OZOP ENERGY SOLUTIONS, INC. - Quarter Report: 2020 June (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: June 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 SURGICAL CORP.
(Exact name of registrant as specified in its charter)
| Nevada | 35-2540672 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
31Sandfort Lane
Warwick, NY 10990
(Address of principal executive offices) (zip code)
(845) 544-5112
(Registrant’s telephone number, including area code)
Not applicable.
(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.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] | |
| (Do not check if a smaller reporting company) | Emerging growth company | [X] | ||
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:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
As of August 10, 2020, there were 2,904,963,462 shares outstanding of the registrant’s common stock, $0.001 par value per share.
Ozop Surgical Corp.
OZOP SURGICAL CORP
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 304,676 | $ | 10,877 | ||||
| Advance for acquisition | 400,000 | - | ||||||
| Prepaid expenses | 2,167 | 5,417 | ||||||
| Assets of discontinued operations | - | 5,462,195 | ||||||
| Total Current Assets | 706,843 | 5,478,489 | ||||||
| Property and equipment, net | 10,910 | 4,001 | ||||||
| Goodwill | 194,951 | 194,951 | ||||||
| License Rights, net of accumulated amortization | 151,041 | 171,875 | ||||||
| TOTAL ASSETS | $ | 1,063,745 | $ | 5,849,316 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 419,355 | $ | 370,640 | ||||
| Accounts payable and accrued expenses, related parties | 419,692 | 470,886 | ||||||
| Convertible notes payable, net of discounts | 1,767,505 | 1,694,227 | ||||||
| Current portion of notes payable | 270,030 | 425,033 | ||||||
| Derivative liabilities | 9,471,445 | 2,462,940 | ||||||
| Liabilities of discontinued operations | 75,270 | 5,592,706 | ||||||
| Total Current Liabilities | 12,423,299 | 11,016,432 | ||||||
| Long Term Liabilities | ||||||||
| Note payable, net of discount | 176,365 | - | ||||||
| TOTAL LIABILITIES | 12,599,663 | 11,016,432 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock (10,000,000 shares authorized, par value $0.001, 50,000 shares issued and outstanding) | ||||||||
|
Series C Preferred Stock (50,000 shares authorized and 50,000 issued and outstanding, par value $0.001) |
50 | 50 | ||||||
| Common stock (4,990,000,000 shares authorized par value $0.001; 1,549,176,877 and 219,035 shares issued and outstanding June 30, 2020, and December 31, 2019, respectively) | 1,549,177 | 219 | ||||||
| Deferred stock compensation | - | (49,033 | ) | |||||
| Treasury stock, Series C Preferred Stock (47,500 shares, par value $0.001) | (100,000 | ) | - | |||||
| Common stock to be issued (1,350 shares issuable) | 1 | 1 | ||||||
| Additional paid in capital | 28,452,220 | 5,090,936 | ||||||
| Accumulated Deficit | (41,436,232 | ) | (10,208,905 | ) | ||||
| Stock subscription receivable | (7,600 | ) | (7,600 | ) | ||||
| Accumulated comprehensive gain | 6,466 | 7,216 | ||||||
| Total Stockholders’ Deficit | (11,535,918 | ) | (5,167,116 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,063,745 | $ | 5,849,316 | ||||
See notes to condensed consolidated financial statements.
| 1 |
OZOP SURGICAL CORP
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue | $ | - | $ | 1,521 | $ | - | $ | 49,123 | ||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative, related parties | 30,000 | 163,000 | 87,505 | 283,000 | ||||||||||||
| General and administrative, other | 170,006 | 453,454 | 291,241 | 1,048,819 | ||||||||||||
| Research and development | - | 10,400 | - | 63,604 | ||||||||||||
| Impairment | - | 44,200 | - | 44,200 | ||||||||||||
| Total operating expenses | 200,006 | 671,054 | 378,746 | 1,439,623 | ||||||||||||
| Operating loss | (200,006 | ) | (669,533 | ) | (378,746 | ) | (1,390,500 | ) | ||||||||
| Other (income) expenses: | ||||||||||||||||
| Interest expense | 11,390,835 | 572,229 | 15,212,160 | 939,703 | ||||||||||||
| Loss (Gain) on change in fair value of derivatives | 2,148,349 | (20,762 | ) | 3,682,522 | (68,372 | ) | ||||||||||
| Loss on extinguishment of debt | 11,816,065 | 696,241 | 12,011,607 | 559,566 | ||||||||||||
| Total Other Expenses | 25,355,250 | 1,247,708 | 30,906,290 | 1,430,897 | ||||||||||||
| Loss from continuing operations before income taxes | (25,555,256 | ) | (1,917,241 | ) | (31,285,036 | ) | (2,821,397 | ) | ||||||||
| Income tax provision | - | - | - | - | ||||||||||||
| Loss from continuing operations | $ | (25,555,256 | ) | $ | (1,917,241 | ) | (31,285,036 | ) | (2,821,397 | ) | ||||||
| Discontinued operations: | ||||||||||||||||
| Loss from discontinued operations, net of income taxes | - | - | (29,147 | ) | - | |||||||||||
| Gain from license termination, net of income taxes | - | - | 86,856 | - | ||||||||||||
| Net loss | $ | (25,555,256 | ) | $ | (1,917,241 | ) | $ | (31,227,327 | ) | $ | (2,821,397 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustment | (9 | ) | (717 | ) | (750 | ) | (530 | ) | ||||||||
| Comprehensive loss | $ | (25,555,265 | ) | $ | (1,917,958 | ) | $ | (31,228,077 | ) | $ | (2,821,927 | ) | ||||
| Loss per share basic and fully diluted | $ | (0.06 | ) | $ | (59.54 | ) | $ | (0.14 | ) | (91.87 | ) | |||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic and diluted | 432,058,100 | 32,203 | 217,814,987 | 30,711 | ||||||||||||
See notes to condensed consolidated financial statements.
| 2 |
OZOP SURGICAL CORP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
THREE AND SIX MONTHS ENDED JUNE 30, 2020
(Unaudited)
| Common stock | Common stock to be issued | Series C Preferred Stock | Treasury | Deferred Stock | Stock Subscription | Accumulated
comprehensive | Additional
Paid-in | Accumulated | Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Stock | Compensation | Receivable | income | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Balances January 1, 2020 | 219,035 | $ | 219 | 1,350 | $ | 1 | 50,000 | $ | 50 | $ | - | $ | (49,033 | ) | $ | (7,600 | ) | $ | 7,216 | $ | 5,090,936 | $ | (10,208,905 | ) | (5,167,116 | ) | ||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | 4,939,400 | 4,939 | - | - | - | - | - | - | - | - | 1,127,959 | - | 1,132,899 | |||||||||||||||||||||||||||||||||||||||
| Adjustment for rounding of reverse split | 58 | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Redemption Series C Preferred stock | - | - | - | - | (2,500 | ) | - | (50,000 | ) | - | - | - | - | - | (50,000 | ) | ||||||||||||||||||||||||||||||||||||
| Issuance Series C Preferred stock as compensation | - | - | - | - | 2,500 | - | - | - | - | - | 4,998 | - | 5,000 | |||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation | - | - | - | - | - | - | - | 49,033 | - | - | - | - | 49,033 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (741 | ) | - | - | (741 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | (5,672,071 | ) | (5,672,071 | ) | |||||||||||||||||||||||||||||||||||||
| Balances March 31, 2020 | 5,158,493 | 5,158 | 1,350 | 1 | 50,000 | 50 | (50,000 | ) | - | (7,600 | ) | 6,475 | 6,223,895 | (15,880,976 | ) | (9,702,997 | ) | |||||||||||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | 1,439,298,485 | 1,439,298 | - | - | - | - | - | - | - | - | 21,620,570 | - | 23,059,868 | |||||||||||||||||||||||||||||||||||||||
| Redemption Series C Preferred stock | - | - | - | - | - | - | (50,000 | ) | - | - | - | - | - | (50,000 | ) | |||||||||||||||||||||||||||||||||||||
| Shares issued upon cashless exercise of warrants | 104,719,899 | 104,720 | - | - | - | - | - | - | - | - | 607,755 | - | 712,475 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | - | (9 | ) | - | - | (9 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | (25,555,256 | ) | (25,555,256 | ) | |||||||||||||||||||||||||||||||||||||
| Balances June 30, 2020 | 1,549,176,877 | $ | 1,549,177 | 1,350 | $ | 1 | 50,000 | $ | 50 | $ | (100,000 | ) | $ | - | $ | (7,600 | ) | $ | 6,466 | $ | 28,452,220 | $ | (41,436,232 | ) | $ | (11,535,917 | ) | |||||||||||||||||||||||||
OZOP SURGICAL CORP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
THREE AND SIX MONTHS ENDED JUNE 30, 2019
(Unaudited)
| Common stock | Common stock to be issued | Series B Preferred Stock | Treasury | Series C Preferred Stock | Deferred Stock | Stock Subscription | Accumulated comprehensive | Additional Paid-in | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Stock | Shares | Amount | Compensation | Receivable | income | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances January 1, 2019 | 29,068 | $ | 29 | - | $ | - | - | $ | - | $ | - | $ | $ | (269,167 | ) | $ | (7,600 | ) | $ | 8,228 | $ | 1,988,897 | $ | (4,068,747 | ) | $ | (2,348,360 | ) | ||||||||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | 231 | - | - | - | - | - | - | - | - | 51,750 | - | 51,750 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in private placement | 160 | - | - | - | - | - | - | - | - | 80,000 | - | 80,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share issued and to be issued for services | 171 | - | 450 | 1 | - | - | (422,100 | ) | - | - | 422,099 | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivatives for payments of convertible notes | - | - | - | - | - | - | - | - | - | 18,479 | - | 18,479 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation | - | - | - | - | - | - | 395,720 | - | - | - | - | 395,720 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on foreign translation | - | - | - | - | - | - | - | - | 187 | - | - | 187 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | (904,156 | ) | (904,156 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2019 | 29,630 | 29 | 450 | 1 | - | - | - | - | - | (295,547 | ) | (7,600 | ) | 8,415 | 2,561,225 | (4,972,903 | ) | (2,706,380 | ) | |||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | 5,597 | 6 | - | - | - | - | - | - | - | 995,809 | - | 995,815 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued and to be issued for services | 200 | - | 450 | 0 | - | - | (55,500 | ) | - | - | 87,500 | - | 32,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation | - | - | - | - | - | - | 235,982 | - | - | - | - | 235,982 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in private placement | 40 | - | - | - | - | - | - | - | - | 20,000 | - | 20,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Series B Preferred Stock issued | - | - | - | - | 1,000 | 1 | - | - | - | - | - | 67,999 | - | 68,000 | ||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on foreign translation | - | - | - | - | - | - | - | - | (717 | ) | - | - | (717 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2019 | - | - | - | - | - | - | - | - | - | - | (1,917,241 | ) | (1,917,241 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances June 30, 2019 | 35,467 | $ | 35 | 900 | $ | 1 | 1,000 | $ | 1 | $ | - | - | $ | - | $ | (115,065 | ) | $ | (7,600 | ) | $ | 7,698 | $ | 3,732,533 | $ | (6,890,144 | ) | $ | (3,272,541 | ) | ||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
| 3 |
OZOP SURGICAL, CORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss from continuing operations | $ | (31,285,036 | ) | $ | (2,821,397 | ) | ||
| Net gain from discontinued operations | 57,709 | - | ||||||
| Adjustments to reconcile net loss to net cash used in operations | ||||||||
| Non-cash interest expense | 14,727,584 | 860,561 | ||||||
| Amortization and depreciation | 22,313 | 22,433 | ||||||
| Loss (Gain) on fair value change of derivatives | 3,682,522 | (68,372 | ) | |||||
| Loss on extinguishment of debt | 12,011,607 | 559,567 | ||||||
| Stock compensation expense | 54,033 | 706,702 | ||||||
| Gain on termination of license | (86,856 | ) | - | |||||
| Impairment | - | 44,200 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | - | 42,590 | ||||||
| Prepaid expenses | 3,249 | 7,359 | ||||||
| Accounts payable and accrued expenses | 481,140 | 137,501 | ||||||
| Accounts payable and accrued expenses, related parties | (51,193 | ) | (28,924 | ) | ||||
| Net cash used in operating activities-continuing operations | (440,638 | ) | (537,780 | ) | ||||
| Net cash provided by operating activities-discontinued operations | 89,326 | - | ||||||
| Net cash used in operating activities | (351,312 | ) | (537,780 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of office and computer equipment | (8,389 | ) | - | |||||
| Advance for acquisition | (400,000 | ) | - | |||||
| Net cash used in investing activities | (408,389 | ) | - | |||||
| Cash flows from financing activities: | ||||||||
| Redemption of preferred stock | (100,000 | ) | - | |||||
| Proceeds from sale of common stock | - | 100,000 | ||||||
| Proceeds from issuances of convertible notes payable | 803,250 | 494,950 | ||||||
| Proceeds from issuances of notes payable | 351,000 | - | ||||||
| Payments of principal of convertible note payable and notes payable | - | (102,805 | ) | |||||
| Net cash provided by financing activities | 1,054,250 | 492,145 | ||||||
| Effects of exchange rate on cash | $ | (750 | ) | $ | (530 | ) | ||
| Net increase (decrease) in cash | 293,799 | (46,165 | ) | |||||
| Cash, Beginning of period | 10,877 | 50,903 | ||||||
| Cash, End of period | $ | 304,676 | $ | 4,738 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 47,737 | $ | 3,135 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Schedule of non-cash Investing or Financing Activity: | ||||||||
| Original issue discount included in convertible notes payable | $ | 202,500 | $ | 66,050 | ||||
| Default penalties added to convertible notes payable | $ | 1,680,544 | $ | - | ||||
| Issuance of common stock upon convertible note and accrued interest conversion | $ | 3,207,320 | $ | 155,440 | ||||
| Reclassification of notes payable to convertible notes payable | $ | 330,000 | $ | - | ||||
| Carrying value of assets and liabilities at termination of license with Spinal Resources, Inc. | ||||||||
| Inventory | $ | 374,500 | $ | - | ||||
| Implant instruments, net | 350,825 | - | ||||||
| Patent rights, net | 2,714,204 | - | ||||||
| Goodwill | 2,002,314 | - | ||||||
| License fee payable | (1,234,089 | ) | - | |||||
| Present value of option to buy SRI | (2,899,420 | ) | - | |||||
| Common stock payable | (245,000 | ) | ||||||
| Iberia Note | (447,153 | ) | - | |||||
| Equity line payable | (45,359 | ) | - | |||||
| Note issued for inventory and instruments | (640,699 | ) | - | |||||
| Accrued interest | (16,979 | ) | - | |||||
| Gain on termination | $ | 86,856 | $ | - | ||||
See notes to condensed consolidated financial statements.
