UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2019

 

[  ] 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

(State or Other Jurisdiction of

Incorporation or Organization)

 

3841

(Primary Standard Industrial

Classification Number)

 

35-2540672

(IRS Employer

Identification Number)

 

31 Sandfort Lane

Warwick, NY 10990

(845) 544-5112

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

  

Securities registered under Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [  ]

 

Indicate by check mark whether the issuer (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 has for such 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. Yes [X] 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). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

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[  ] (Do not check if a smaller reporting company)

Smaller reporting company [X]

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 Act). Yes [  ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2019) $1,047,888.

 

The number of shares outstanding of the registrant’s $0.001 par value Common Stock as of May 11, 2020, is 257,026,917 shares.

 

 

 

     
 

 

Table of Contents

 

    Page
  PART I  
     
Item 1 Business 4
Item 1A Risk Factors 9
Item 1B Unresolved Staff Comments 9
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Mine Safety Disclosures 9
     
  PART II  
     
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 9
Item 6 Selected Financial Data 10
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk 16
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16
Item 9A Controls and Procedures 16
Item 9B Other Information 17
     
  PART III  
     
Item 10 Directors, Executive Officers and Corporate Governance 18
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 21
Item 13 Certain Relationships and Related Transactions, and Director Independence 22
Item 14 Principal Accountant Fees and Services 23
     
  PART IV  
     
Item 15 Exhibits and Financial Statement Schedules 23
  Signatures 25

 

  2  
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “project”, “believe”, “anticipate”, “plan”, “expect”, “estimate”, “intend”, “should”, “would”, “could”, or “may”, or other such words, verbs in the future tense and words and phrases that convey similar meaning and uncertainty of future events or outcomes to identify these forward–looking statements. There are a number of important factors beyond our control that could cause actual results to differ materially from the results anticipated by these forward–looking statements. While we make these forward–looking statements based on various factors and using numerous assumptions, you have no assurance the factors and assumptions will prove to be materially accurate when the events they anticipate actually occur in the future. Factors that could cause our actual results of operations and financial condition to differ materially are discussed in greater detail under Item 1A, “Risk Factors” of this annual report on Form 10-K.

 

The forward–looking statements are based upon our beliefs and assumptions using information available at the time we make these statements. We caution you not to place undue reliance on our forward–looking statements as (i) these statements are neither predictions nor guaranties of future events or circumstances, and (ii) the assumptions, beliefs, expectations, forecasts and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward–looking statement to reflect developments occurring after the date of this report.

 

  3  
 

 

PART I

Item 1. Description of Business

 

ORGANIZATION

 

Ozop Surgical Corp. (the” Company,” “we,” “us” or “our”) was originally incorporated as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of the renting different kind of Segways and bicycles, dual wheels self-balancing electric scooters and related safety equipment. Following the acquisition of OZOP Surgical, Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and pain management procedures and specialties.

 

Our corporate website is located at http://ozopsurgical.com/, and the contents of our website are expressly not incorporated herein.

 

Acquisition

 

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 $768,844 (subject to adjustments) for the purchase of the inventory of the Products (as defined in the Agreement). The Note has a stated interest rate of six percent (6%) and payment terms of the Note are in eighteen equal installments, 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 can increase based on the revenue rate at the time the option is exercised. If the Company does not elect to exercise their option to purchase SRI, SRI can “put” the Acquisition to the Company. Any payments made for the license, the 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 will be charged to interest expense over the option period.

 

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   $ 5,336,125  
Liabilities assumed     524,387  
Total purchase price   $ 5,856,012  
Assets acquired   $ 768,844  
Intellectual Property/Technology     2,810,000  
Goodwill     2.277,168  
    $ 5,856,012  

 

The total purchase price of $5,856,012 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. The Company will record amortization expense assuming a straight-line basis over the expected life of the finite lived intangible assets, which approximates expected future cash flows.

 

Goodwill represents the amount by which the estimated consideration transferred exceeds the fair value of the assets the Company acquired and the liabilities the Company assumed. The Company will not amortize the goodwill, but will instead test the goodwill for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. During the year ended December 31, 2019. the Company recorded an impairment of $274,854, for the termination of the SRI Agreement pursuant to an email received from SRI on January 16, 2020, 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. 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 as follows:

 

Assets      
Inventory   $ 378,061  
Instruments, net     353,985  
Patent rights, net     2,724,848  
Goodwill     2,277,168  
Total assets as of December 31, 2019   $ 5,734,062  
         
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     595,379  
Option to buy     2,892,228  
Total consideration and liabilities assumed balances   $ 5,459,208  
Impairment recorded December 31, 2019   $ 274,854  

 

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Reverse Merger

 

On April 13, 2018, we entered into and completed a share exchange agreement (the “Share Exchange Agreement”) with OZOP Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group, owning 96.9% of such shares. Currently, our executive officers and directors, as a group, own 6,374,223 of our shares representing 21.81 % of our issued and outstanding shares of common stock. The merger was accounted for as a reverse merger, whereby OZOP was considered the accounting acquirer and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment for a “reverse merger” or a “reverse acquisition,” the Company’s historical financial statements prior to the reverse merger were and will be replaced with the historical financial statements of OZOP prior to the reverse merger, in all future filings with the U.S. Securities and Exchange Commission (the “SEC”).

 

In connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company’s Chief Executive Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry (who resigned March 4, 2019) and Eric Siu (who resigned March 5, 2019) were named as directors of the Company.

 

Corporate Matters

 

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 (resigned February 28, 2020) and Director. 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-related parties.

 

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.

 

  5  
 

 

On September 19, 2019, the Company issued 50,000 shares of its Series C Preferred Stock to the Company’s CEO (resigned February 28, 2020) and Director, 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 October 29, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock to 2,500,000,000 shares, of which 2,490,000,000 have been designated as common stock, par value $0.001 and 10,000,000 shares have been designated as Preferred Stock, par value $0.001. The Preferred Stock 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 December 26, 2019, the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-1,000 reverse stock split of the Company’s common stock. The reverse stock split became effective on February 10, 2020. The par values and the authorized shares of the Company’s common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock, stock options and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.

 

On December 30, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock to 5,000,000,000 shares, of which 4,990,000,000 have been designated as common stock, par value $0.001 and 10,000,000 shares have been designated as Preferred Stock, par value $0.001. The Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of Directors may determine from time to time.

 

OZOP

 

OZOP was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”). On July 19, 2016, Mr. Eric Siu (“Siu”), one of our former directors purchased 100% of the outstanding capital stock of Perma and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled as a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, OZOP formed as the sole member, Ozop Surgical, LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, OZOP acquired 100% of Ozop Surgical Limited (“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong Kong.

