding principal balance of this note was $110,000 with a carrying value of $18,860, net of unamortized discounts of $91,140. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $25,369 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $110,000 with a carrying value of $44,229, net of unamortized discounts of $65,771.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on May 5, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $03 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.03 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. As of July 10, 2020, the outstanding principal balance of this note was $162,000 with a carrying value of $62,100, net of unamortized discounts of $99,900. In conjunction with this note, the Company issued a warrant to purchase 4,325,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year anniversary of the Issuance Date. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $72,900 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $162,000 with a carrying value of $135,000, net of unamortized discounts of $27,000.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on May 7, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures on May 7, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. As of July 10, 2020, the outstanding principal balance of this note was $30,000 with a carrying value of $5,000, net of unamortized discounts of $25,000. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $6,875 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $30,000 with a carrying value of $11,875, net of unamortized discounts of $18,125.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a convertible note issued by the Company on January 8, 2020, with a maturity date of January 8, 2021, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on May 15, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $115,500, with a carrying value of $56,306, net of unamortized discounts of $59,194. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $59,194 was charged to interest expense. For the period from July 11, 2020 to September 30, 2020, the investor converted a total of $115,067 of the face value and $2,408 of accrued interest and fees into 88,500,000 shares of common stock at an average conversion price of $0.00133. As of September 30, 2020, the outstanding principal balance of this note is $433.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a convertible note issued by the Company on November 27, 2019, with a maturity date of November 27, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on May 15, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $296.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on May 28, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures on May 28, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. As of July 10, 2020, the outstanding principal balance of this note was $30,000 with a carrying value of $3,250, net of unamortized discounts of $26,750. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $6,750 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $30,000 with a carrying value of $10,000, net of unamortized discounts of $20,000.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due convertible note issued by the Company on May 29, 2019, with a maturity date of May 29, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on May 28, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $31,043. For the period from July 11, 2020 to September 30, 2020, the investor converted a total of $31,043 of the face value and $53,337 of accrued interest and fees into 86,262,262 shares of common stock at an average conversion price of $0.001. As of September 30, 2020, the note balance is $-0-.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on June 1, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. As of July 10, 2020, the outstanding principal balance of this note was $127,500 with a carrying value of $27,625, net of unamortized discounts of $99,875. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $57,375 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $127,500 with a carrying value of $85,000, net of unamortized discounts of $42,500. In conjunction with this note, the Company issued a warrant to purchase 6,375,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year anniversary of the Issuance Date.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on June 11, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the twenty- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. As of July 10, 2020, the outstanding principal balance of this note was $53,000 with a carrying value of $4,417, net of unamortized discounts of $48,583. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $11,792 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $53,000 with a carrying value of $16,209, net of unamortized discounts of $36,791.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on June 30, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. As of July 10, 2020, the outstanding principal balance of this note was $129,500 with a carrying value of $8,375, net of unamortized discounts of $121,125. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $ was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $129,500 with a carrying value of $65,750, net of unamortized discounts of $63,750. In conjunction with this note, the Company issued a warrant to purchase 6,375,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year anniversary of the Issuance Date.

On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on July 8, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. As of July 10, 2020, the outstanding principal balance of this note was $250,000 with a carrying value of $-0-, net of unamortized discounts of $250,000. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $114,583 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $250,000 with a carrying value of $114,583, net of unamortized discounts of $135,417. In conjunction with this note, the Company issued a warrant to purchase 12,500,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year anniversary of the Issuance Date.