| 4 |
OZOP SURGICAL CORP
Notes to Condensed Consolidated Financial Statements
June 30, 2020
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. Following the acquisition of OZOP Surgical, Inc. (“Ozop”) as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and pain management procedures and specialties.
Stock Purchase Agreement
On February 28, 2020, the Company entered into a Binding Letter of Intent (the “LOI”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. On June 26, 2020, the Company, PCTI and Chis signed a Stock Purchase Agreement (the “SPA”) and on July 10, 2020, the Company closed the SPA with PCTI and Chis, the sole shareholder of PCTI. 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 a cash payment of $400,000 (of which $100,000 was paid May 26, 2020, and $300,000 was paid June 26,2020) and is presented as advance for acquisition on the accompanying balance sheet, and 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. PCTI operates in the very high-power niche of the power electronics market, designing and manufacturing leading edge equipment for use in power conversion applications. PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid, telecommunications, military, transportation, renewable energy, aerospace and mission critical defense systems. PCTI’s clients include Fortune 500 companies, all branches of the US Department of Defense including the US Army and the US Air Force, NASA as well as other global military organizations
Acquisition and Termination of Exclusive License Agreement
On August 23, 2019, the Company entered into an Exclusive License Agreement (the “Agreement”) with Spinal Resources, Inc. (“SRI”). Pursuant to the Agreement, SRI granted to the Company an exclusive license, for products, as defined in the Agreement, and utilized in spine and related surgical procedures. In accordance with ASC 805, the Company has determined to account for the Agreement as a business combination. As consideration for the Agreement, the Company agreed to pay license fees equal to $1,500,000, over the eighteen- month term of the Agreement. The Company recorded the liability at its present value of $1,234,089. Additionally, the Company has agreed to issue 6,000 shares of restricted common stock on a quarterly basis, pursuant to the terms of the Agreement, of which 1,000 shares were issued on August 23, 2019. The Company valued the shares issued at $49,000 (based on the market price of the common stock) and included the $49,000 as part of the consideration of the transaction. The remaining 5,000 shares to be issued has been recorded as a $245,000 liability to be paid in common stock and was included in the total consideration issued in the transaction. The Company also issued a Promissory Note (the “Note”) to SRI for $723,524 for the purchase of the inventory of the Products (as defined in the Agreement). This note has a stated interest rate of six percent (6%) and payment terms of this note are in eighteen equal instalments, beginning on October 1, 2019. Either party may terminate the Agreement upon written notice if the other party has failed to remedy a material breach within 30 days (or 15 days in the case of a breach of a payment obligation). SRI also granted the Company an option to purchase the Company on or before the termination date of the license for a minimum of $5,500,000 which could have been increased based on the revenue rate at the time the option would be exercised. If the Company did not elect to exercise their option to purchase SRI, SRI can “put” the Acquisition to the Company. Any payments made for the license, this note and other liabilities assumed by the Company can be net against the option to buy price. The Company calculated the net minimum purchase price to be $3,093,604 and recorded the liability at its present value of $2,834,692. The difference of $258,912 was charged to interest expense over the option period.
| 5 |
The following table summarizes the preliminary value of the consideration issued and the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the transaction:
| Purchase Price Allocation | ||||
| Fair value of consideration issued | $ | 5,286,305 | ||
| Liabilities assumed | 524,387 | |||
| Total purchase price | $ | 5,810,692 | ||
| Assets acquired | $ | 723,524 | ||
| Intellectual Property/Technology | 2,810,000 | |||
| Goodwill | 2,277,168 | |||
| $ | 5,810,692 | |||
The total purchase price of $5,810,692 has been allocated on a preliminary basis to the tangible and intangible assets acquired and liabilities assumed based on preliminary estimated fair values as of the completion of the transaction. These allocations reflect various preliminary estimates that are currently available and are subject to change upon the valuation being finalized within the measurement period.
On January 16, 2020, the Company received from SRI notice that the Agreement dated August 23, 2019, between SRI and the Company has been revoked, as the Company did not make the required January 6, 2020, license payment nor cure the default. Based on the termination of the Agreement, the Company recorded an impairment charge to goodwill of $274,854 as of December 31, 2019. The impairment charge was calculated as the difference of the carrying values of the assets acquired compared to the consideration and liabilities assumed in the transaction.
The Company recorded a gain of $86,856 for the six months ended June 30, 2020 based on the difference of the carrying values of the assets acquired and liabilities that were assumed in the transaction as follows:
| Assets | ||||
| Inventory | $ | 374,500 | ||
| Instruments, net | 350,825 | |||
| Patent rights, net | 2,714,204 | |||
| Goodwill | 2,002,314 | |||
| Total assets as of January 16, 2020 | $ | 5,441,843 | ||
| Consideration issued and liabilities assumed | ||||
| Common Stock payable | $ | 245,000 | ||
| License fee payable | 1,234,089 | |||
| Equity Line payable | 45,359 | |||
| Iberia Note | 447,153 | |||
| Inventory and Instrument note | 640,699 | |||
| Accrued interest | 16,979 | |||
| Option to buy | 2,899,420 | |||
| Total consideration and liabilities assumed balances | $ | 5,528,699 | ||
| Gain on termination of license | $ | 86,856 | ||
See Note 12 for further discussion on discontinued operations.
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Corporate Matters
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. On January 16, 2020, the Company received from SRI notice that the Agreement dated August 23, 2019, between SRI and the Company has been revoked, as the Company did not cure a payment default within the cure period. As of June 30, 2020, the Company had a stockholders’ deficit of $11,535,918 and a working capital deficit of $11,716,456. 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).
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 June 30, 2020, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Current Report on Form 10-K filed on May 14, 2020.
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The unaudited condensed consolidated financial statements include the accounts of the Company and Ozop and its wholly owned subsidiaries Ozop LLC, Ozop HK and Spinus, LLC (“Spinus”). All intercompany accounts and transactions have been eliminated in consolidation.
Emerging Growth Companies
The Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of the benefits of this extended transition period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally insured limits
Sales Concentration and credit risk
Following is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and six months ended June 30, 2020, and 2019, and their accounts receivable balance as of June 30, 2020:
| Sales % Three Months Ended June 30, 2020 | Sales % Three Months Ended June 30, 2019 | Sales % Six Months Ended June 30, 2020 | Sales % Six Months Ended June 30, 2019 | Accounts receivable balance June 30, 2020 | ||||||||||||||||
| Customer A | N/A | 100 | % | N/A | 100 | % | $ | - | ||||||||||||
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.
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Inventory
Inventory, if any, which consists of finished goods, is valued at the lower of cost or net realizable value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management analysis or inventory levels and future sales forecasts.
Purchase concentration
The principal purchases by the Company is comprised of finished goods that the Company sells to its customers. Following is a summary of suppliers who accounted for more than ten percent (10%) of the Company’s purchases for the three and six months ended June 30, 2020, and 2019:
| Purchase % Three Months Ended June 30, 2020 | Purchase % Three Months Ended June 30, 2019 | Purchase % Six Months Ended June 30, 2020 | Purchase % Six Months Ended June 30, 2019 | |||||||||||||
| Supplier A | N/A | 100 | % | N/A | 100 | % | ||||||||||
Property, plant and equipment
Property and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets.
The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| Office equipment | $ | 17,979 | $ | 9.590 | ||||
| Less: Accumulated Depreciation | (7,069 | ) | (5,589 | ) | ||||
| Property and Equipment, Net | $ | 10,910 | $ | 4,001 | ||||
Depreciation expense was $816 and $1,480 for the three and six months ended June 30, 2020, respectively, and $800 and $1,599 for the three and six months ended June 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 year ended December 31, 2019, the Company impaired $44,200 of tradenames as management has decided not to go forward with the use of the trade name Spinus. For the three and six months ended June 30, 2020, the Company recorded amortization expense of $10,415 and $20,833, respectively and the three and six months ended June 30, 2019, $10,417 and $20,834, respectively. In accordance with ASC 350, “Intangibles—Goodwill and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.
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Goodwill
Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. During the year ended December 31, 2019, the Company recorded goodwill of $2,277,168, included in assets of discontinued operations in the accompanying balance sheet at December 31, 2019, related to the SRI transaction. The Company reviews the goodwill allocated to each of our reporting units for possible impairment annually and whenever events or changes in circumstances indicate carrying amount may not be recoverable. When assessing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its’ carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its’ carrying amount, then the Company performs a two-step impairment test. If the Company concludes otherwise, then no further action is taken. The Company also has the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit. During the year ended December 31, 2019. the Company recorded an impairment of goodwill of $274,854, for the termination of the SRI License Agreement due to no known future cash flows being provided by the assets, and as of January 16, 2020, the Company wrote off the remaining Goodwill balance associated with SRI transaction of $2,002,314.
In assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.
If the carrying amount of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of the impairment analysis to measure the amount of the impairment loss, by allocating the reporting unit’s fair value to its assets and liabilities other than goodwill, comparing the carrying amount of the goodwill to the resulting implied fair value of the goodwill, and recording an impairment charge for any excess.
Discontinued Operations
In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations. .
| 10 |
On January 16, 2020, the Company pursuant to the termination of the SRI transaction Agreement (see Note 1) which meets the definition of a discontinued operation. For additional information, see Note 12- Discontinued Operations.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. Under ASC 606, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of its’ customers. Revenues from Spinus were $1,521 and $47,602 for the three and six months ended June 30, 2019, and are recognized as an agent and are recorded at net. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and six months ended June 30, 2020, and 2019.
Advertising and Marketing Expenses
The Company expenses advertising and marketing costs as incurred. For the six months ended June 30, 2020, and 2019, the Company recorded $1,226 and $59,422, 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 six months ended June 30, 2020, and 2019, the Company recorded $-0- and $63,604 of research and development expenses, respectively.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of this note transaction and the effective conversion price embedded in this note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.
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Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
| ● | Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities. | |
| ● | Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| ● | Level 3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments.
The following table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as of June 30, 2020, and December 31, 2019, for each fair value hierarchy level:
| June 30, 2020 | Derivative Liabilities | Total | ||||||
| Level I | $ | - | $ | - | ||||
| Level II | $ | - | $ | - | ||||
| Level III | $ | 9,471,445 | $ | 9,471,445 | ||||
| December 31, 2019 | Derivative Liabilities | Total | ||||||
| Level I | $ | - | $ | - | ||||
| Level II | $ | - | $ | - | ||||
| Level III | $ | 2,462,940 | $ | 2,462,940 | ||||
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented.
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Foreign Currency Translation
The accounts of the Company’s Hong Kong subsidiary are maintained in Hong Kong dollars and the accounts of the U.S. companies are maintained in USD. The accounts of the Hong Kong subsidiary were translated into USD in accordance with Accounting Standards Codification (“ASC”) Topic 830, Foreign Currency Matters. According to Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and statement of comprehensive income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting from the foreign currency transactions are reflected in the statements of comprehensive income.