 

On February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas limited liability company (“Spinus), from RWO Medical Consulting LLC (“RWO”), a Texas limited liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000 shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt is secured by Spinus’s assets and was due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum of a $3,000,000 equity raise. OZOP acquired Spinus to gain control of a license rights agreement for exclusive rights to intellectual property related to minimally invasive spine surgery techniques. The Assumed Debt of $250,000 was paid in November 2018.

 

On February 28, 2020, the Company entered into a Binding Letter of Intent (the “LOI”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Pursuant to the terms of the LOI, the Company will acquire 100% of the issued and outstanding shares of PCTI (the “PCTI Shares”) from Chis (the “Acquisition”). PCTI operates in the very high power niche of the power electronics market, designing and manufacturing leading edge equipment for use in power conversion applications. PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid, telecommunications, military, transportation, renewable energy, aerospace and mission critical defense systems. PCTI’s clients include Fortune 500 companies, all branches of the US Department of Defense including the US Army and the US Air Force, NASA as well as other global military organizations. The Company believes the Acquisition will close by June 30, 2020, and is in the best interests of the Company and its’ shareholders. In conjunction with the LOI, Michael Chermak and Barry Hollander resigned as Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), respectively, and Brian Conway was named CEO and Interim CFO. Mr. Chermak remains as the sole Director of the Company.

 

Overview

 

Our Principal Products and Services

 

We are 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.

 

  6  
 

 

Our principal products and services include a full line of implants which can be used in +80% of all surgical spine cases, including:

 

  Anterior cervical spine cases (ACP, CIB).
  Posterior lumbar Interbody Fusion (PLIF).
  Transforaminal Interbody Fusion (TLIF).
  Anterior Lumbar Interbody Fusion (ALIF).
  Lateral Lumbar Interbody Fusion (LLIF).
  Lateral Buttress Plate.
  Open and MIS Pedicle Screws.

 

Sales and marketing

 

OZOP’s sales and marketing strategy is based on our market experience and an extensive network of personal relationships built over the careers of our founders and officers. These relationships include surgeons, institutional buyers, and a vast network of surgical product distributors throughout the US. The Company plans to sponsor ‘hands on’ clinical workshops for surgeons in the US to train practitioners in the new techniques and products. The overriding objective of this business approach is to generate steadily increasing revenue and build a customer base that will embrace the Company’s current and future products. This has the two-fold benefit of lowering the company’s capital requirements and decreasing new product adoption curve. It is important to note that the customers of the current product offering are the same buyers that we hope will adopt future products. The same physician customers and distribution partners are all prospects for the new products in development. In fact, in many cases, OZOP plans to use the attraction of early access to these new products as an inducement to secure their immediate business.

 

We primarily plan to sell our products to hospitals and surgical facilities by (i) employees and contracted sales representatives, and (ii) commission-paid distributors. Our representatives and commission-paid distributors use their business contacts to expand and establish relationships to build our target medical facility customer base. We also plan to execute and maintain stocking distribution agreements providing distributors exclusive or non- exclusive distribution rights in certain geographic areas for the sale and promotion of the products we offer. We believe our IP and exclusive distribution agreements can provide us with important competitive advantages by increasing our brand awareness and ensuring that we use the latest design and manufacturing technology for our products that are perceived to be important to our customers.

We plan to develop and expand our customer portfolio by building relationships with key medical professionals. We will provide on-going product training and support to our sales representatives and independent contractors along with product marketing materials to ensure customer satisfaction with the products we offer. We believe focusing on these key areas is essential to growing our customer base and revenues.

 

We have significant concentration in and dependence on a small number of customers. In 2019, two (2) customers represented one hundred percent (100%) of our consolidated net revenues. If we lose either customer relationship, without replacing them, it could adversely impact our business, future operating results, and financial condition.

 

Manufacturing

 

We contract primarily with small and medium-sized manufacturers that are subject to FDA compliance and approval standards. These manufacturers are highly innovative and cost effective because of their streamlined sales infrastructures. All of our manufacturing partners will be qualified to manufacture under the FDA’s Quality System Regulations/ISO 13485 standards. The Company intends to retain in-house the quality assurance function so that we can approve all products prior to their release to market. We also intend to utilize high quality software in an effort to assure that our products remain compliant throughout all operations. The Company believes that there are no significant issues with availability of needed materials that would prevent us from meeting the projected market demand for our initial products in a timely manner. Packaging design and manufacturing will be outsourced to one or more experienced medical device packaging companies. The Company believes that this will allow for accelerated time to market and optimizing the shelf life of those products that are pre-packaged sterile.

 

Competition

 

The global spinal surgery market is characterized by strong competition. The worldwide spinal implant market currently includes over 220 manufacturers, but not all active competitors offer interbody spinal fusion devices in the United States. According to the 2018 Orthoworld, Inc., Orthopedic Industry Annual Report, the top ten companies account for approximately 80% of the overall market. The FDA’s reclassification of spinal fusion devices from Class III to Class II in 2007 has attracted, and will continue to attract, new entrants in the market. The Company has recently seen a series of product launches and an increased focus on research and development activities, and it anticipates that intense competition between the new entrants and existing companies may lead to pricing pressure on all companies in the future.

 

According to the Orthoworld report, Medtronic Inc. dominates the global market for spinal surgery devices, with a market share of approximately 27%. The Company believes that this is due, in large part, to its broad portfolio of spinal fusion devices. DePuy Synthes ranks second at 16%. Other leading players with market shares of approximately 10% and 8%, respectively include NuVasive Inc. and Stryker Corporation.

 

  7  
 

 

We believe the competition in our industry is primarily caused by continued mergers and acquisitions of smaller companies by larger, vertically-integrated companies that produce, market and distribute medical devices and surgical implants. Our vertically-integrated competitors benefit from their ability to control costs for the devices they manufacture and distribute. Moreover, the market in which we operate is sensitive to changes in third-party and government reimbursements and, to a lesser degree, competitive discount pricing. We believe that our industry will continue to see increased mergers and acquisitions because the market is significantly fragmented with numerous medical device distributors and specialized suppliers offering similar product portfolios throughout the United States.

 

Intellectual Property

 

We own and license intellectual property (“IP”). On February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). Pursuant to the Spinus acquisition, the Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. In consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The $250,000 was due the earlier of (i) February 16, 2019 or (ii) 15 days subsequent to the Company completing a minimum of a $3,000,000 equity raise. The Company 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.

 

Regulatory Issues

 

Our business is subject to highly complex United States federal and state regulations that may impact our ability to fully implement our strategic plans and initiatives. We are required to obtain and hold licenses and permits and to comply with the regulatory requirements of various governmental agencies. If we fail to comply with such regulatory requirements or if allegations are made that we fail to comply with such regulations, the economic viability of our Company may be adversely affected.