On February 26, 2020, (the “Issuance Date”) PCTI issued a 12% Convertible Promissory Note (the “Note”), in the principal amount of $106,950, to an investor. This note matures 12 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at 55% of the lowest trading price for the twenty-five trading days prior to the conversion. If the trading price cannot be calculated for such security on such date, the trading price shall be the fair market value as mutually determined by the Company and the investor for which the calculation of the trading price is required in order to determine the conversion price. PCTI received proceeds of $85,000 on February 26, 2020, and the Note included an original issue discount of $13,950 and lender costs of $8,000. This note proceeds will be used by the Company for general working capital purposes. The Note also requires a daily payment via ACH of $400. On June 25, 2020, the Note was amended to add $111,225 of additional principal to the outstanding balance. Pursuant to the PCTI transaction with Ozop, on July 10, 2020, the conversion price is equal to 45% multiplied by the lowest closing bid price during the twenty-five-trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. Accordingly, the Company determined the conversion feature of the Notes represented an embedded derivative since the note is convertible into a variable number of shares upon conversion, as the note was 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 embedded feature included in the note resulted in an initial debt discount of $85,000, interest expense of $135,786 and initial derivative liability of $220,786. For the nine months ended September 30, 2020, amortization of the debt discounts of $54,793 was charged to interest expense. For the nine months ended September 30, 2020, principal payments of $56,400 were paid. As of September 30, 2020, the outstanding principal balance of this note was $161,775 with a carrying value of $116,935, net of unamortized discounts of $44,840.

On July 15, 2020, (the “Issuance Date”) the Company issued a 15% convertible promissory note, in the principal amount of $127,500, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.011 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $102,000 on July 22, 2020, and this note included an original issue discount of $25,500. This note proceeds will be used by the Company for general working capital purposes. In conjunction with this note, the Company issued a warrant to purchase 6,375,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year anniversary of the Issuance Date. The Company allocated the proceeds to the debt of $82,068 and to the warrant $19,932 based on the relative fair value. The embedded conversion feature included in this note resulted in an initial derivative liability of $207,699, a debt discount of $82,068 with the excess of $125,541 charged to interest expense of $125,541. For the nine months ended September 30, 2020, amortization of the debt discounts of $53,125 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note was $127,500 with a carrying value of $53,125, net of unamortized discounts of $74,375.

On July 29, 2020, (the “Issuance Date”) the Company issued a 15% convertible promissory note, in the principal amount of $127,500, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.011 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $100,000 on August 3, 2020, and this note included an original issue discount of $25,500. This note proceeds will be used by the Company for general working capital purposes. In conjunction with this note, the Company issued a warrant to purchase 12,750,000 shares of common stock at an exercise price of $0.01, subject to adjustments and expiring on the five-year anniversary of the Issuance Date. The Company allocated the proceeds to the debt $61,733 and warrant $40,267 based on the relative fair value. The embedded conversion feature included in this note resulted in an initial derivative liability of $198,239, a debt discount of $61,733 with the excess of $136,506 charged to interest expense. For the nine months ended September 30, 2020, amortization of the debt discounts of $42,500 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note was $127,500 with a carrying value of $42,500, net of unamortized discounts of $85,000.

A summary of the convertible note balance as of September 30, 2020, is as follows:

NOTE 6 – DERIVATIVE LIABILITIES

The Company determined the conversion feature of the convertible notes, which all contain variable conversion rates, represented an embedded derivative since the notes were convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.

The Company valued the derivative liabilities at September 30, 2020, at $2,250,953. The Company used the Monte Carlo simulation valuation model with the following assumptions as of September 30, 2020, risk free interest rates at 0.11%, and volatility of 85% to 94%. The initial derivative liabilities for convertible notes issued from July 11, 2020 to September 30, 2020, used the following assumptions; risk-free interest rates from 0.12% to 0.17% and volatility of 96% to 106%.

A summary of the activity related to derivative liabilities for the period from July 10, 2020 to September 30, 2020, is as follows:

NOTE 7 – NOTES PAYABLE

The Company has the following note payables outstanding:

On October 26, 2016, PCTI entered into a $210,000 note payable with a bank. On July 24, 2020, due to defaults with the terms of the note, the note was amended with the outstanding balance due December 26, 2020 and the interest rate changed to 7.75%. Borrowings are collateralized by substantially all of the assets of PCTI and the personal guarantee of PCTI’s President. At September 30, 2020 and December 31, 2019, $150,646 and $174,444, respectively, was outstanding on the note payable.