Relevant exchange rates used in the preparation of the consolidated financial statements are as follows for the periods ended June 30, 2020 and December 31, 2019, (Hong Kong dollar per one U.S. dollar):
| June 30, 2020 | December 31, 2019 | |||||||
| Balance sheet date | .1290 | .1284 | ||||||
| Average rate for statements of operations and comprehensive loss | .1288 | .1276 | ||||||
Earnings (Loss) Per Share
The Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of June 30, 2020, and 2019, the Company’s dilutive securities are convertible into approximately 923,181,023 and 138,402,792 shares of common stock, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. The following table represents the classes of dilutive securities as of June 30, 2020, and 2019:
| June 30, 2020 | June 30, 2019 | |||||||
| Common stock to be issued | 1,350 | 750 | ||||||
| Convertible preferred stock | 50,000 | - | ||||||
| Convertible notes payable | 923,129,673 | 138,402,042 | ||||||
| 923,181,023 | 138,402,792 | |||||||
Recent Accounting Pronouncements
There have no recent accounting pronouncements or changes in accounting pronouncements during the period ended June 30, 2020, that are of significance or potential significance to the Company.
NOTE 4 – INTANGIBLE ASSETS
Patents as of June 30, 2020, and December 31, 2019, consist of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Patents and license rights | $ | 250,000 | $ | 250,000 | ||||
| Accumulated amortization | (98,959 | ) | (78,125 | ) | ||||
| Net carrying amount | $ | 151,041 | $ | 171,875 | ||||
Amortization expense for the six months ended June 30, 2020, and 2019, was $20,834 respectively.
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NOTE 5 - CONVERTIBLE NOTES PAYABLE
During the year ended December 31, 2017, OZOP issued 19 convertible promissory notes (the “2017 Notes”), in amounts of $10,000 to $50,000. OZOP received proceeds of $710,000 in the aggregate. The 2017 Notes matured on their one- year anniversary and bear interest at ten percent (10%). The initial conversion feature allowed the holders to convert this note and any unpaid interest due, into shares of the Company’s common stock on the 15th business day that the Company becomes listed, at conversion prices equal to discounts of 35%-50% of the average of the three lowest closing prices of the common stock. In August 2018, the Company offered any noteholder to convert their principal and interest into shares of common stock at $0.50 per share. OZOP also issued $25,500 of convertible notes for consulting fees. During the year ended December 31, 2018, the Company issued a $50,000 convertible promissory note (the “March 2018 Note”) and received proceeds of $50,000. The Company determined that the conversion feature of the 2017 Notes and the March 2018 Note (together, the “Notes”) did not meet the criteria of an embedded derivative and therefore the conversion feature was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no quoted price and no active market for the Company’s common stock.
On April 13, 2018, the Company determined the conversion feature of the Notes represented an embedded derivative since the Notes were convertible into a variable number of shares upon conversion. Accordingly, on April 13, 2018, the Notes were not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments of the Notes that occurred prior to April 13, 2018, were recorded as a liability on April 13, 2018, with the corresponding amount recorded as a discount to the notes. Such discount was amortized from the date of issuance to the maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the reporting period, with the offset to the derivative liability on the balance sheet. The embedded feature included in the Notes resulted in the recognition of a derivative liability. On August 29, 2019, pursuant to a Debt Purchase Agreement, one investor sold the principal balance of $15,000, accrued and unpaid interest of $2,624 and a repayment balance of $5,250 to third party investor, for a total purchase price of $22,874 (see below). Also, on August 29, 2019, pursuant to a Debt Purchase Agreement, a second investor sold the principal balance of $25,000, accrued and unpaid interest of $4,248 and a repayment balance of $8,750 to third party investor, for a total purchase price of $37,998 (see below). On February 18, 2020, an investor purchased two $50,000 convertible notes from investors (see below). On June 23, 2020, pursuant to a Debt Purchase Agreement, one investor sold the principal balance of $50,000 and a repayment balance of $10,000 to third party investor, for a total purchase price of $60,000 (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of the 2017 Notes was $25,000 and $175,000, respectively.
On April 13, 2018, we issued a convertible promissory note in the principal amount of $442,175, pursuant to a Securities Purchase Agreement we entered into with an investor dated April 1, 2018. This note bears interest at the rate of 12% per annum and was due and payable on April 13, 2019. This note is convertible at any time following the funding of this note into a variable number of the Company’s common stock, based on a conversion ratio of 55% of the average of the lowest trading price for the 25 days prior to conversion. This note was funded on April 13, 2018, when the Company received proceeds of $350,000, after OID of $57,675, and disbursements for the lender’s transaction costs, fees and expenses of $34,500, of which $25,000 were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. During the year ended December 31, 2019, the investor sold $30,000 of this note to another investor. This note was in default and during the year ended December 31, 2019, the Company recorded additional interest expense of $26,188 and added that amount to the principal amount outstanding. For the six months ended June 30, 2020, the investor converted a total of $52,375 of the face value and $39,670 of accrued interest into 35,813,035 shares of common stock, at an average conversion price of $0.00257. During the six months ended June 30, 2020, the Company wrote off the remaining principal balance of $26,188 and recognized a gain on debt extinguishment of $26,188. As of June 30, 2020, and December 31, 2019, the outstanding principal balance and carrying value of this note was $-0- and $78,563, respectively.
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On August 29, 2018, we issued a convertible promissory note in the principal amount of $339,250, pursuant to a Securities Purchase Agreement we entered into with the investor. This note bears interest at the rate of 12% per annum and is due and payable on August 29, 2019. This note is convertible at any time following the funding of this note into a variable number of the Company’s common stock, based on a conversion ratio of 55% of the average of the lowest trading price for the 25 days prior to conversion. This note was funded on August 29, 2018, when the Company received proceeds of $280,000, after OID of $44,250, and disbursements for the lender’s transaction costs, fees and expenses of $15,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. Periodic payments are due by us on this note at the rate of $1,000 per day (the “Repayment Amount”) via direct withdrawal from our bank account, beginning on August 30, 2018, until this note is satisfied in full. From time to time the investor waives any Repayment Amount for a period of time as agreed upon. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. This note was in default and during the year ended December 31, 2019, the Company recorded additional interest expense of $87,390 and added that amount to the principal amount outstanding. For the six months ended June 30, 2020, the investor converted a total of $112,141 of the face value and $4,630 of accrued interest into 23,237,756 shares of common stock at an average conversion price of $0.0053. During the six months ended June 30, 2020, the Company wrote off the remining principal balance of $74,990 and recognized $74,990 as a gain on debt extinguishment. As of June 30, 2020, and December 31, 2019, the outstanding principal balance and carrying value of this note was $-0- and $187,130, respectively.
On November 15, 2018, the Company issued a 12% convertible promissory note, in the principal amount of $500,000, pursuant to a Securities Purchase Agreement we entered into with the investor. This note matures November 15, 2019. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day period ending on the last completed trading date prior to the date of this note and (2) 65% multiplied by the average of the 3 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed trading day of the common stock prior to the date of conversion of this note. Pursuant to this note, the Company agreed to include on its next registration statement filed with the Securities and Exchange Commission, all shares issuable upon conversion of this note. Pursuant to the Security Agreement, all of the obligations under this note are secured by a first security interest in and to all of the Company’s rights, title and interests in, to and under all assets and all personal property of the Company. The Security Agreement includes customary representations, warranties and covenants by the Company. This note was funded on November 19, 2018, when the Company received proceeds of $458,500 after OID of $37,500, and disbursements for the lender’s transaction costs, fees and expenses of $4,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, the investor converted a total of $445,360 of the face value and $39,570 of accrued interest and fees into 150,631,924 shares of common stock at an average conversion price of $0.0032. As of June 30, 2020, and December 31, 2019, the outstanding principal balance and carrying value of this note was $-0- and $445,360, respectively. In connection with the issuance of this note, during the six months ended June 30, 2020, the Company issued 43,500,000 shares upon the cashless exercise of warrants issued.
On January 7, 2019, the Company issued an 8% convertible promissory note, in the principal amount of $150,000, pursuant to a Securities Purchase Agreement we entered into with the investor. This note matured January 7, 2020. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day period ending on the last completed trading date prior to the date of this note and (2) 65% multiplied by the average of the 3 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed trading day of the common stock prior to the date of conversion of this note. This note was funded on January 9, 2019, when the Company received proceeds of $133,250 after OID of $14,000, and disbursements for the lender’s transaction costs, fees and expenses of $2,750, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $2,416 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $150,000 of the face value and $28,664 of accrued interest and fees into 96,727,034 shares of common stock at an average conversion price of $0.00185. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $150,000 with a carrying value of $147,584, as of December 31, 2019, net of unamortized discounts of $2,416.
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On February 5, 2019, the Company issued an 8% convertible promissory note (the “Master Note”) in the aggregate principal amount of up to $165,000 in exchange for an aggregate purchase price of up to $148,500 with an original issue discount of $16,500 to cover the Investor’s accounting fees, due diligence fees, monitoring and other transactional costs incurred in connection with the purchase and sale of the Master Note, which is included in the principal balance of this note. On February 8, 2019, the Investor funded the first tranche under the Master Note, with a maturity date of February 8, 2020, and the Company received $49,500 ($47,500 after payment of $2,000 of the Investor’s legal fees) for this first tranche of $55,000 under the Master Note and on the same date, the Company issued this note to the Investor. This note is convertible into shares of the Company’s common stock, beginning on the date which is 180 days from the issuance date of the Master Note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day period ending on the last completed trading date prior to the date of conversion of the Master Note and (2) 65% multiplied by the average of the 3 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed trading day of the common stock prior to the date of conversion of the Master Note. The embedded conversion feature included in the Master Note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $12,102 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $22,105 of the face value and $4,400 of fees into 6,017,711 shares of common stock at an average conversion price of $0.0044. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of the Master Note was $-0- and $11,640, respectively, with a carrying value as of December 31, 2019, of $7,144, net of unamortized discounts of $4,496. In connection with the issuance of this Note, during the six months ended June 30, 2020, the Company issued 20,138,746 shares upon the cashless exercise of warrants issued.
On March 7, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $85,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock, at a conversion price equal to 58% of the average of the two lowest trading prices of the Company’s common stock for the previous 20 trading day period ending on the date the notice of conversion of this note is received by the Company. This note was funded on March 11, 2019, when the Company received proceeds of $77,900 after OID of $3,000, and disbursements for the lender’s transaction costs, fees and expenses of $4,100, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $15,714 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $31,800 of the face value and $3,427 of accrued interest into 446,416 shares of common stock at an average conversion price of $0.07891. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $31,800, respectively, with a carrying value as of December 31, 2019, of $16,086, net of unamortized discounts of $15,714.
On May 29, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $80,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock, at a conversion price equal to 58% of the average of the two lowest trading prices of the Company’s common stock for the previous 20 trading day period ending on the date the notice of conversion of this note is received by the Company. This note was funded on March 29, 2019, when the Company received proceeds of $73,300 after OID of $2,800, and disbursements for the lender’s transaction costs, fees and expenses of $3,900, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $32,021 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $19,300 of the face value and $2,058 of accrued interest into 3,784,352 shares of common stock at an average conversion price of $0.00564. On May 28, 2020, pursuant to a Debt Purchase Agreement, the investor sold the principal balance of $60,700 and accrued and unpaid interest of $6,665 to third party investor, for a total purchase price of 67,365 (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $80,000, respectively, with a carrying value on December 31, 2019, of $47,979, net of unamortized discounts of $32,021.
On June 5, 2019, an investor (the “Purchaser”) pursuant to an Assignment Agreement, purchased a convertible note issued by the Company on December 5, 2018, with a maturity date of December 5, 2019. The Purchaser paid $93,391 to acquire this note. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 65% multiplied by the average of the lowest two trading prices during the 15- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The embedded conversion feature pursuant to the Assignment Agreement resulted in the recognition of a derivative liability. On April 17, 2020, the Purchaser sold the note to another third- party investor (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $-0- and $93,391, respectively.
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On June 7, 2019, an investor (the “Purchaser”) pursuant to an Assignment Agreement, purchased a convertible note issued by the Company on October 19, 2018, with a maturity date of October 19, 2019. The Purchaser paid $77,000 to acquire this note. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 65% multiplied by the average of the lowest two trading prices during the 15- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The embedded conversion feature pursuant to the Assignment Agreement resulted in the recognition of a derivative liability. On April 24, 2020, the Purchaser sold the note to another third- party investor (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $-0- and $77,000, respectively.