 

FDA Regulations

 

The manufacturers and suppliers of the products we market are subject to extensive regulation by the FDA, other federal governmental agencies, and state authorities. These laws and regulations govern the approval of, clearance of, or license to commercialize medical devices (such as implants). This includes compliance with the standards and requirements related to the design, testing, manufacture, labeling, promotion, and sales of the products, record keeping requirements, tracking of devices, reporting of potential product defects and adverse events, conduct of corrections, and recalls and other matters. As a distributor, marketer and repackager/relabeler of such FDA-regulated products, we are subject to independent requirements to register and list certain products. We may be required to obtain state licensure or certifications and we may be subject to inspections, in addition to complying with requirements that apply to the manufacturers of the products we market. Failure to comply with those applicable requirements could result in a wide variety of enforcement actions, ranging from warning letters to more severe sanctions such as fines, civil penalties, operating restrictions, injunctions, and criminal prosecutions.

 

Healthcare Laws and Regulations

 

We are required to comply with federal and state healthcare laws and regulations. Such healthcare fraud and abuse laws apply to the relationships that we or our distributors have with healthcare professionals and entities, such as physicians and hospitals. U.S. federal health care laws including laws related to false claims, health care fraud and abuse, physician self-referrals, and anti-kickbacks apply when we or our customers submit claims for items or services that are reimbursed under federally-funded health care programs (such as Medicare or Medicaid). State health care laws of a similar nature apply to state-funded health care programs and may also apply with private third-party payors. The requirements of these laws are complex and subject to varying interpretations. If we fail to comply with these laws, we could be subject to federal or state government investigations, substantial fines, exclusion from future participation in government healthcare programs, and civil or criminal sanctions. Such sanctions and damages could adversely affect the economic viability of our Company.

 

Employees

 

Other than our officers and directors, we currently do not have any employees.

 

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ITEM 1A. RISK FACTORS

 

We are a smaller reporting Company and are not required to include disclosures under this item.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

We do not own any real estate or other properties. Our corporate office utilizes the office of our CEO in Warwick, New York at no cost to the Company.

 

ITEM 3. LEGAL PROCEEDINGS.

 

On July 12, 2019, counsel representing two of the Company’s lenders holding approximately $100,000 in aggregate in principal of convertible notes, sent a demand letter to the Company noting the Company is in default for the Company’s failure to repay the notes at maturity including unpaid interest and an unpaid 35% premium to the principal amount of the notes. The Company retained counsel, which responded to the lender’s counsel. As of the date of the report, a third party has purchased the convertible notes from the initial lenders.

 

Other than the above, we know of no legal proceedings to which we are a party or to which any of our property is the subject which are pending, threatened or contemplated or any unsatisfied judgments against us.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock began trading on May 8, 2017, and currently trades on the OTC Pink Market under the symbol “OZSC.” The closing price of our common stock on May 11, 2020 was $0.0121

 

Holders

 

As of December 31, 2019, the Company had 219,035 shares of our common stock issued and outstanding held by 51 holders of record.

 

Dividends

 

We have not declared or paid dividends on our common stock since our formation, and we do not anticipate paying dividends in the foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of our Board of Directors and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the Board of Directors. There are no contractual restrictions on our ability to declare or pay dividends.

 

Securities authorized for issuance under equity compensation plans

 

None

 

RECENT SALES OF UNREGISTERED SECURITIES

 

Other than as previously disclosed on our Current Reports on Form 8-K or Quarterly Reports on Form 10-Q filed with the SEC, we did not issue any unregistered equity securities during the twelve months ended December 31, 2019.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

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OTHER STOCKHOLDER MATTERS

 

None.

 

Item 6. Selected Financial Data

 

Not applicable to smaller reporting companies.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The independent auditors’ reports on our financial statements for the years ended December 31, 2019 and 2018 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 12 to the consolidated financial statements filed herein.

 

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern.

 

THE COMPANY

 

Ozop Surgical Corp. (the “Company,” “we,” “us” or “our”) was originally incorporated as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada, for the purpose of renting out Segways and bicycles. Following the acquisition of OZOP Surgical, Inc. as discussed below, we have been engaged in the business of inventing, designing, developing, manufacturing and globally distributing innovative endoscopic instruments, surgical implants, instrumentation, devices and related technologies, focused on spine, neurological and pain management procedures and specialties.

 

On April 13, 2018, we entered into and completed a share exchange agreement (the “Share Exchange Agreement”) with OZOP Surgical, Inc. (“OZOP”), the shareholders of OZOP (the “OZOP Shareholders”) and Denis Razvodovskij, the then holder of 2,000,000 shares of our common stock. Pursuant to the terms of the Share Exchange Agreement, the OZOP Shareholders transferred and exchanged 100% of the capital stock of OZOP in exchange for an aggregate of 25,000,000 newly issued shares of our common stock (the “Share Exchange”). After giving effect to the redemption of 2,000,000 shares of our common stock pursuant to the Redemption Agreement discussed below and the issuance of 25,000,000 shares of our common stock pursuant to the Share Exchange Agreement, we had 25,797,500 shares of common stock issued and outstanding, with the OZOP Shareholders, as a group, owning 96.9% of such shares. The merger was accounted for as a reverse merger, whereby OZOP was considered the accounting acquirer and became a wholly-owned subsidiary of the Company. In accordance with the accounting treatment for a “reverse merger” or a “reverse acquisition,” the historical financial statements prior to the reverse merger were and will be replaced with the historical financial statements of OZOP prior to the reverse merger, in all future filings with the SEC. The consolidated financial statements after completion of the reverse merger have and will include the assets, liabilities and results of operations of the combined company from and after the closing date of the reverse merger.

 

In connection with the acquisition of OZOP, we purchased and redeemed 2,000,000 shares of our common stock from Mr. Razvodovskij for a total purchase price of $350,000 pursuant to a Share Redemption Agreement (the “Redemption Agreement”). Pursuant to the terms of the Share Exchange Agreement, effective April 13, 2018, Mr. Razvodovskij resigned as the Company’s Chief Executive Officer, Chief Financial Officer, Secretary, and sole director, and Michael Chermak, Salman J. Chaudhry and Eric Siu were named as directors of the Company. On March 3, 2019, Mr. Thomas McLeer was named a director. Mr. Chaudhry resigned from our board of directors on March 4, 2019, and Mr. Siu resigned from the board on March 5, 2019.

 

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 (resigned February 28, 2020) and Director. 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-related parties.

 

  10  
 

 

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 (resigned February 28, 2020) and Director, 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 October 29, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock to 2,500,000,000 shares, of which 2,490,000,000 have been designated as common stock, par value $0.001 and 10,000,000 shares have been designated as Preferred Stock, par value $0.001. The Preferred Stock 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 December 26, 2019, the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-1,000 reverse stock split of the Company’s common stock. The reverse stock split became effective on February 10, 2020. The par values and the authorized shares of the Company’s common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock, stock options and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.