On September 25, 2019, PCTI renewed their $350,000 promissory note with a bank that provides for borrowings of up to $350,000. Interest is due monthly and the principal was due on April 12, 2020, however, on July 24, 2020, due to PCTI being in default with agreement was amended with a change in the maturity date to December 26, 2020, and the interest rate changed to the prime rate plus 3.25% (6.5% at September 30, 2020). Borrowings are collateralized by substantially all of the assets of PCTI and the personal guarantee of PCTI’s President. At September 30, 2020 and December 31, 2019, $347,588 and $349,962, respectively, was outstanding on the promissory note.

On August 24, 2020 (the “Issue Date”), the Company entered into a 12%, $750,000 face value promissory note with a third-party (the “Holder”) due August 24, 2021 (the “Maturity Date”). Principal payments shall be made in six instalments of $125,000 commencing 180 days from the Issue Date and continuing each 30 days thereafter for 5 months and the final payment of principal and interest due on the Maturity Date. The Holder shall have the right from time to time, and at any time following an event of default, as defined on the agreement, to convert all or any part of the outstanding and unpaid principal, interest and any other amounts due into fully paid and non-assessable shares of common stock of the Company, at the lower of i) the Trading Price (as defined in the agreement) during the previous five trading days prior to the Issuance Date or ii) the volume weighted average price during the five trading days ending on the day preceding the conversion date. The Company received proceeds of $663,000 on August 25, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $87,000. For the nine months ended September 30, 2020, amortization of the costs of $9,063 was charged to interest expense. In conjunction with this Note, the Company issued 2 common stock purchase warrants; each warrant entitles the Holder to purchase 122,950,819 shares of common stock at an exercise price of $0.0061, subject to adjustments and expires on the five-year anniversary of the Issue Date. The warrants issued resulted in a debt discount of $471,307, with the offset to additional paid in capital. For the nine months ended September 30, 2020, amortization of the debt discount of $49,094 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note was $750,000 with a carrying value of $249,839, net of unamortized discounts of $500,151.

On April 20, 2020, PCTI was granted a loan from a bank in the amount of $100,400, pursuant to the Paycheck Protection Program (“PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The loan matures on April 20, 2022 and bears interest at a rate of 1.0% per annum, payable monthly beginning on November 20, 2020. The loan may be prepaid at any time prior to maturity with no prepayment penalties. Under the terms of the loan, a portion or all of the loan is forgivable to the extent the loan proceeds are used to fund qualifying payroll, rent and utilities during a designated twenty-four-week period. Payments are deferred until the SBA determines the amount to be forgiven. The Company intends to utilize the proceeds of the PPP loan in a manner which will enable qualification as a forgivable loan. However, no assurance can be provided that all or any portion of the PPP loan will be forgiven. The balance on this PPP loan was $10,400 as of September 30, 2020 and has been classified as a long-term liability in notes payable.

On July 14, 2020, PCTI received $10,000 grant under the Economic Injury Disaster Loan (“EIDL”) program. Up to $10,000 of the EIDL can be forgiven as long as such funds were utilized to provide working capital. The first payment due is deferred one year. The entirety of the loan as of September 30, 2020 and has been classified as a long-term liability in notes payable.

The following notes were assumed on July 10, 2020, pursuant to the PCTI transaction:

On June 23, 2020 (the “Execution Date”), the Company entered into a Loan and Securities Purchase Agreement with a third- party (the “Lender”). Pursuant to the agreement in exchange for a $210,000 Promissory Note, inclusive of an original issue discount of $35,000 the Company received proceeds of $175,000 from the Lender. The note carries an interest rate of 18% and matures and is due in one lump sum on the 24- month anniversary (the “Maturity Date”) of the Execution Date. For the first nine months interest may accrue on a monthly basis, and the Company has the option to pay the monthly interest or add such interest to the principal balance of the note. Commencing on the tenth month of the note, all accrued interest, if any, shall be added to the principal amount of the note, and interest on the new principal amount shall become due and payable on a monthly basis. Should the Company default on making any interest payments following the initial nine-months, or paying the note by the Maturity Date, the note shall automatically be converted into an 18% convertible debenture.