On July 22, 2019, the Company issued a 10% convertible promissory note, in the principal amount of $38,900, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock, at a conversion price equal to 60% of the lowest closing bid price of the Company’s common stock for the previous 20 trading day period ending on the date the notice of conversion of this note is received by the Company. This note was funded on July 24, 2019, when the Company received proceeds of $30,000 after OID of $3,900, and disbursements for the lender’s transaction costs, fees and expenses of $5,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $22,587 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $38,900 of the face value and $2,714 of accrued interest into 6,379,036 shares of common stock at an average conversion price of $0.00652. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $38,900, respectively, with a carrying value as of December 31, 2019, of $16,313, net of unamortized discounts of $22,587.
On August 2, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $157,500, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 60% multiplied by the average of the lowest two trading prices during the 20 trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. This note was funded on August 2, 2019, when the Company received proceeds of $150,000 after disbursements for the lender’s transaction costs, fees and expenses of $7,500, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $77,844 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $157,500 of the face value and $13,523 of accrued interest into 23,114,263 shares of common stock at an average conversion price of $0.0074. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $157,500, respectively, with a carrying value as of December 31, 2019, of $79,656, net of unamortized discounts of $77,844.
On August 21, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $55,125, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 58% multiplied by the average of the lowest two trading prices during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. This note was funded on August 21, 2019, when the Company received proceeds of $50,000 after OID of $2,625, and disbursements for the lender’s transaction costs, fees and expenses of $2,500, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability . For the six months ended June 30, 2020, amortization of the debt discounts of $33,479 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $3,825 of the face value and $247 of accrued interest into 77,144 shares of common stock at an average conversion price of $0.05278, and on March 9, 2020, sold the remining portion of this note to a third part investor (see below) for $76,000. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $55,125, respectively, with a carrying value of $21,646, as of December 31, 2019, net of unamortized discounts of $33,479. On March 9, 2020, the Company also issued a warrant for $25,000 to the investor in consideration of the sale of this note. The exercise price of the warrant is equal to a 42% discount of the average of the two lowest trading prices of the Company’s common stock for the twenty days preceding the exercise and the warrant expires September 9, 2020. For the six months ended June 30, 2020, the Company issued 3,967,740 shares of common stock upon the cashless exercises of the warrant.
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On August 19, 2019, the Company issued an 8% convertible promissory note, in the principal amount of $85,000, pursuant to a Securities Purchase Agreement we entered into with the investor. This note matures May 19, 2020. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to the lesser of (1) the lowest trading price during the previous 20 trading day period ending on the last completed trading date prior to the date of this note and (2) 65% multiplied by the average of the 3 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed trading day of the common stock prior to the date of conversion of this note. This note was funded on August 22, 2019, when the Company received proceeds of $75,000 after OID of $7,250, and disbursements for the lender’s transaction costs, fees and expenses of $2,750, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $33,656 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $85,000 of the face value and $7,121 of accrued interest into 39,658,500 shares of common stock at an average conversion price of $0.00232. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $85,000, respectively, with a carrying value as of December 31, 2019, of $51,344, net of unamortized discounts of $33,656. The Company also issued a five- year warrant to purchase 28,333 shares of common stock at an exercise price of $1.50, subject to adjustments.
On August 23, 2019, the Company issued to a third-party investor a convertible redeemable promissory note with a face value of $37,800, including an original issue discount of $1,800. This note matures on May 23, 2020, has a stated interest of 10% and is convertible into a variable number of the Company’s common stock, based on a conversion ratio of 58% of the average of the two lowest trading prices for the 20 days prior to conversion. This note was funded on August 26, 2019, when the Company received proceeds of $33,500, after disbursements for the lender’s transaction costs, fees and expenses of $2,500, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $19,239 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $24,317 of the face value and $2,980 of accrued interest into 4,336,000 shares of common stock at an average conversion price of $0.0063, and on April 28, 2020, sold the remining portion of $13,483 of this note to a third- party investor (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $0-0 and $37,800, respectively, with a carrying value as of December 31, 2019, of $18,561, net of unamortized discounts of $19,239.
On August 29, 2019, the Company issued a 10% convertible promissory note, in the principal amount of $45,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 60% multiplied by the average of the lowest two trading prices during the 20 trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. This note was funded on September 4, 2019, when the Company received proceeds of $40,000 after disbursements for the lender’s transaction costs, fees and expenses of $5,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $26,567 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $45,000 of the face value and $2,838 of accrued interest into 7,933,325 shares of common stock at an average conversion price of $0.00603. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $45,000, respectively, with a carrying value as of December 31, 2019, of $18,434, net of unamortized discounts of $26,566.
On August 29, 2019, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note issued by the Company on September 1, 2017 (see above). The Purchaser paid $22,874 to acquire this note. This note, as amended, is convertible into common stock at a conversion price equal to a 35% discount to the average of the 3 lowest closing prices of the common stock for fifteen prior trading days including the day upon which a notice of conversion is received. The embedded conversion feature pursuant to this agreement resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, the investor converted a total of $15,874 of the face value and $968 of accrued interest into 217,331 shares of common stock at an average conversion price of $0.0775. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $-0- and $15,874, respectively.
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On August 29, 2019, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note issued by the Company on October 2, 2017 (see above). The Purchaser paid $37,998 to acquire this note. This note, as amended, is convertible into common stock at a conversion price equal to a 35% discount to the average of the 3 lowest closing prices of the common stock for fifteen prior trading days including the day upon which a notice of conversion is received. The embedded conversion feature pursuant to this agreement resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, the investor converted a total of $37,998 of the face value and $2,331 of accrued interest into 3,781,509 shares of common stock at an average conversion price of $0.01066. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of assigned note was $-0- and $37,998, respectively.
On October 1, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $68,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 61% multiplied by the lowest closing bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. This note was funded on October 2, 2019, when the Company received proceeds of $65,000 after disbursements for the lender’s transaction costs, fees and expenses of $3,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $41,584 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $68,000 of the face value and $4,080 of accrued interest into 9.186,036 shares of common stock at an average conversion price of $0.00785. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $68,000, respectively, with a carrying value as of December 31, 2019, of $26,416, net of unamortized discounts of $41,584.
On October 8, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $66,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the two lowest trading prices of the Company’s common stock for the previous 20 trading day period ending on the date the notice of conversion of this note is received by the Company. This note was funded on October 10, 2019, when the Company received proceeds of $57,000 after OID of $6,000, and disbursements for the lender’s transaction costs, fees and expenses of $2,300, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $83,398 was charged to interest expense. For the six months ended June 30, 2020, the investor added $37,750 od defaults to the principal balance of the note. For the six months ended June 30, 2020, the investor converted a total of $103,750 of principal and $2,640 of accrued interest into 24,394,666 shares of common stock at an average conversion price of $0.00436. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $66,000, respectively, with a carrying value as of December 31, 2019, of $18,452, net of unamortized discounts of $47,548.
On October 24, 2019, the Company issued a convertible promissory note in the principal amount of $248,400, pursuant to a Securities Purchase Agreement we entered into with the investor. This note bears interest at the rate of 12% per annum and matures 12 months after the date of issuance. This note is convertible at any time following the funding of this note into a variable number of the Company’s common stock, based on a conversion ratio of 60% of the lowest trading price for the 25 days prior to conversion. This note was funded on October 28, 2019, when the Company received proceeds of $200,000, after OID of $32,400, and disbursements for the lender’s transaction costs, fees and expenses of $16,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months June 30, 2020, amortization of the debt discounts of $221,683 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $48,400 of principal and $16,796 of accrued interest into 26,288,995 shares of common stock at an average conversion price of $0.00248, and on May 7, 2020, sold the remining portion of $200,000 of this note to a third- party investor (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $248,400, respectively, with a carrying value as of December 31, 2019, of $26,717, net of unamortized discounts of $221,683.
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On October 24, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $225,000, pursuant to a Securities Purchase Agreement we entered into with the investor. This note matures October 24, 2020. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to the lesser of (1) $0.05 and (2) 58% multiplied by the average of the 2 lowest trading prices of the Company’s common stock during the 20 day trading period ending on the latest completed trading day of the common stock prior to the date of conversion of this note. This note was funded on October 31, 2019, when the Company received proceeds of $202,250 after OID of $20,000, and disbursements for the lender’s transaction costs, fees and expenses of $2,750, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months ended June 30, 2020, amortization of the debt discounts of $147,689 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $225,000 of principal and $16,858 of accrued interest into 125,613,294 shares of common stock at an average conversion price of $0.00193. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $225,000, respectively, with a carrying value as of December 31, 2019, of $77,311, net of unamortized discounts of $147,689.
On October 25, 2019, the Company issued a convertible promissory note in the principal amount of $36,750, pursuant to a Securities Purchase Agreement we entered into with the investor. This note bears interest at the rate of 12% per annum and matures 12 months after the date of issuance. This note is convertible at any time following the funding of this note into a variable number of the Company’s common stock, based on a conversion ratio of 58% of the average of the two lowest closing bid prices for the 20 days prior to conversion. This note was funded on October 25, 2019, when the Company received proceeds of $33,000, after OID of $1,750, and disbursements for the lender’s transaction costs, fees and expenses of $2,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the six months June 30, 2020, amortization of the debt discounts of $31,106 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $36,750 of principal and $2,219 of accrued interest into 7,881,267 shares of common stock at an average conversion price of $0.00494. As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $36,750, respectively, with a carrying value as of December 31, 2019, of $5,644, net of unamortized discounts of $31,106.
On November 27, 2019, the Company issued a 12% convertible promissory note, in the principal amount of $53,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 56% multiplied by the lowest closing bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. This note was funded on December 2, 2019, when the Company received proceeds of $50,000 after disbursements for the lender’s transaction costs, fees and expenses of $3,000, which were recorded as discounts against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in the recognition of a derivative liability. For the three months ended March 31, 2020, amortization of the debt discounts of $48,2742 was charged to interest expense. On May 15, 2020, pursuant to a Debt Purchase Agreement, the investor sold the principal balance of $53,000, accrued and unpaid interest of $2,997 and a prepayment of $19,003, which was recognized as interest expense, to a third- party investor, for a total purchase price of $75,000 (see below). As of June 30, 2020, and December 31, 2019, the outstanding principal balance of this note was $-0- and $53,000, respectively, with a carrying value as of December 31, 2019, of $4,626, net of unamortized discounts of $48,374.
On January 8, 2020, the Company entered into a securities purchase agreement (the “SPA”) with an investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor a 12% Convertible Promissory Note, in the principal amount of $38,000 in exchange for a purchase price of $35,000. This note was funded by the Investor on January 13, 2020, and on such date pursuant to the SPA, the Company reimbursed the Investor for expenses for legal fees and due diligence of $3,000. This note proceeds will be used by the Company for general working capital purposes. The SPA includes customary representations, warranties and covenants by the Company and customary closing conditions. The embedded conversion feature included in this note resulted in an initial debt discount and derivative liability of $29,063. For the six months ended June 30, 2020, amortization of the debt discounts of $32,063 was charged to interest expense. On May 15, 2020, pursuant to a Debt Purchase Agreement, the investor sold the principal balance of $38,000, accrued and unpaid interest of $1,624 and a prepayment of $12,276, which was recognized as interest expense, to a third- party investor, for a total purchase price of $52,000 (see below). As of June 30, 2020, the outstanding principal balance of this note was $-0-.
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On February 18, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note issued by the Company on August 18, 2017 (see above). The Purchaser agreed to pay $50,000 to acquire this note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for the thirty prior trading days including the day upon which a notice of conversion is received. For the six months ended March 31, 2020, the Company recorded additional interest expense of $154,627 due to various defaults of this note and the amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to this agreement resulted in interest expense of $607,950 (since the purchased note was past its’ maturity date and was in default) with the offset recorded to derivative liabilities. For the six months ended June 30, 2020, the investor converted a total of $202,541 of principal and $64,650 accrued interest and fees into 90,191,785 shares of common stock at an average conversion price of $0.00257. As of June 30, 2020, the outstanding principal balance of assigned note was $2,086.
Also, on February 18, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note issued by the Company on August 18, 2017 (see above). The Purchaser agreed to pay $50,000 to acquire this note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for the thirty prior trading days including the day upon which a notice of conversion is received. For the six months ended June 30, 2020, the Company recorded additional interest expense of $192,025 due to various defaults of this note and the amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to this agreement resulted in interest expense of $607,950 (since the purchased note was past its’ maturity date and was in default) with the offset recorded to derivative liabilities. For the six months ended June 30, 2020, the investor converted a total of $242,025 of principal and $84,849 accrued interest and fees into 241,489,074 shares of common stock at an average conversion price of $0.00123. As of June 30, 2020, the outstanding principal balance of assigned note was $-0-.