 

On December 30, 2019, the Company amended its’ Articles of Incorporation to increase the authorized shares of capital stock to 5,000,000,000 shares, of which 4,990,000,000 have been designated as common stock, par value $0.001 and 10,000,000 shares have been designated as Preferred Stock, par value $0.001. The Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of Directors may determine from time to time.

 

OZOP

 

OZOP was originally incorporated in Switzerland on November 28, 1998 under the name Perma Consultants Holding AG (“Perma”). On July 19, 2016, Mr. Eric Siu (“Siu”), one of our directors purchased 100% of the outstanding capital stock of Perma and changed the name from Perma to Ozop Surgical AG (“Ozop AG”). On February 1, 2018, Ozop AG was re-domiciled as a Delaware corporation and changed its name to Ozop Surgical, Inc. On July 28, 2016, Ozop formed as the sole member, Ozop Surgical, LLC (“Ozop LLC”), a Wyoming limited liability company. On October 28, 2016, Ozop acquired 100% of Ozop Surgical Limited (“Ozop HK”), from Siu, the sole shareholder of Ozop HK. Ozop HK, is a private limited company incorporated in Hong Kong.

 

On February 16, 2018, OZOP acquired the 100% membership interest (the “Membership Interest”) in Spinus, LLC, a Texas limited liability company (“Spinus), from RWO Medical Consulting LLC (“RWO”), a Texas limited liability company (the “Acquisition”). OZOP purchased the Membership Interest from RWO in exchange for; (i) 5,000,000 shares OZOP’s common stock and ii) the assumption of all liabilities of Spinus, including an obligation of $250,000 pursuant to a license agreement by and between Spinus and a third party (the “Assumed Debt”). The Assumed Debt was paid in November 2018. There have not been any sales of the licensed products and accordingly, no royalties have been incurred.

 

On August 23, 2019, the Company entered into the Agreement (see Note 1) with 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. Under the Agreement, SRI continued 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 utilized SRI as a distributor. The Company began recognizing revenues for the sales of SRI product in September 2019. To optimize sales potential under the Agreement, the Company, on September 2, 2019, engaged an industry experienced consultant, with distributor relationships, performing the services of EVP Sales and Marketing. 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.

 

  11  
 

 

Results of Operations for the years ended December 31, 2019 and 2018:

 

Revenue

 

For the year ended December 31, 2019, the Company generated revenue of $316,865, compared to $157,458 for the year ended December 31, 2018. The revenues are from the sale of spine surgery products and endoscopes. Revenues of $267,742 for the year ended December 31, 2019, were pursuant to the Agreement with SRI, while revenues of $49,123 and $107,851 for the years ended December 31, 2019, and 2018, respectively, where from Spinus, were recognized as an agent and were recorded at net. Additionally, revenues from 2018 of $49,607 were derived from Ozop HK.

 

Operating expenses

 

Total operating expenses for the years ended December 31, 2019, and 2018, were $2,667,282 and $1,561,539, respectively. The operating expenses were comprised of:

 

    Year ended December 31,  
    2019     2018  
Management fees   $ 478,000     $ 553,401  
Stock-based compensation     849,004       334,333  
Professional and consulting fees     219,795       235,279  
Research and development     75,434       88,572  
Bad debt expense     92,767       -  
Impairment     364,374       -  
General and administrative. other     633,228       349,954  
Total   $ 2,712,602     $ 1,561,539  

 

Current period Management fees consist of monthly fees to our CEO (resigned February 28, 2020), COO (resigned October 2019) and CFO (resigned February 28,2020) of $15,000, $15,000 and $10,000, respectively. The 2018 period included monthly fees of $10,000 for the same positions as well as $10,000 per month to the former CEO of Ozop HK (resigned in March 2019). Effective February 28, 2020, the Company entered into an employment agreement with Brian Conway as CEO. Mr. Conway’s compensation is $120,000 annually.

 

Stock based compensation for the year ended December 31, 2019, is comprised of:

 

  Amortization of $216,667 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).
     
  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 year ended December 31, 2019.
     
  For the year ended December 31, 2019, the Company recorded 1,350 shares of common stock to be issued pursuant to the one-year agreement above to issue 1,800 shares. The 1,350 shares were valued at $410,370, based on the market price of the common stock on their respective date of issuances, and the Company expensed $410,370 as stock-based compensation for the year ended December 31, 2019.
     
  On March 24, 2019, the Company signed a one-year consulting agreement with Newbridge. As compensation for its services under the Agreement, Newbridge and its assignees received 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 year ended December 31, 2019, the Company amortized $59,347 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 (resigned February 28, 2020). 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 year ended December 31, 2019.
     
  On June 14, 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 year ended December 31, 2019.

 

  12  
 

 

  On June 27, 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 $12,000 was recorded as stock-based compensation expense for the year ended December 31, 2019, respectively.
     
  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 year ended December 31, 2019, the Company amortized $31,250 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 year ended December 31, 2019, the Company amortized $31,250 as stock-based compensation expense.
     
  On September 3, 2019, the Company issued 200 shares of common stock for web-site development services. The shares were valued at $20 per share (the market price on the date of the agreement) and $4,000 was recorded as stock-based compensation expense for the year ended December 31, 2019.
     
  On September 20, 2019, the Company issued 100 shares of common stock for consulting services. The shares were valued at $14.2 per share (the market price on the date of the agreement) and $1,420 was recorded as stock-based compensation expense for the year ended December 31, 2019.
     
  On September 25, 2019, the Company issued 300 shares of common stock for consulting services. The shares were valued at $9 per share (the market price on the date of the agreement) and $2,700 was recorded as stock-based compensation expense for the year ended December 31, 2019.

 

Stock based compensation expense for the year ended December 31, 2018 was comprised of:

 

  On July 1, 2018, the Company recorded the issuance of 30 of common stock for legal services. 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), pursuant to the April PPM and recorded $15,000 of stock- based compensation expense for the year ended December 31, 2018.
     
  On August 31, 2018, the company recorded the issuance of 650 shares of common stock pursuant to a one-year consulting agreement. 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), pursuant to the April PPM. The Company recorded $325,000 as deferred stock compensation to be amortized over the term of the agreement, and accordingly has included $108,333 in stock-based compensation for the year ended December 31, 2018.
     
  On October 19, 2018, the company recorded the issuance of 450,000 shares of common stock, as the first tranche of a one- year consulting agreement requiring a total of 1,800,000 shares. The Company valued the shares issued at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement), pursuant to the October PPM. The Company recorded $225,000 as deferred stock compensation to be amortized over the first three months of the agreement, and accordingly has included $172,500 in stock-based compensation for the year ended December 31, 2018.
     