On June 25, 2020 (the “Issue Date”), the Company entered into a 12%, $203,000 face value promissory note with a third-party (the “Holder”) due June 25, 2021 (the “Maturity Date”). Principal payments shall be made in six instalments of $33,333 commencing 180 days from the Issue Date and continuing each 30 days thereafter for 5 months and the final payment of principal and interest due on the Maturity Date. The Holder shall have the right from time to time, and at any time following an event of default, as defined on the agreement, to convert all or any part of the outstanding and unpaid principal, interest and any other amounts due into fully paid and non-assessable shares of common stock of the Company, at the lower of i) the Trading Price (as defined in the agreement) during the previous five trading days prior to the Issuance Date or ii) the volume weighted average price during the five trading days ending on the day preceding the conversion date. The Company received proceeds of $176,000 on June 26, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $27,000. In conjunction with this Note, the Company issued 2 common stock purchase warrants; each warrant entitles the Holder to purchase 10,000,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expires on the five-year anniversary of the Issue Date.

NOTE 8 – DEFERRED LIABILITY

On September 2, 2020, PCTI entered into an Agreement (the “Agreement”) with a third- party. Pursuant to the terms of the Agreement, in exchange for $750,000, PCTI agreed to pay the third-party a perpetual three percent (3%) payment of revenues, as defined in the Agreement. Payments are due ninety (90) days after each calendar quarter, with the first payment due on or before March 31, 2021, for revenues for the quarter ending December 31, 2020. The Company has recorded the $750,000 as deferred liability on the September 30, 2020, consolidated condensed balance sheet.

NOTE 9 – RELATED PARTY TRANSACTIONS

Employment Agreement

On July 10, 2020, pursuant to the PCTI transaction, the Company assumed an employment contract entered into on February 28, 2020, between the Company and Mr. Conway (the “Employment Agreement”). Pursuant to the terms of the Employment Agreement, Mr. Conway is to receive an annual salary of $120,000, for his position of CEO of the Company, payable monthly. Mr. Conway was issued 2,500 shares of Series C Preferred Stock. The Company valued the shares at $5,000. On August 28, 2020, Mr. Conway was issued 1,333 shares of Series D Preferred stock and 500 shares of series E Preferred Stock. The Series D Preferred Stock is convertible in the aggregate into three times the number of shares of common stock outstanding at the time of conversion. Mr. Conway owns 6.67% of the issued and outstanding Series D Preferred Stock, and based on the 3,107,037,634 shares outstanding on August 28, 2020, Mr. Conway’s Preferred Stock is convertible into 621,253,401 shares of common stock. Based on the share price of the common stock on that date of $0.0065, the shares were valued at $4,286,648 and recognized as compensation on the accompanying unaudited condensed consolidated Statement of Comprehensive Loss.

Management Fees and related party payables

For the three and nine months ended September 30, 2020, and 2019, the Company recorded expenses to its officers in the following amounts:

As of September 30, 2020, and December 31, 2019, included in related party payable is $10,308 and $27,909, respectively, for the amounts owed the CEO of PCTI.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Leases

On October 25, 2019 PCTI executed a non-cancellable lease of office and industrial space totaling 11,800 square feet in Zelienople, PA., which began December 1, 2019 and expires on November 30, 2022. The lease terms include a monthly rent of $7,000 (see Note 12). The Company also pays $3,400 on a month to month basis for its corporate office in Warwick, New York.

Licenses

On February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms of the Licensing Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The Company paid the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of net sales on any product sold utilizing any of the patents. There have not been any sales of the licensed products and accordingly, no royalties have been incurred.