On February 26, 2020, the Company entered into a securities purchase agreement (the “SPA”) with an investor (the “Investor”), pursuant to which the Company agreed to issue to the Investor a 12% secured convertible promissory note in the aggregate principal amount of $132,750 in exchange for a purchase price of $117,750. Pursuant to the SPA, the Company agreed to pay the Investor $15,000 to cover the Investor’s due diligence expenses incurred in connection with the SPA and Note, which is to be offset against the proceeds of this note. This note was funded by the Investor on February 26, 2020, and on such date pursuant to the SPA, the Company reimbursed the Investor for expenses for legal fees and due diligence of $2,750. This note proceeds will be used by the Company for general working capital purposes. The SPA includes customary representations, warranties and covenants by the Company and customary closing conditions. 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. The embedded conversion feature included in this note resulted in an initial debt discount and derivative liability of $86,001. For the six months ended June 30, 2020, amortization of the debt discounts of $34,584 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $132,750 with a carrying value of $63,583, net of unamortized discounts of $69,167.
On February 26, 2020, the Company and an investor (the “Investor”) agreed to exchange $330,000 of notes payable into a 12% convertible note with a face value of $330,000. This note is convertible into common stock at a conversion price equal to a 44% discount to the lowest trading price of the common stock for the 20 prior trading days including the day upon which a notice of conversion is received. The embedded conversion feature included in this note resulted in interest expense of $365,757 with the offset to derivative liabilities. On March 3, 2020, a third-party investor (the “Purchaser”), pursuant to a Debt Purchase Agreement, purchased this note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. For the six months ended June 30, 2020, the Company recorded additional interest expense of $468,750 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to this agreement resulted in interest expense of $1,321,618 with the offset recorded to derivative liabilities. As of June 30, 2020, the outstanding principal balance of assigned note was $798,750. This note was fully converted as of August 13, 2020.
On March 9, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note issued by the Company on August 19, 2019, with a maturity date of May 19, 2020 (see above). The Purchaser paid $76,000 to acquire this note. This note, as amended, is convertible into common stock at a conversion price equal to a 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. The embedded conversion feature pursuant to this agreement resulted in an initial debt discount and derivative liability of $76,000. For the six months ended June 30, 2020, the Company recorded additional interest expense of $83,263 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. For the six months ended June 30, 2020, amortization of the debt discounts of $76,000 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $3,603 of the face value and $81,521 of accrued interest and fees into 52,946,489 shares of common stock at an average conversion price of $0.0014. As of June 30, 2020, the outstanding principal balance of assigned note was $155,632. This note was fully converted as of August 13, 2020.
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On March 9, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, in the principal amount of $80,000, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $.25 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.25 or 50% of the lowest trading price for the thirty trading days prior to the conversion. The embedded conversion feature included in this note resulted in an initial debt discount of $57,000, interest expense of $64,067 and an initial derivative liability of $121,067. For the six months ended June 30, 2020, amortization of the debt discounts of $48,933 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $80,000 with a carrying value of $48,933, net of unamortized discounts of $31,067.
On April 17, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note initially issued by the Company on December 5, 2018, and thereafter was acquired on June 5, 2019 (see above). The Purchaser acquired the note balance of $93,391. 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. The embedded conversion feature pursuant to this agreement resulted in interest expense of $1,476,436 (since the purchased note was past its’ maturity date and was in default) with the offset recorded to derivative liabilities. For the six months ended June 30, 2020, the Company recorded additional interest expense of $259,305 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. As of June 30, 2020, the outstanding principal balance of assigned note was $352,695. This note was fully converted as of August 13, 2020.
On April 24, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note initially issued by the Company on October 19, 2018, and thereafter was acquired on June 7, 2019 (see above). The Purchaser acquired the note balance of $77,000. 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. The embedded conversion feature pursuant to this agreement resulted in interest expense of $881,058 (since the purchased note was past its’ maturity date and was in default) with the offset recorded to derivative liabilities. For the six months ended June 30, 2020, the Company recorded additional interest expense of $121,250 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. For the six months ended June 30, 2020, the investor converted a total of $198,183 of the face value and $44,396 of accrued interest and fees into 179,688,215 shares of common stock at an average conversion price of $0.00131. As of June 30, 2020, the outstanding principal balance of assigned note was $67.
On April 27, 2020, the Company issued a 15% convertible redeemable note in the principal amount of $60,000. This note matures on April 27,2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. This note was funded on April 27, 2020, when the Company received proceeds of $50,000, after OID of $10,000, which was recorded as a discount against the debt to be amortized into interest expense through maturity. The embedded conversion feature included in this note resulted in an initial debt discount of $50,000, interest expense of $36,274 and an initial derivative liability of $86,274. For the six months June 30, 2020, amortization of the debt discounts of $10,000 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $60,000 with a carrying value of $10,000, net of unamortized discounts of $50,000.
On April 28, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note issued by the Company on August 23, 2019 with a maturity date of May 23, 2020 (see above). The Purchaser acquired $13,483 of this note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. The embedded conversion feature pursuant to this agreement resulted in an initial debt discount of $13,483, interest expense of $42,261 and an initial derivative liability of $55,744. For the six months ended June 30, 2020, the Company recorded additional interest expense of $1,348 due to a default of this note and the amount was added to the principal balance owed the Purchaser. For the six months ended June 30, 2020, amortization of the debt discounts of $13,483 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of assigned note was $14,831.
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On April 28, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $53,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The Company received proceeds of $50,000 (including direct payments from the lender to certain Company vendors) on May 4, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $3,000. This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $50,000, interest expense of $1,539 and an initial derivative liability of $51,539. For the six months June 30, 2020, amortization of the debt discounts of $8,833 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $53,000 with a carrying value of $8,833, net of unamortized discounts of $44,167.
On May 4, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $110,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to the lower of $0.50 or 58% multiplied by the average of the two lowest closing trading price or bid price during the 20- trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The Company received proceeds of $96,250 on May 6, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $13,750. This note proceeds will be used by the Company for general working capital purposes. 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. The embedded conversion feature included in this note resulted in an initial debt discount of $100,000, interest expense of $5,526 and an initial derivative liability of $105,526. For the six months ended June 30, 2020, amortization of the debt discounts of $18,792 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $110,000 with a carrying value of $16,042, net of unamortized discounts of $93,958.
On May 5, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $162,000, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $03 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.03 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $100,000 on May 13, 2020, and this note included an original issue discount of $62,000. This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $100,000, interest expense of $151,512 and an initial derivative liability of $251,512. For the six months ended June 30, 2020, amortization of the debt discounts of $54,000 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $162,000 with a carrying value of $54,000, net of unamortized discounts of $108,000. 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.
On May 7, 2020, the Company issued a 15% convertible redeemable note in the principal amount of $30,000. This note matures on May 7,2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. The Company received proceeds of $25,000 on May 7, 2020, and this note included an original issue discount of $5,000, which was recorded as a discount against the debt to be amortized into interest expense through maturity This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $25,000, interest expense of $17,828 and an initial derivative liability of $42,828. For the six months June 30, 2020, amortization of the debt discounts of $4,375 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $30,000 with a carrying value of $4,375, net of unamortized discounts of $25,625.
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On May 7, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note issued by the Company on October 24, 2019, with a maturity date of October 24, 2020 (see above). The Purchaser acquired $200,000 of this note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. The embedded conversion feature pursuant to this agreement resulted in an initial debt discount of $200,000, interest expense of $111,128 and an initial derivative liability of $311,128. For the six months ended June 30, 2020, amortization of the debt discounts of $200,000 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $200,000 of the face value and $16,922 of accrued interest and fees into 92,332,507 shares of common stock at an average conversion price of $0.00218. As of June 30, 2020, the outstanding principal balance of assigned note was $-0-.
On May 15, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note initially issued by the Company on January 8, 2020, with a maturity date of January 8, 2021 (see above). The Purchaser paid $52,000 for the note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. For the six months ended June 30, 2020, the Company recorded additional interest expense of $63,500 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to this agreement resulted in an initial debt discount of $100,000, interest expense of $526,507 and an initial derivative liability of $626,507. For the six months ended June 30, 2020, amortization of the debt discounts of $25,000 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $66,454 of the face value and $5,246 of accrued interest and fees into 53,110,926 shares of common stock at an average conversion price of $0.00129. As of June 30, 2020, the outstanding principal balance of assigned note was $83,546, with a carrying value of $8,546, net of unamortized discounts of $75,000. This note was fully converted as of August 13, 2020.
On May 15, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note initially issued by the Company on November 27, 2019, with a maturity date of November 27, 2020 (see above). The Purchaser paid $75,000 for the note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. For the six months ended June 30, 2020, the Company recorded additional interest expense of $75,000 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to this agreement resulted in an initial debt discount of $77,000, interest expense of $388,385 and an initial derivative liability of $465,385. As of June 30, 2020, the outstanding principal balance of assigned note was $115,500, with a carrying value of $52,398, net of unamortized discounts of $62,563. This note was fully converted as of August 13, 2020.
On May 28, 2020, the Company issued a 15% convertible redeemable note in the principal amount of $30,000. This note matures on May 28, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. The Company received proceeds of $25,000 on May 28, 2020, and this note included an original issue discount of $5,000. This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $25,000, interest expense of $19,346 and an initial derivative liability of $44,346. For the six months June 30, 2020, amortization of the debt discounts of $2,500 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $30,000 with a carrying value of $2,500, net of unamortized discounts of $27,500.
On May 28, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a convertible note issued by the Company on May 29, 2019 (see above). The Purchaser acquired $67,365 of this note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. The embedded conversion feature pursuant to this agreement resulted in an initial debt discount of $67,365, interest expense of $443,420 and an initial derivative liability of $510,785. For the six months ended June 30, 2020, the Company recorded additional interest expense of $83,395 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. For the six months ended June 30, 2020, amortization of the debt discounts of $67,365 was charged to interest expense. For the six months ended June 30, 2020, the investor converted a total of $47,090 of the face value and $3,000 of accrued interest and fees into 39,959,295 shares of common stock at an average conversion price of $0.00118. As of June 30, 2020, the outstanding principal balance of assigned note was $103,671. This note was fully converted as of August 13, 2020.
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On June 1, 2020, (the “Issuance Date”) the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $127,500, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $100,000 on June 1, 2020, and this note included an original issue discount of $27,500. This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $100,000, interest expense of $103,250 and an initial derivative liability of $203,250. For the six months ended June 30, 2020, amortization of the debt discounts of $21,250 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $127,500 with a carrying value of $21,250, net of unamortized discounts of $106,250. 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 June 11, 2020, the Company issued a 12% convertible promissory note, (the “Note”) in the principal amount of $53,000, pursuant to a Securities Purchase Agreement we entered into with an investor. This note matures 12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the twenty trading day period ending on the last completed trading date in the OTC Markets prior to the date of conversion. The Company received proceeds of $50,000 on June 12, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $3,000. This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $50,000, interest expense of $2,218 and an initial derivative liability of $52,218. For the six months June 30, 2020, amortization of the debt discounts of $2,849 was charged to interest expense. As of June 30, 2020, the outstanding principal balance of this note was $53,000 with a carrying value of $2,849, net of unamortized discounts of $50,151.
On June 23, 2020, an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, purchased a past-due convertible note initially issued by the Company on October 6, 2017 (see above). The Purchaser paid $60,000 for the note. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. For the six months ended June 30, 2020, the Company recorded additional interest expense of $52,500 due to defaults of this note and the amount was added to the principal balance owed the Purchaser. The embedded conversion feature pursuant to this agreement resulted in interest expense of $658.093 (since the purchased note was past its’ maturity date and was in default) with the offset recorded to derivative liabilities. For the six months ended June 30, 2020, the investor converted a total of $91,579 of the face value and $42,071 of accrued interest and fees into 99,000,000 shares of common stock at an average conversion price of $0.00133. As of June 30, 2020, the outstanding principal balance of assigned note was $20,921. This note was fully converted as of August 13, 2020.
On June 30, 2020, (the “Issuance Date”) the Company issued a 15% convertible promissory note, (the “Note”) in the principal amount of $129,500, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $102,000 on July 1, 2020, and this note included an original issue discount of $27,500 and lender costs of $2,000. This note proceeds will be used by the Company for general working capital purposes. The embedded conversion feature included in this note resulted in an initial debt discount of $100,000, interest expense of $107,122 and an initial derivative liability of $207,122. As of June 30, 2020, the outstanding principal balance of this note was $129,500 with a carrying value of $-0-, net of unamortized discounts of $129,500. 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.
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A summary of the convertible note balance as of June 30, 2020, and December 31, 2019, is as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| Principal balance | $ | 2,640,450 | $ | 2,500,230 | ||||
| Unamortized discount | (872,945 | ) | (806,003 | ) | ||||
| Ending balance, net | $ | 1,767,505 | $ | 1,694,227 | ||||
NOTE 6 – DERIVATIVE LIABILITIES
The Company determined the conversion feature of these 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 June 30, 2020, and December 31, 2019, at $9,471,445 and $2,462,490, respectively. The Company used the Monte Carlo simulation valuation model with the following assumptions as of June 30, 2020, risk free interest rates from 0.16% to 0.18%, and volatility of 81% to 105% and as of December 31, 2019, risk-free interest rates from 1.57% to 1.77% and volatility of 31% to 36%. The initial derivative liabilities for convertible notes issued during the six months ended June 30, 2020, used the following assumptions; risk-free interest rates from 0.12% to .24% and volatility of 74% to 105%.