  On October 24, 2018, the company recorded the issuance of 20,000 shares of common stock pursuant to a consulting agreement. The Company valued the shares at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement), pursuant to the October PPM and recorded $10,000 of stock- based compensation expense.
     
  On November 21, 2018, the company recorded the issuance of 57,000 shares of common stock for services provided to the Company. The Company valued the shares at $0.50 per share (the price the Company was selling shares of common stock on the date of the agreement), pursuant to the October PPM and recorded $28,500 of stock- based compensation expense.

 

Research and development costs were $75,434 and $88,572 for the years ended December 31, 2019, and 2018, respectively, were all costs related to development of new product.

 

  13  
 

 

Impairment expenses for the year ended December 31, 2019, consisted of:

 

  the Company impaired $44,200 of tradenames as management has decided not to go forward with the use of the trade name Spinus.
     
  the Company recorded an impairment of $274,854, for the termination of the SRI Agreement.
     
  the Company recorded a charge of $45,320 to inventory.

 

General and administrative expenses, other

 

Total general and administrative expenses, other, were $633,228 and $349,954 for the years ended December 31, 2019, and 2018, respectively, and were comprised of:

 

    Year ended December 31,  
    2019     2018  
Travel expenses   $ 57,976     $ 107,553  
Advertising and marketing     44,019       43,527  
Meals and entertainment     12,836       638  
Commissions     128,195       12,332  
Investor relations     104,919       18,709  
Depreciation and amortization     155,302       38,229  
Other     129,981       128,966  
Total   $ 633,228     $ 349,954  

 

Other Income (Expenses)

 

Other expenses, net, for the years ended December 31, 2019, and 2018, was $3,687,910 and $1,046,933, respectively, and were as follows.

 

   

Year ended

December 31,

 
    2019     2018  
Interest expense   $ 594,701     $ 442,845  
Amortization of debt discount     1,578,419       1,232,154  
Loss on change in fair value of derivatives     653,551       33,787  
Loss (gain) on extinguishment of debt     861,249       (661,853 )
Total other expense, net   $ 3,687,910     $ 1,046,933  

 

Net loss

 

The net loss for the year ended December 31, 2019, was $6,140,158, compared to $2,490,705 for the year ended December 31, 2018. 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 bringing new products to market. The Company has achieved only limited 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 our business, and to further expand our business. We may be unable to obtain the additional capital required. Our inability to generate capital or raise additional funds when required will have a negative impact on our operations, business development and financial results.

 

For the year ended December 31, 2019, we primarily funded our business operations with $1,497,700 of proceeds from the issuances of convertible note financings as well as $100,000 from the sale of 200 shares of common stock at $500 per share. Of the proceeds $200,000 was used for the first license payment due, $410,825 was used to make principal and interest payments on convertible debt and for working capital. We may continue to rely on the issuance of convertible promissory notes to fund our business operations.

 

  14  
 

 

As of December 31, 2019, we had cash of $10,877 as compared to $50,903 at December 31, 2018. As of December 31, 2019, we had current liabilities of $7,872,764 (including $2,462,940 of non-cash derivative liabilities), compared to current assets of $397,343, which resulted in a working capital deficit of $7,475,421. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, license fees payable and notes payable.

 

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 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. As of December 31, 2019, the Company had a stockholders’ deficit of $5,167,116 and a working capital deficit of $7,475,421. 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.

 

Operating Activities

 

For the year ended December 31, 2019, net cash used in operating activities was $1,040,889, compared to $835,378 for the year ended December 31, 2018. For the year ended December 31, 2019, our net cash used in operating activities was primarily attributable to the net loss of $6,140,158, adjusted for the loss of $653,551 on the change in fair value of derivative liabilities, loss of $861,238 in extinguishment of debt, non-cash expenses of interest and amortization and depreciation of $2,018,556, stock-based compensation of $892,004 and impairment charges of $364,374. Net changes of $216,779 in operating assets and liabilities reduced the cash used in operating activities. For the year ended December 31, 2018, our net cash used in operating activities was primarily attributable to the net loss of $2,490,705 and a gain of $661,853 in extinguishment of debt, adjusted by the non-cash expenses of interest and amortization and depreciation of $1,582,786, stock based compensation of $333,334 and loss on the change in fair value of derivatives of $33,787. Net changes of $366,274 in operating assets and liabilities reduced the cash used in operating activities.

 

Investing Activities

 

For the year ended December 31, 2019, investing activities were comprised of $200,000 paid pursuant to the Agreement with SRI. For the year ended December 31, 2018, cash used investing activities of $236,066 was comprised of the cash acquired in the Spinus acquisition of $21,580, offset by the purchase of office equipment of $7,646 and payment of $250,000 under the Spinus license agreement.

 

Financing Activities

 

For the year ended December 31, 2019, the net cash provided by financing activities was $1,201,875, compared to $1,011,188 for the year ended December 31, 2018. During the year ended December 31, 2019, we received $1,497,700 of proceeds from the issuances of convertible note financings, as well as $100,000 from the sale of 200 shares of common stock at $500 per share and $15,000 received on the issuance of a note payable. The Company made payments on convertible debt and notes payable of $410,825. During the year ended December 31, 2018, we received $1,333,000 of proceeds from the issuance of a note payable ($230,000) and convertible note financings ($1,527,425) as well as $300,000 from the sale of 600 shares of common stock at $500 per share. Payments of $350,000 was used to redeem 2,000 shares of common stock from our former CEO and we also made payments on convertible debt of $201,800 and notes payable of $270,012.

 

Critical Accounting Policies

 

Our significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies to be most critical to the judgement and estimates used in the preparation of our financial statements:

 

Basis of Presentation

 

The accompanying consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the consolidated accounts of the Company and Ozop and its’ wholly owned subsidiaries; Ozop LLC, Ozop HK and Spinus. All intercompany accounts and transactions have been eliminated in consolidation.

 

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.

 

  15  
 

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the years ended December 31, 2019 and 2018.

 

Research and Development

 

Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended December 31, 2019, and 2018, the Company recorded $75,434 and $88,572 of research and development expenses, respectively.

 

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.

 

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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See Index to Financial Statements and Financial Statement Schedules appearing on pages F1-F20 of this annual report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), as of the end of the period covered by this annual report on Form 10-K, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that as of December 31, 2019, disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.

 

  16  
 

 

Management’s Report on Internal Controls over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of our assets;
  Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2019, as described below.

 

We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:

 

Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.

 

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.

 

Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.

 

We are committed to improving the internal controls and will (1) consider using third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.

 

We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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.

 

  17  
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Identification of directors and executive officers.

 

The names and ages of our directors and executive officers are set forth below. Also included is their principal occupation(s). Our By-Laws provide for up to four directors. All directors are elected annually by the stockholders to serve until the next annual meeting of the stockholders and until their successors are duly elected and qualified.