A summary of the activity related to derivative liabilities for the six months ended June 30, 2020, and the year ended December 31, 2019, is as follows:
| Balance- January 1, 2019 | $ | 1,199,514 | ||
| Issued during period | 1,460,123 | |||
| Converted or paid | (850,248 | ) | ||
| Change in fair value recognized in operations | 653,551 | |||
| Balance- December 31, 2019 | 2,462,940 | |||
| Issued during the period | 11,953,787 | |||
| Converted or paid | (8,627,804 | ) | ||
| Change in fair value recognized in operations | 3,682,522 | |||
| Balance June 30, 2020 | $ | 9,471,445 |
NOTE 7 – NOTES PAYABLE
The Company has the following note payables outstanding:
| June 30, 2020 | December 31, 2019 | |||||||
| Note payable, interest at 8%, matured September 6, 2018, in default | $ | - | $ | 330,033 | ||||
| Notes payable, interest at 8%, matured January 5, 2020, currently in default | 45,000 | 45,000 | ||||||
| Other, due on demand, interest at 6% | 50,000 | 50,000 | ||||||
| Note payable, interest at 18%, matures June 23, 2022, net of discount of $34,635 | 175,365 | - | ||||||
| Note payable, interest at 12%, matures June 25, 2021, net of discount of $26,970 | 176,030 | - | ||||||
Sub- total notes payable | 446,395 | 425,033 | ||||||
| Less long-term portion, net of discount | 176,365 | - | ||||||
| Current portion of notes payable, net of discount | $ | 270,030 | $ | 425,033 | ||||
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On February 26, 2020, the Company and the noteholder agreed to convert $330,033 of principal note balances to a 12% convertible note with a face value of $330,000 (see Note 5).
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 (the “Issue Date”), 2020, 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 – RELATED PARTY TRANSACTIONS
Employment Agreement
On February 28, 2020, the Company and Mr. Conway entered into an employment agreement (the “Employment Agreement”). Pursuant to the terms of the Employment Agreement, Mr. Conway is to receive an annual salary of $120,000, for his position of CEO of the Company, payable monthly. Mr. Conway was also issued 2,500 shares of Series C Preferred Stock. The Company valued the shares at $5,000.
Management Fees and related party payables
For the three and six months ended June 30, 2020, and 2019, the Company recorded expenses to its officers in the following amounts:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| CEO, parent (includes $5,000 stock-based compensation six months ended June 30, 2020) | $ | 30,000 | $ | - | $ | 45,000 | $ | - | ||||||||
| CEO, former | - | 88,000 | 22,505 | 133,000 | ||||||||||||
| COO, former | - | 45,000 | - | 90,000 | ||||||||||||
| CFO, former | - | 30,000 | 20,000 | 60,000 | ||||||||||||
| Total | $ | 30,000 | $ | 163,000 | $ | 87,505 | $ | 283,000 | ||||||||
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As of June 30, 2020, and December 31, 2019, included in accounts payable and accrued expenses, related party is $456,185 and $470,886, respectively, for the following amounts owed the Company’s former officers for accrued fees, accounts payable and loans made. The loans have no terms of repayment.
| June 30, 2020 | December 31, 2019 | |||||||
| Former CEO, former (1) | $ | 200 | $ | 125 | ||||
| Former CEO, subsidiary (2) | 144,087 | 144,639 | ||||||
| Former COO and CCO (3) | 162,085 | 162,085 | ||||||
| Former COO (4) | 112,500 | 112,500 | ||||||
| Former CFO (5) | - | 51,537 | ||||||
| CEO | 100 | - | ||||||
| Total | $ | 419,692 | $ | 470,866 | ||||
(1)The former CEO, parent resigned February 28, 2020.
(2) The former CEO, subsidiary resigned on March 4, 2019.
(3) The Former COO and CCO resigned from those positions on October 1, 2018, and March 4, 2019, respectively.
(4) The former COO resigned on October 23, 2019.
(5) The former CFO resigned effective February 28, 2020.
Other
On February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the issuance of 7,600,000 shares of common stock.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Licenses
On February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms of the Licensing Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The Company paid the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of net sales on any product sold utilizing any of the patents. There have not been any sales of the licensed products and accordingly, no royalties have been incurred.
Consulting Agreements
On March 4, 2019, the Company entered into a Separation Agreement (the “Separation Agreement”) with Salman J. Chaudhry, pursuant to which Mr. Chaudry resigned immediately from his positions as the CCO and Secretary of the Company and as a member of the Board and from all positions with the Company effective immediately and pursuant to which the Company agreed to pay Mr. Chaudry $227,200 (the “Outstanding Fees”) in certain increments as set forth in the Separation Agreement. Mr. Chaudry’s resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. As of June 30, 2020, and December 31, 2019, the balance owed Mr. Chaudhry is $162,085.
On March 24, 2019, the Company and Newbridge Securities Corporation (“Newbridge”) entered into an Investment Banking Engagement Agreement (the “Agreement”). Under the terms of the Agreement, Newbridge will provide investment banking and financial advisory services to the Company, including, but not limited to assisting the Company with an up-listing process to a national exchange in the United States, introducing the Company to other investment banking firms focused on servicing emerging growth companies; rendering advice related to capital structures, capital market opportunities, evaluating potential capital raise transactions and assisting the Company to develop growth optimization strategies. The term of the Agreement is 12 months from the date of the Agreement, however either party may terminate the Agreement anytime upon 15 days written notice. As compensation for its services under the Agreement, Newbridge and its assignees received 172 shares of the Company’s common stock. The Agreement contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes customary representations, warranties and covenants by the Company. The Company valued the shares at $77,130, based on the market price of the common stock on the date of the agreement, to be amortized over the one-year term of the contract. For the six months ended June 30, 2020, the Company amortized $17,783 as stock-based compensation expense. As of June 30, 2020, the expense has been fully recognized.
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On September 2, 2019, the Company entered Consulting Agreement (the “Agreement”) with a consultant to act as the Company’s Executive Vice President, Sales and Marketing (the “EVP”) through December 31, 2019, and to provide the Company with customary services of an EVP. The Company has agreed to compensate the consultant $10,000 per month. Either party may terminate the Agreement in its sole and absolute discretion. The parties have agreed that they will negotiate follow up agreement with terms and conditions to include salary, commission, bonuses and stock and or option grants or awards, to be consistent with industry standards for like size companies prior to the termination of the Agreement. For the year ended December 31, 2019, the Company has expensed $30,000. As of June 30, 2020, and December 31, 2019, the Company owes the EVP $10,000, included in liabilities of discontinued operations.
On September 3, 2019, the Company entered into an Investor Relations Agreement (the “Agreement”) with a consultant. Under the terms of the Agreement, the consultant will provide consulting services to the Company, including, but not limited to assisting the Company in the conception and implementation of the Company’s corporate and business development plan. The term of the Agreement is 6 months from the date of the Agreement. As compensation for its services under the Agreement, the consultant received 1,250 shares of the Company’s common stock. The Agreement contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes customary representations, warranties and covenants by the Company. The Company valued the shares at $46,875, based on the market price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the six months ended June 30, 2020, the Company amortized $15,625 as stock-based compensation expense. As of June 30, 2020, the expense has been fully recognized.
On September 3, 2019, the Company entered into a Consulting Agreement (the “Agreement”) with a consultant. Under the terms of the Agreement, the consultant will provide consulting services to the Company, including, but not limited to assisting the Company in its general strategy for corporate communications. The term of the Agreement is 6 months from the date of the Agreement. As compensation for its services under the Agreement, the consultant received 1,250 shares of the Company’s common stock. The Agreement contains customary terms relating to payment of expenses, indemnification and other matters. The Agreement also includes customary representations, warranties and covenants by the Company. The Company valued the shares at $46,875, based on the market price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the six months ended June 30, 2020, the Company amortized $15,625 as stock-based compensation expense. As of June 30, 2020, the expense has been fully recognized.
On June 5, 2020, the Company entered into a one-year agreement for media relations services with a third-party. Pursuant to the Agreement, the Company will pay the consultants $10,000 per month for the development and execution of a comprehensive media relations plan.
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:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2020 | 2019 | |||||||
| Pre-tax loss | $ | (31,227,327 | ) | $ | (2,823,397 | ) | ||
| U.S. federal corporate income tax rate | 21 | % | 21 | % | ||||
| Expected U.S. income tax benefit | (6,557,739 | ) | (592,493 | ) | ||||
| Tax rate difference between U.S. and foreign operations | - | 289 | ||||||
| Permanent differences | 6,198,791 | 417,713 | ||||||
| Change of valuation allowance | 358,948 | 174,491 | ||||||
| Effective tax expense | $ | — | $ | — | ||||
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The Company had deferred tax assets as follows:
| June 30, 2020 | December 31, 2019 | |||||||
| Net operating losses carried forward | $ | 1,381,018 | $ | 1,022,071 | ||||
| Less: Valuation allowance | (1,381,018 | ) | (1,022,071 | ) | ||||
| Net deferred tax assets | $ | — | $ | — | ||||
As of June 30, 2020, the Company has approximately $6,108,000 and $595,000 net operating loss carryforwards available in the United States and Hong Kong, respectively, to reduce future taxable income. The net operating loss from Hong Kong operations can be carried forward with no time limit from the year of the initial loss pursuant to relevant Hong Kong tax laws and regulations. For U.S. purposes the NOL deduction for a tax year is equal to the lesser of (1) the aggregate of the NOL carryovers to such year, plus the NOL carry-backs to such year, or (2) 80% of taxable income (determined without regard to the deduction). Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely. The special extended carryback provisions are generally repealed, except for certain farming and insurance company losses. The amendments incorporating the 80% limitation apply to losses arising in tax years beginning after Dec. 31, 2017. It is more likely than not that the deferred tax assets cannot be utilized in the future because there will not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.
As of June 30, 2020, and December 31, 2019, the Company has no material unrecognized tax benefits which would favourably affect the effective income tax rate in future periods, and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three and six months ended June 30, 2020, and 2019, and no provision for interest and penalties is deemed necessary as of June 30, 2020, and 2019.
Since the Company’s foreign subsidiaries have not generated income since inception, the Company believes that Tax Act will not have significant impact on the Company’s consolidated financial statements.
NOTE 11 – STOCKHOLDERS’ EQUITY
On January 21, 2020, the Company filed an amendment to its Certificate of Incorporation, with the Nevada Secretary of State, for 1-for-1,000 reverse stock split of our common stock (the “Reverse Stock Split”) effective February 10, 2020. The number of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of one- thousand and no fractional shares were issued. All historical share in this report have been adjusted to reflect the Reverse Stock Split. There were no changes to the authorized number of shares and the par value of our common stock.
Common stock
On July 5, 2019, the Company entered into an Equity Financing Agreement (the “Equity Agreement”) with GHS Investments, LLC, a Nevada limited liability company (the “Investor”), with the Investor committing to purchase up to $7,000,000 of the Company’s common stock in tranches of up to $400,000, following an effective registration of the shares and subject to restrictions regarding the timing of each sale and total percentage stock ownership held by the Investor. The purchase price for the shares will be 85% of the lowest closing price during the 10-day period prior to each sale, and with each sale, the Investor will receive an issuance premium of 5% to cover the Investor’s transaction costs associated with selling the shares and payable by the Company to the Investor in registered shares. The obligation of the Investor to purchase shares pursuant to the Equity Agreement is subject to several conditions, including (i) that the Company has filed a registration statement (the “Registration Statement”) with the United States Securities and Exchange Commission (the “SEC”) registering the shares to be sold to the Investor within 30 calendar days from the date of the Equity Agreement, with the Registration Statement being declared effective prior to sale of any shares to the Investor; and (ii) that the purchase of shares by the Investor pursuant to the Equity Agreement shall not cause the Investor to own more than 4.99% of the outstanding shares of the Company’s common stock.
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In connection with the Equity Agreement, on July 5, 2019, the Company also entered into a Registration Rights Agreement with the Investor (the “Registration Rights Agreement”). On October 1, 2019, the SEC issued a Notice of Effectiveness of the Company’s Registration Statement.
During the six months ended June 30, 2020, holders of an aggregate of $2,774,896 in principal and $636,466 of accrued interest and fees of convertible notes issued by the Company, converted their debt into 1,444,237,885 shares of our common stock at an average conversion price of $0.00236 per share. The Company also issued 104,719,899 shares of common stock upon the cashless exercise of common stock purchase warrants.
As of June 30, 2020, the Company has 4,990,000,000 shares of $0.001 par value common stock authorized and there are 1,549,176,877 shares of common stock issued and outstanding.
Common stock to be issued
For the year ended December 31, 2019, the Company recorded 1,350 shares (post reverse stock split) of common stock to be issued, and valued the shares at $410,370, based on the market price of the common stock on the date of the shares being earned. For the year ended December 31, 2019, the company amortized $410,370 as stock-based compensation expense. As of June 30, 2020, and December 31, 2019, there are 1,350 shares of common stock to be issued.
Preferred stock
As of June 30, 2020, 10,000,000 shares have been authorized as preferred stock, par value $0.001 (the “Preferred Stock”), which such Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of Directors may determine from time to time.
On March 28, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 1,000,000 shares as Series B Preferred Stock. The Series B Preferred Stock is not convertible into common stock, nor does the Series B Preferred Stock have any right to dividends and any liquidation preference. The Series B Preferred Stock entitles its holder to a number of votes per share equal to 50 votes. On April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the Company’s CEO at the time. This resulted in a change in control of the Company.
On September 18, 2019, the Company filed a Certificate of Designation with the Secretary of State of Nevada to designate 50,000 shares as Series C Preferred Stock. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance, into one share of fully paid and non-assessable share of common stock. Each share of Series C Preferred Stock shall entitle the holder thereof to ten thousand (10,000) votes on all matters submitted to a vote of the stockholders of the Company.
On September 19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock to the Company’s CEO and Director, at the time, in consideration of the cancellation and return of 1,000,000 shares of the Company’s Series B Preferred Stock. On September 20, 2019, the Company filed a Certificate of Withdrawal of Certificate of Designation (the “Certificate of Withdrawal”) for the Company’s Series B Preferred Stock, pursuant to which the prior designation of the Company’s Series B Stock was cancelled. On February 28, 2020, pursuant to a share redemption agreement between the Company and Mr. Chermak pursuant to which, the Company agreed to redeem his 50,000 shares of Series C Preferred Stock for $100,000, ($2 per share), the Company redeemed 2,500 shares of series C Preferred Stock from Mr. Chermak, and issued 2,500 shares of Series C Preferred Stock to Mr. Conway, pursuant to Mr. Conway’s employment agreement. The Company valued the 2,500 shares issued to Mr. Conway at $5,000 ($2 per share). On April 28, 2020, the Company redeemed the remaining 47,500 shares of Series C Preferred Stock from the former CEO. As of June 30, 2020, and December 31, 2019, there are 50,000 shares of Series C Preferred Stock outstanding, respectively, and no shares of Series B Preferred Stock outstanding.
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On February 4, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s Series C Preferred Stock. The voting rights associated with the Series C Preferred Stock were amended whereby each share of Series C Preferred Stock shall entitle the holder thereof to have voting rights equal to two times the sum of all the number of shares of other classes of Company capital stock eligible to vote on all matters submitted to a vote of the stockholders of the Company, divided by the number of shares of Preferred Stock issued and outstanding at the time of voting.
Stock subscription receivable
On February 9, 2018, the Company recorded a stock subscription receivable from its officers and directors of $7,600 related to the issuance of 7,600 shares of common stock.
NOTE 12 – DISCONTINUED OPERATIONS
ASC 205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. As a result, the component’s results of operations have been reclassified as discontinued operations on a retrospective basis for all periods presented. Accordingly, the assets and liabilities of this component are separately reported as “assets and liabilities held for disposal” as of December 31, 2019. The results of operations of this component, for all periods, are separately reported as “discontinued operations”. There have been no transactions between the Company and SRI since the termination.
A reconciliation of the major classes of line items constituting the gain from discontinued operations, net of income taxes as is presented in the Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020, are summarized below; there was no activity of the SRI business for the three and six months ended June 30, 2019.
| Cost of goods sold | $ | 4,326 | ||
| Operating expenses: | ||||
| Depreciation expense | 13,805 | |||
| Rent expense | 2,222 | |||
| Interest expense | 8.794 | |||
| Total operating expenses | 24,821 | |||
| Loss from discontinued operations | $ | (29,147 | ) | |
| Gain from license termination | $ | 86,856 |
Liabilities of discontinued operations at June 30, 2020, of $75,270 consist of accounts payable and accrued expenses related to SRI.
The following table presents the reconciliation of carrying amounts of major classes of assets and liabilities of the Company classified as discontinued operations in the condensed consolidated balance sheet at December 31, 2019:
Carrying amounts of major classes of assets included as part of assets held for discontinued operations | ||||
| Inventory | $ | 378,061 | ||
| Prepaid expenses | 2,987 | |||
| Property and equipment, net | 353,985 | |||
| License rights, net | 2,724,848 | |||
| Goodwill | 2,002,314 | |||
| Total assets included in the assets of discontinued operations | $ | 5,462,195 | ||
Carrying amounts of major classes of liabilities included as part of liabilities of discontinued operations | ||||
| Accounts payable and accrued expenses | $ | 88,178 | ||
| Liability for common stock payable | 245,000 | |||
| Current portion of notes payable | 1,131,771 | |||
| Current portion of license fee payable | 984,089 | |||
| Long term portion of notes payable | 1,440 | |||
| Long term portion of license fee payable | 250,000 | |||
| Put option payable | 2,892,228 | |||
| Total liabilities included in the liabilities of discontinued operations | $ | 5,592,706 | ||
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NOTE 13 – SUBSEQUENT EVENTS
From July 1, 2020, through August 10, 2020, the Company has issued 1,205,966,108 shares of common stock upon the conversion of $1,883,096 of principal, accrued interest and fees of convertible notes. The Company also issued 149,820,477 shares of common stock upon the cashless exercise of warrants.
On July 8, 2020, (the “Issuance Date”) the Company issued a 15% convertible promissory note, in the principal amount of $250,000, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the conversion. The Company received proceeds of $200,000 on July 9, 2020, and this note included an original issue discount of $50,000. 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 12,500,000 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 July 7, 2020, the Company filed with the Secretary of State of the State of Nevada an Amendment to Certificate of Designation of Series C Preferred Stock, a Certificate of Designation of Series D Preferred Stock, and a Certificate of Designation of Series E Preferred Stock (collectively, the “Certificates of Designation”).
Under the terms of the Amendment to Certificate of Designation of Series C Preferred Stock, 50,000 shares of the Company’s preferred remain designated as Series C Preferred Stock. The holders of Series C Preferred Stock have no dividend rights. For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the Holder thereof, voting separately as a class, shall have the right to vote on all shareholder matters equal to sixty-seven (67%) percent of the total vote.
Under the terms of the Certificate of Designation of Series D Preferred Stock, 20,000 shares of the Company’s preferred stock have been designated as Series D Convertible Preferred Stock. The holders of the Series D Convertible Preferred Stock shall not be entitled to receive dividends. The holders as a group may, at any time convert all of the shares of Series D Convertible Preferred Stock into a number of fully paid and nonassessable shares of common stock determined by multiplying the number of issued and outstanding shares of common stock of the Company on the date of conversion, by 3. Except as provided in the Certificate of Designation or as otherwise required by law, no holder of the Series D Convertible Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Company for their vote, waiver, release or other action. The Series D Convertible Preferred Stock shall not bear any liquidation rights.
Under the terms of the Certificate of Designation of Series E Preferred Stock, 3,000 shares of the Company’s preferred stock have been designated as Series E Preferred Stock. The holders of the Series E Convertible Preferred Stock shall not be entitled to receive dividends. No holder of the Series E Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Corporation for their vote, waiver, release or other action, except as may be otherwise expressly required by law. At any time, the Corporation may redeem for cash out of funds legally available therefor, any or all of the outstanding Preferred Stock (“Optional Redemption”) at $1,000 (one thousand dollars) per share. The shares of Series E Preferred Stock have not been registered under the Securities Act of 1933 or the laws of any state of the United States and may not be transferred without such registration or an exemption from registration.
On July 10, 2020, the Company closed the SPA with (“PCTI”) and Chis, the sole shareholder of PCTI. 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 Catherine Chis in exchange for a cash payment of $400,000 (paid as of June 30, 2020) and 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.
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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 $27,500. 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.
On July 24, 2020, PCTI, the Company’s wholly owned subsidiary, entered into a three- month consulting agreement with a third-party. Pursuant to the agreement, the Company will pay the consultant $10,000 per month and the consultant will provide services, including, but not limited to, identifying PCTI’s best path forward into the renewable energy and energy storage industries as well as advance their presence in the maritime/transportation industry.
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 $27,500. 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 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report and other reports filed by Ozop Surgical Corp. (“we,” “us,” “our,” or the “Company”), from time to time contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates.
The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q.
THE COMPANY
Ozop Surgical Corp. (the “Company,” “we,” “us” or “our”) was originally incorporated as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada. Following the acquisition of OZOP Surgical, Inc., we have been engaged in the business of inventing, designing, developing, manufacturing and globally distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and pain management procedures and specialties. On May 8, 2018, we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to Ozop Surgical Corp. in order to reflect more accurately the name of our core service offering and operations.
On January 21, 2020, the Company filed an amendment to its Certificate of Incorporation, with the Nevada Secretary of State, for 1-for-1,000 reverse stock split of our common stock (the “Reverse Stock Split”) effective February 10, 2020. The number of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of one- thousand and no fractional shares were issued. All historical share in this report have been adjusted to reflect the Reverse Stock Split. There were no changes to the authorized number of shares and the par value of our common stock.
On February 4, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s Series C Preferred Stock (the “Preferred Stock”). The voting rights associated with the Preferred Stock were amended whereby each share of Preferred Stock shall entitle the holder thereof to have voting rights equal to two times the sum of all the number of shares of other classes of Company capital stock eligible to vote on all matters submitted to a vote of the stockholders of the Company, divided by the number of shares of Preferred Stock issued and outstanding at the time of voting.
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OZOP
OZOP was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”). On July 19, 2016, Mr. Eric Siu (“Siu”), one of our directors purchased 100% of the outstanding capital stock of Perma and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled as a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, Ozop formed as the sole member, Ozop Surgical, LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, Ozop acquired 100% of Ozop Surgical Limited (“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong Kong.
On February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas limited liability company (“Spinus”), from RWO Medical Consulting LLC (“RWO”), a Texas limited liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000 shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt was paid in November 2018.
On August 23, 2019, the Company entered into the License Agreement (see note 1) with SRI. Pursuant to the License Agreement, SRI granted to the Company an exclusive license, for products, as defined in the License Agreement, and utilized in spine and related surgical procedures. Under the License Agreement, SRI will continue to market the Swedge platform along with the existing portfolio to existing US and International customers. Ozop purchased all existing inventory of SRI instruments and implants and will utilize SRI as a distributor. On January 16, 2020, the Company received via email from SRI notice that the Agreement dated August 23, 2019, between SRI and the Company has been revoked, as the Company did not cure a payment default within the cure period.
On February 28, 2020, the Company entered into a Binding Letter of Intent (the “LOI”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. On June 26, 2020, the Company, PCTI and Chis signed a Stock Purchase Agreement (the “SPA”) and transaction was closed on July 10, 2020. Pursuant to the terms of the SPA, the Company acquired 100% of the issued and outstanding shares of PCTI (the “PCTI Shares”) from Chis in consideration of (a) the issuance by the Company to Chis of (i) 47,500 shares of the Company’s Series C Preferred Stock, (ii) 18,667 shares of the Company’s Series D Preferred Stock, (iii) 500 shares of the Company’s Series E Preferred Stock; and (b) the Company paying $400,000 to PCTI (the “Acquisition”). The Company paid $100,000 on May 26, 2020, and $300,000 on June 26, 2020). PCTI operates in the very high-power niche of the power electronics market, designing and manufacturing leading edge equipment for use in power conversion applications. PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid, telecommunications, military, transportation, renewable energy, aerospace and mission critical defense systems. PCTI’s clients include Fortune 500 companies, all branches of the US Department of Defense including the US Army and the US Air Force, NASA as well as other global military organizations.
Results of Operations for the three and six months ended June 30, 2020 and 2019:
Revenue
For the three and six months ended June 30, 2020, the Company did not recognize any revenues due to the termination of the agreements with SRI (see above). For the three and six months ended June 30, 2019, the Company generated total revenue of $1,521 and $ 49,123, respectively. The revenues are from the sale of spine surgery products. The decrease in revenues is a result of Spinus deciding to not to continue to supply its’ spine surgery products to the surgeon who previously performed surgeries with Spinus product. Revenues from Spinus are recognized as an agent and are recorded at net.