 

Name   Age     Position   Beginning  
Michael Chermak     61     Chief Executive Officer (resigned February 28, 2020) and Director     April 13, 2018  
Barry Hollander     63     Chief Financial Officer (resigned February 28, 2020)     April 13, 2018  
Brian Conway     49     Chief Executive Officer and Interim Chief Financial Officer     February 28, 2020  

 

Michael Chermak, 61, has been a director and Chief Executive Officer of the Company since September 2016. From 2012 to the present Mr. Chermak has served as the Managing Director of Makena Investment Advisers, LLC. From June 2011 to the present he has served as president of MD Capital Advisors, Inc., a business advisory firm. Previously, he was the founder and CEO of Healthdemographics, Inc., a company in the healthcare predictive data and decision support business. He sold the company in 1997 to Medirisk. In 1998, he was the co-founder and Chairman of Medibuy.com, an Internet healthcare supply vendor. From 2005 to 2008, he was the Chairman and Chief Executive Officer of Bridgetech Holdings International (OTC: BGTH) which focused on introducing western medicine into China. He has served on the Board of Directors and as an Audit Committee member of Beijing Origin Seed (NASDAQ: SEED) from 2005 to 2006. Mr. Chermak graduated from the University of New Mexico, Anderson School of Management. Mr. Chermak resigned as the Company’s CEO on February 28, 2020.

 

Barry Hollander, 63, served as the Company’s Chief Financial Officer from April 13, 2018 to February 28, 2020. Mr. Hollander has nearly 40 years of business experience including 25 years as Chief Financial Officer of private and public companies. Since May 2017, Mr. Hollander has been the Chief Executive Officer and Chief Financial Officer of Blockchain Solutions, Inc. (“BLCS” and f/k/a Cabinet Grow, Inc.), a publicly traded company. From May 2014 to November 2015 Mr. Hollander served as the CFO of BLCS and from January 2016 to May 2016 was the CEO and CFO of BLCS. From May 2011 to September 2015, Mr. Hollander was the Chief Financial Officer of Agritek Holdings, Inc. (“Agritek”), a publicly traded company, formerly known as MediSwipe, Inc. Agritek provides real estate management and health and wellness product lines for the medicinal marijuana industry. In 2010, Mr. Hollander founded Venture Equity, LLC, a Florida limited liability corporation that offers financial and business consulting services. Mr. Hollander began his career in 1981 in the accounting department of Macgregor Sporting Goods, and became part of the executive management team. Over his career, Mr. Hollander contributed to acquisitions, mergers assisting company’s preparing to go public and public reporting responsibilities, thereafter. Mr. Hollander has a BS degree in Accounting from Fairleigh Dickinson University. Mr. Hollander resigned as the Company’s CFO on February 28, 2020.

 

Brian P. Conway, the Chief Executive Officer and Interim Chief Financial Officer brings 20 years of proven success in marketing and business development for both private and publicly traded companies. Starting off in database management and sales for Venture Direct on Madison Avenue, he crossed over to Wall Street first as a co-founder of Waypoint Capital Partners. During this time, he has overseen national sales, marketing, business and product development, national account customers, and new business relations with international and US companies while creating awareness for public companies with many of the nation’s top public relations firms. From October 1, 2014, through August 31, 2019, Mr. Conway was the CEO, CFO and Director of Ngen Technologies, Inc. (f/k/a/ Liberated Solutions, Inc.). His relationships and experience with investment bankers, non-dilutive financing, and public relations should be instrumental in moving the Company forward in the upcoming months.

 

Family Relationships

 

None

 

Involvement in Certain Legal Proceedings

 

No director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

 

Corporate Governance

 

Our Board has not established any committees, including an audit committee, a compensation committee or a nominating committee, or any committee performing a similar function. The functions of those committees are being undertaken by our Board. Because we do not have any independent directors, our Board believes that the establishment of committees of our Board would not provide any benefits to our Company and could be considered more form than substance.

 

Given our relative size and lack of directors’ and officers’ insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all current members of our Board will participate in the consideration of director nominees.

 

  18  
 

 

As with most small, early stage companies until such time as our Company further develops our business, achieves a revenue base and has sufficient working capital to purchase directors’ and officers’ insurance, we do not have any immediate prospects to attract independent directors. When we are able to expand our Board to include one or more independent directors, we intend to establish an audit committee of our Board of Directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an audit committee or other committee of our Board.

 

 

Code of Ethics

 

We adopted a Code of Ethics for Senior Financial Management to promote honest and ethical conduct and to deter wrongdoing. This Code applies to our Chief Executive Officer and Chief Financial Officer and other employees performing similar functions. The obligations of the Code of Ethics supplement, but do not replace, any other code of conduct or ethics policy applicable to our employees generally.

 

Under the Code of Ethics, all members of the senior financial management shall:

 

  Act honestly and ethically in the performance of their duties at our company,
  Avoid actual or apparent conflicts of interest between personal and professional relationships,
  Provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submits to, the SEC and in other public communications by our company,
  Comply with rules and regulations of federal, state and local governments and other private and public regulatory agencies that effect the conduct of our business and our financial reporting,
  Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing the member’s independent judgment to be subordinated
  Respect the confidentiality of information in the course of work, except when authorized or legally obtained to disclosure such information,
  Share knowledge and maintain skills relevant to carrying out the member’s duties within our company,
  Proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community,
  Achieve responsible use of and control over all assets and resources of our company entrusted to the member, and
  Promptly bring to the attention of the Chief Executive Officer any information concerning (a) significant deficiencies in the design or operating of internal controls which could adversely affect to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting or internal controls.

 

Director Independence

 

None of the members of our Board of Directors qualifies as an independent director in accordance with the published listing requirements of the NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board has not made a subjective determination as to each director that no relationships exist which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our Board of Directors made these determinations, our Board would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.

 

In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements.

 

  19  
 

 

Our board as a whole will consider executive officer compensation, and our entire board participates in the consideration of director compensation. Our board as a whole oversees our compensation policies, plans and programs, reviews and approves corporate performance goals and objectives relevant to the compensation of our executive officers, if any, and administers our equity incentive and stock option plans, if any.

 

Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, persons who beneficially own more than 10% of a registered class of the Company’s equity securities, and certain other persons to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC, and to furnish the Company with copies of the forms. Based solely on its review of the forms it received, or written representations from reporting persons, the Company believes that all of its directors, executive officers and greater than 10% beneficial owners complied with all such filing requirements during 2019.

 

ITEM 11. EXECUTIVE COMPENSATION

 

EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE

 

The following table sets forth information regarding compensation earned in or with respect to our fiscal years 2019 and 2018:

 

  (i) our principal executive officer or other individual serving in a similar capacity during the fiscal year 2019 and 2018;

 

  (ii) our two most highly compensated executive officers other than our principal executive officers who were serving as executive officers at December 31, 2019 and 2018 whose compensation exceed $100,000; and

 

  (iii) up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2019. Compensation information is shown for the fiscal years ended December 31, 2019, and 2018:

 

Name and

Principal Position

  Year     Salary     Bonus    

Stock

Awards

   

Option

Awards

   

All Other

Compensation

    Total  
Denis Razvodovskij(1)     2019     $     $     $     $     $     $  
      2018     $     $     $     $     $     $  
Michael Chermak(2)     2019     $ 180,000     $     $     $     $     $ 180,000  
      2018     $ 140,885     $     $     $     $     $ 140,885  
Salman J. Chaudhry(3)     2019     $     $     $     $     $     $  
      2018     $ 120,000     $     $     $     $     $ 120,000  
Barry Hollander(4)     2019     $ 120,000     $     $     $     $     $ 120,000  
      2018     $ 120,000     $     $     $     $     $ 120,000  
Eric Siu (5)     2019     $     $     $     $     $     $  
      2018     $ 120,000     $     $     $     $     $ 120,000  

 

(1) Effective April 13, 2018, Mr. Razvodovskij resigned as the Company’s Chief Executive Officer, Chief Financial Officer, Secretary, and then sole director.

(2) On April 13, 2018, Mr. Chermak was appointed as the Company’s Chief Executive Officer and member of the Board. Mr. Chermak resigned his Chief Executive Officer role on February 28, 2020, and from his position as a member of the Company’s board on April 28 2020.

(3) On October 1, 2018, Salman J. Chaudhry resigned from his position as Chief Operating Officer and further resigned from his position as a member of the Company’s Board and from all positions with the Company on March 4, 2019.

(4) On April 13, 2018, Mr. Hollander was appointed as the Company’s Chief Financial Officer. Mr. Hollander resigned February 28, 2020.

(5) On March 4, 2019, Eric Siu resigned from his position as a member of the Company’s Board.

 

  20  
 

 

2019 OPTION GRANTS

 

There were no options to purchase shares of our Common Stock issued and outstanding as of December 31, 2019, or December 31, 2018.

 

OUTSTANDING EQUITY AWARDS AT 2019 FISCAL YEAR-END

 

There were no outstanding equity awards for the years ended December 31, 2019, and 2018.

 

EXECUTIVE EMPLOYMENT AGREEMENTS

 

On October 1, 2018, the Company entered into a Consulting Agreement (the “Agreement”) with Thomas J. McLeer, pursuant to which the Company agreed to engage Mr. McLeer as the Company’s Chief Operating Officer and Mr. McLeer agreed to provide the Company with services typically provided by a Chief Operating Officer. The term of the Agreement is for three (3) months and pursuant to the Agreement the Company agreed to negotiate an employment agreement with Mr. McLeer by December 31, 2018, with such employment agreement planned to contain standard industry terms and conditions. However, no employment agreement has been entered into. Pursuant to the Agreement, the Company agreed to pay Mr. McLeer $15,000 per month to be accrued monthly and to be paid upon a successful closing of a minimum of $1,000,000 in a private placement fundraising by the Company. Mr. McLeer resigned in October 2019.

 

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, payable monthly. Additionally, within ten (10) days of the Employment Agreement, the Company will issue Mr. Conway 2,500 shares of the Company’s Series C Preferred Stock. If Mr. Conway is employed on the six-month anniversary of the Employment Agreement, the Company will issue Mr. Conway 1,333 shares of Series D Preferred Stock and 500 shares of Series E Preferred Stock.

 

Other than the foregoing, at this time, we do not have any written employment agreement or other formal compensation agreements with our officers and directors. Compensation arrangements are the subject of ongoing development and we will make appropriate additional disclosures as they are further developed and formalized.

 

DIRECTOR COMPENSATION

 

Director Compensation Policies

 

We have not compensated our directors for their service on our Board from our inception through fiscal 2019. There are no arrangements currently in place pursuant to which directors will be compensated in the future for any services provided as a director.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table shows the beneficial ownership of the Company’s shares as of May 11 2020, (unless otherwise noted) by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares, (ii) each director and director nominee of the Company, (iii) each executive officer of the Company named in the Summary Compensation Table (the “Named Executive Officers” or “NEOs”), and (iv) all executive officers and directors of the Company as a group. The table includes shares that may be acquired within 60 days of May 11, 2020, upon the exercise of stock options by employees or outside directors and shares of restricted stock.

 

Unless otherwise indicated, each of the persons or entities listed below exercises sole voting and dispositive power over the shares that each of them beneficially owns.

 

  21  
 

 

For the beneficial ownership of the stockholders owning 5% or more of the shares, the Company relied on publicly available filings and representations of the stockholders.

 

Name and Title:   Class of
Security
  Amount of
beneficial ownership
   

Percent of

Class (1)

   

Percent of  

Class (6)

 
Executive Officers and Directors:                            
                             
Michael Chermak (2), former Chief Executive Officer and Director   Common Stock     5,360           * %       * %

319 Clematis Street, Suite 714

West Palm Beach FL 33401

                           
                             
Barry Hollander (3), former Chief Financial Officer   Common Stock     1,000           * %       * %
319 Clematis Street, Suite 714 West Palm Beach, FL 33401                            

 

Brian Conway (4), Chief Executive Officer and Director   Common Stock (5)     2,500       66.7 %     66.7 %
31 Sandfort Lane Warwick, NY 10990   Series C Preferred Stock     2,500       100 %     -  
                             
All directors and executive officers as a group (1 person)   Common Stock     2,500       * %     66.7 %
    Series C Preferred Stock     2,500       100 %     -  

 

*Less than 1%.

 

(1) Percentages are based on 257,026,917 shares of the Company’s common stock and 2,500 shares of Series C Preferred Stock issued and outstanding as of May 11, 2020. The voting rights associated with the Series C Preferred Stock are 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.

(2) Mr. Chermak resigned as CEO on February 28, 2020 and resigned as a Director on April 28, 2020.

(3) The 1,000 shares are in the name of Venture Equity, LLC, which is owned and controlled by Mr. Hollander. Mr. Hollander resigned as CFO on February 28, 2020.

(4) Mr. Conway was named CEO on February 28, 2020 and as a Director on April 28, 2020.

(5) Includes 2,500 shares of Series C Preferred Stock that is convertible into 2,500 shares of common stock.

(6) Percentages are based upon 771,078,591 shares of common stock, consisting of 257,026,917 shares of common stock issued and outstanding and 514,052,394 voting shares of common stock based upon the 2,500 shares of Series C Preferred Stock issued and outstanding as of May 11, 2020.