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Operating expenses
Total operating expenses for the three and six months ended June 30, 2020, were $200,006 and $378,746, respectively, compared to $671,054 and $1,439.623 for the three and six months ended June 30, 2019, respectively. The operating expenses were comprised of:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Management fees- related parties | $ | 30,000 | $ | 120,000 | $ | 87,505 | $ | 240,000 | ||||||||
| Stock-based compensation | - | 310,982 | 49,033 | 706,702 | ||||||||||||
| Professional and consulting fees | 72,500 | 101,414 | 97,925 | 148,670 | ||||||||||||
| Research and development | - | 10,400 | - | 63,604 | ||||||||||||
| Impairment of intangible asset | - | 44,200 | - | 44,200 | ||||||||||||
| General and administrative | 97,506 | 84,058 | 144,283 | 236,447 | ||||||||||||
| Total | $ | 200,006 | $ | 671,054 | $ | 378,746 | $ | 1,439,623 | ||||||||
On February 28, 2020, pursuant to the LOI with PCTI (see above) our CEO and CFO at the time resigned and Mr. Brian Conway was named CEO. Through that date the former CEO and CFO were compensated $22,205 and $20,000, respectively. The Company entered into an employment agreement with Mr. Conway, which includes a monthly salary of $10,000 and the immediate issuance of 2,500 shares of Series C Preferred Stock. The Company valued the Series C Preferred stock at $5,000 and is included in management fees for the six months ended June 30, 2020, along with his monthly compensation of $30,000 and $40,000 for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2019, management fees consisted of monthly fees to our CEO, COO and CFO of $15,000, $15,000 and $10,000, respectively.
Stock based compensation for the six months ended June 30, 2020 is comprised of:
| ● | On March 24, 2019, the Company signed a one-year consulting agreement with a consultant. As compensation for its services under the agreement, the consultant and its assignees received 171 shares of the Company’s common stock. The Company valued the shares at $77,130, based on the market price of the common stock on the date of the agreement, to be amortized over the one-year term of the contract. For the six months ended June 30, 2020, the Company amortized $17,783 as stock-based compensation expense. | |
| ● | On September 3, 2019, the Company signed a six- month consulting agreement with a consultant. As compensation for its services under the agreement, the consultant received 1,250 shares of the Company’s common stock. The Company valued the shares at $46,875, based on the market price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the six months ended June 30, 2020, the Company amortized $15,625 as stock-based compensation expense. | |
| ● | On September 3, 2019, the Company signed a six- month consulting agreement with a consultant. As compensation for its services under the agreement, the consultant received 1,250 shares of the Company’s common stock. The Company valued the shares at $46,875, based on the market price of the common stock on the date of the agreement, to be amortized over the term of the contract. For the six months ended June 30, 2020, the Company amortized $15,625 as stock-based compensation expense. |
Stock based compensation for the three and six months ended June 30, 2019 is comprised of:
| ● | Amortization of $162,500 related to a one-year consulting agreement effective on August 31, 2018, pursuant to the issuance of 650 shares of common stock. The Company valued the shares at $500 per share (the price the Company was selling shares of common stock on the date of the agreement). The Company recorded $325,000 as deferred stock compensation to be amortized over the term of the agreement, and accordingly has included $81,250 and $162,500 in stock-based compensation for the three and six months ended June 30, 2019, respectively. |
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| ● | On October 19, 2018, the company recorded the issuance of 450 shares of common stock, as the first tranche of a one- year consulting agreement requiring a total of 1,800 shares. The Company valued the shares issued at $500 per share (the price the Company was selling shares of common stock on the date of the agreement). The Company recorded $225,000 as deferred stock compensation to be amortized over the first three months of the agreement, and accordingly has included $52,500 in stock-based compensation for the six months ended June 30, 2019. | |
| ● | For the six months ended June 30, 2019, the Company recorded 900 shares of common stock to be issued pursuant to the one-year agreement above to issue 1,800 shares. The 900 shares were valued at $400,470, based on the market price of the common stock on their respective date of issuances, and the Company expensed $135,450 and $395,290 as stock-based compensation for the three and six months ended June 30, 2019, respectively. | |
| ● | On March 24, 2019, the Company signed a one-year consulting agreement with Newbridge. As compensation for its services under the Agreement, Newbridge and its assignees received 172 shares of the Company’s common stock. The Company valued the shares at $77,130, based on the market price of the common stock on the date of the agreement, to be amortized over the one-year term of the contract. For the three and six months ended June 30, 2019, the Company amortized $19,282 and $20,782 as stock-based compensation expense, respectively. | |
| ● | On April 1, 2019, the Company issued 1,000,000 shares of Series B Preferred Stock to the Company’s CEO. The shares were valued at $68,000 of which $25,000 was applied to accrued liabilities-related and $43,000 was recorded as stock-based compensation expense for the three and six months ended June 30, 2019. | |
| ● | On April 29, 2019, the Company issued 100 shares of common stock for consulting services. The shares were valued at $275 per share (the market price on the date of the agreement) and $27,500 was recorded as stock-based compensation expense for the six and months ended June 30, 2019. | |
| ● | On May 20, 2019, the Company issued 100 shares of common stock for consulting services. The shares were valued at $120 per share (the market price on the date of the agreement) and $4,500 was recorded as stock-based compensation expense for the three and six months ended June 30, 2019. |
Research and development costs of $10,400 and $63,604 for the three and six months ended June 30, 2019, respectively, were all costs related to development of new product.
General and administrative expenses, other
Total general and administrative expenses, other, were $97,506 and $144,283 for the three and six months ended June 30, 2020, respectively, compared to $84,058 and $236,447 for the three and six months ended June 30, 2019, respectively, and were comprised of:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Travel expenses | $ | 212 | $ | 7,095 | $ | 321 | $ | 33,118 | ||||||||
| Advertising and marketing | 1,226 | 33,663 | 1,226 | 59,442 | ||||||||||||
| Meals and entertainment | 451 | 2,319 | 451 | 6,141 | ||||||||||||
| Investor relations | 21,517 | 16,740 | 34,022 | 79,496 | ||||||||||||
| Transfer agent fees | 21,475 | 4,442 | 34,209 | 6,692 | ||||||||||||
| Depreciation and amortization | 11,232 | 11,216 | 22,313 | 22,432 | ||||||||||||
| Other | 41,393 | 8,583 | 51,741 | 29,126 | ||||||||||||
| Total | $ | 97,506 | $ | 84,058 | $ | 144,283 | $ | 236,447 | ||||||||
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Other Income (Expenses)
Other expenses, net, for the three and six months ended June 30, 2020, was $25,355,250 and $30,906,290, respectively, compared to other expenses, net of $1,247,708 and $1,430,897 for the three and six months ended June 30, 2019, respectively, and were as follows.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest expense | $ | 10,256,626 | $ | 99,701 | $ | 13,727,840 | $ | 148,493 | ||||||||
| Amortization of debt discount | 1,134,210 | 472,528 | 1,484,321 | 791,210 | ||||||||||||
| Loss (gain) on change in fair value of derivatives | 2,148,349 | (20,762 | ) | 3,682,522 | (68,372 | ) | ||||||||||
| Loss on extinguishment of debt | 11,816,065 | 696,241 | 12,011,607 | 559,566 | ||||||||||||
| Total other expense, net | $ | 25,355,250 | $ | 1,247,708 | $ | 30,906,290 | $ | 1,430,897 | ||||||||
The increase in other expense is primarily a result of increases in losses on changes in fair values of derivatives, interest expense and amortization of debt discounts and losses on extinguishment of debt for the three and six months ended June 30, 2020.
Net loss
The net loss for the three and six months ended June 30, 2020, was $25,555,256 and $31,227,327 respectively, compared to $1,917,241 and $2,821,397 for the three and six months ended June 30, 2019, respectively. The increases are a result of the changes discussed above.
Liquidity and Capital Resources
Currently, we have limited operating capital. The Company anticipates that it will require a minimum of $1,000,000 of working capital to complete substantially all of its desired business activity for the next twelve months, including PCTI. The Company currently is not generating any revenues from its business operations. Our current capital and our other existing resources will be sufficient only to provide a limited amount of working capital, and, to date, the revenues generated from our business operations have not been sufficient to fund our operations or planned growth. As noted above, we will require additional capital to continue to operate PCTI, and to further expand our business. We may be unable to obtain the additional capital required. Our inability to generate capital or raise additional funds when required will have a negative impact on our operations, business development and financial results.
For the six months ended June 30, 2020, we primarily funded our business operations with $803,250 of proceeds from the issuances of convertible note financings as well as $351,000 from the issuances of promissory notes. Of the proceeds, $400,000 was used for the payment to PCTI per the SPA, $100,000 was used to redeem 50,000 shares of Series C Preferred Stock from the Company’s former CEO and for working capital. We may continue to rely on the issuance of convertible notes and promissory notes to fund our business operations.
As of June 30, 2020, we had cash of $304,676 as compared to $10,877 at December 31, 2019. As of June 30, 2020, we had current liabilities of $12,423.299 (including $9,471,445 of non-cash derivative liabilities), compared to current assets of $706,843, which resulted in a working capital deficit of $11,716,456. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, liabilities of discontinued operations and notes payable.
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.
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Operating Activities
For the six months ended June 30, 2020, net cash used in operating activities from continuing operations was $440,638 compared to $537,780 for the six months ended June 30, 2019. For the six months ended June 30, 2020, our net cash used in operating activities from continuing operations was primarily attributable to the net loss from continuing operations of $31,285,036, adjusted by the non-cash expenses of interest and amortization and depreciation of $14,749,897, losses on the fair value changes in derivatives and on extinguishment of debt of $3,682,522 and $12,011,607, respectively and stock-based compensation of $54,033, partially offset by the gain on the license termination of $86,856. Net changes of $433,196 in operating assets and liabilities reduced the cash used in operating activities.
For the six months ended June 30, 2019, net cash used in operating activities of $537,780 was primarily attributable to the net loss of $2,821,397, a gain of $68,372 on the change in fair value of derivative liabilities, adjusted for the loss of $559,567 in extinguishment of debt, non-cash expenses of interest and amortization and depreciation of $882,994, stock-based compensation of $706,702 and an impairment charge of $44,200. Net changes of $158,525 in operating assets and liabilities reduced the cash used in operating activities.
Investing Activities
For the six months ended June 30, 2020, the Company acquired office furniture and equipment of $8,389 and advanced $400,000 to PCTI, pursuant to the SPA. There were no investing activities for the six months ended June 30, 2019.
Financing Activities
For the six months ended June 30, 2020, the net cash provided by financing activities was $1,054,250, compared to $492,145 for the six months ended June 30, 2019. During the six months ended June 30, 2020, we received $803,250 of proceeds from the issuances of convertible note financings and $351,000 from the issuances of promissory notes. During the six months ended June 30, 2020, the Company purchased 50,000 shares of Series C Preferred Stock for $100,000 from the Company’s former CEO.
For the six months ended June 30, 2019, the net cash provided by financing activities was $492,145, as we received $494,950 of proceeds from the issuances of convertible note financings, as well as $100,000 from the sale of 200,000 shares of common stock at $0.50 per share. The Company made payments on convertible debt of $100,000.
OFF BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
Critical Accounting Policies
Our significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe the following accounting policies to be most critical to the judgement and estimates used in the preparation of our unaudited financial statements:
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2020, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K filed on May 14, 2020.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of is’ customers. Revenues from Spinus of $1,521 and $49,123 for the three and six months ended June 30, 2020, respectively, are recognized as an agent and are recorded at net. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and six months ended June 30, 2020 and 2019.
Research and Development
Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the six months ended June 30, 2020, and 2019, the Company recorded $-0- and $63,604 of research and development expenses.
Earnings (Loss) Per Share
The Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2020. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the reasons discussed below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2020, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.
| 1. | We do not have an Audit Committee – While not being legally obligated to have an audit committee, it is the management’s view that such a committee, including a financial expert member, is an utmost important entity level control over the Company’s financial statement. Currently the Board of Directors acts in the capacity of the Audit Committee, and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities. | |
| 2. | We did not maintain appropriate cash controls – As of June 30, 2020, the Company has not maintained sufficient internal controls over financial reporting for cash, including failure to segregate cash handling and accounting functions, and did not require dual signatures on the Company’s bank accounts. |
Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting occurred during the three months ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Not applicable for smaller reporting companies.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2020, holders of an aggregate of $2,668,959 in principal and $561,093 of accrued interest and fees of convertible notes issued by the Company, converted their debt into 1,439,298,485 shares of our common stock at an average conversion price of $0.0022 per share. The Company also issued 104,719,899 shares of common stock upon the cashless exercises of warrants.
The shares described above were issued pursuant to the exemption from registration requirements relying on Section 4(a)(2) of the Securities Act.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
| (a) | None. | |
| (b) | During the quarter ended June 30, 2020, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors. |
The following documents are filed as part of this report:
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(d)
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 14, 2020
| /s/ Brian P Conway | |
| Brian P. Conway | |
| Chief Executive Officer | |
| (principal executive officer) | |
| (principal financial and accounting officer) |
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