 

Item 13. Certain Relationships and Related Transactions

 

For the years ended December 31, 2019, and 2018, the Company recorded expenses to its former officers in the following amounts:

 

   

Year ended December 31,

 
    2019     2018  
Former CEO, parent   $ 180,000     $ 140,885  
Former CEO, subsidiary     -       120,016  
Former COO and CCO     -       120,000  
Former COO     135,000       52,500  
Former CFO     120,000       120,000  
Total   $ 435,000     $ 553,401  

 

  22  
 

 

As of December 31, 2019, and 2018, included in accounts payable and accrued expenses, related party is $470,886 and $542,982, respectively, for the following amounts owed the Company’s former officers:

 

   

December 31, 2019

   

December 31, 2018

 
Former CEO, parent   $ 125     $ 22,825  
Former CEO, subsidiary     144,639       162,215  
Former COO and CCO     162,085       236,905  
Former COO     112,500       45,000  
Former CFO     51,537       58,037  
Total $     470,886     $ 524,982  

 

 

Item 14. Principal Accountant Fees and Services

 

The following table presents fees for professional services rendered by Paritz & Company, P.A. for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2019, and December 31, 2018, as well as fees billed for other services rendered by Paritz & Company, P.A. during those periods.

 

    Fiscal 2019     Fiscal 2018  
Audit Fees(1)   $     $ 3,500  
Audit-Related Fees            
Tax Fees(2)            
All Other Fees            
Total Fees   $ -     $ 3,500  

 

(1) Audit Fees are fees paid for professional services rendered for the audit of the Company’s annual consolidated financial statements, reviews of the Company’s interim consolidated financial statements and statutory audit requirements at certain non-U.S. locations.

 

(2) Tax Fees are fees paid for an international expansion review, transfer pricing studies, compliance services and tax consultation.

 

The following table presents fees for professional services rendered by Prager Metis CPAs, LLC for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2019, and 2018 (following the reverse merger) as well as fees billed for other services rendered by Prager Metis CPAs, LLC during those periods.

 

    Fiscal 2019     Fiscal 2018  
Audit Fees(1)   $ 53,000     $ 51,000  
Audit-Related Fees            
Tax Fees(2)            
All Other Fees            
Total Fees   $ 53,000     $ 51,000  

 

(1) Audit Fees are fees paid for professional services rendered for the audit of the Company’s annual consolidated financial statements, reviews of the Company’s interim consolidated financial statements and statutory audit requirements at certain non-U.S. locations.

 

(2) Tax Fees are fees paid for an international expansion review, transfer pricing studies, compliance services and tax consultation.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a) 1. Financial Statements
     
   

The financial statements and Report of Independent Registered Public Accounting Firm are listed in the “Index to Financial Statements and Schedules” on page F-1 and included on pages F-2 to F-21.

     
  2. Financial Statement Schedules
     
    All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the “Commission”) are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein.
     
  3. Exhibits (including those incorporated by reference).

 

  23  
 

 

The following documents are filed as part of this report:

 

Exhibit No.   Description
     
2.1   Share Exchange Agreement dated April 5, 2018 by and among Newmarkt Corp., the shareholders of Ozop Surgical, Inc., Ozop Surgical, Inc. and Denis Razvodovskij (Incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed on April 19, 2018).
     
3.1   Articles of Incorporation (Incorporated by reference to our General Form for Registration of Securities on Form S-1 filed on August 1, 2016)
     
3.2   Bylaws (Incorporated by reference to our General Form for Registration of Securities on Form S-1 filed on August 1, 2016)
     
3.3  

Certificate of Amendment of Amended and Restated Articles of Incorporation as filed with the Nevada Secretary of State on May 8, 2018 (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on May 14, 2018).

     
3.4    

Certificate of Designations for Series B Preferred Stock. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on April 2, 2019).

     
3.5  

Amended and Restated Bylaws of Ozop Surgical Corp. adopted on May 22, 2019. (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed on May 22, 2019).

     
3.6  

Amended and Restated Articles of Incorporation as filed with the Nevada Secretary of State on July 25, 2019. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on July 30, 2019).

     
3.7  

Certificate of Designation of Series C Preferred Stock. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed on September 24, 2019).

     
3.8  

Certificate of Withdrawal of Series B Preferred Stock. (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed on September 24, 2019).

     
3.9  

Amended and Restated Articles of Incorporation as filed with the Nevada Secretary of State on October 29, 2019. (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed on October 31, 2019).

     
10.1    

Share Redemption Agreement dated April 13, 2018, by and between Newmarkt Corp. and Denis Razvodovskij (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on April 19, 2018).

     
10.2  

Equity Transfer Agreement entered into among Zhao Zhen Rong, Sun Gui Ying and OZOP (Guangdong) Medical Technology Co., Ltd. dated July 23, 2018 (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on July 25, 2018).

     
10.3  

Intellectual Property Portfolio License Agreement dated February 1, 2018 by and between Loubert S. Suddaby, MD and Spinus, LLC. (Incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on August 20, 2018).

     
10.4     Amended and Restated Equity Transfer Agreement entered into among Zhao Zhen Rong, Sun Gui Ying and OZOP (Guangdong) Medical Technology Co., Ltd. dated September 27, 2018. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on September 28, 2018).
     
10.5+     Consulting Agreement entered into between Ozop Surgical Corp and Thomas J. McLeer dated October 1, 2018. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on October 3, 2018).
     
10.6     Consulting Agreement entered into between Ozop Surgical Corp. and Draper Inc. dated October 19, 2018. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on October 24, 2018).
     

10.7  

October 24, 2018, consulting agreement with Jeffrey Patchen. (Incorporated by reference to Exhibit 10.12 of the Quarterly Report on Form 10-Q for the period ended September 30, 2018, filed on November 14, 2018).

     

10.8

 

 

Agreement of Understanding between Ozop Surgical Corp. and Eric Sui dated February 27, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 6, 2019).

     

10.9

 

 

Separation Agreement between Ozop Surgical Corp. and Salman J. Chaudhry dated March 4, 2019. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on March 6, 2019).

     

10.10

 

 

Investment Banking Engagement Agreement between Ozop Surgical Corp. and Newbridge Securities Corporation dated March 24, 2019. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 28, 2019).

     
31.1*  

Certification of Chief Executive Officer required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     
31.2*   Certification of Chief Financial Officer required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1*   Certification of Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63

 

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.

 

  24  
 

 

ITEM 16. FORM 10-K SUMMARY

 

Not applicable.

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Ozop Surgical Corp.  

 

By: /s/ Brian P. Conway  
  Brian P. Conway  
  Chief Executive Officer  
     
Date: May 14, 2020  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         

/s/ Brian P. Conway

Brian P. Conway

  Chairman and Chief Executive Officer (principal executive officer)   May 14, 2020

 

  25  
 

 

OZOP SURGICAL CORP.

 

FINANCIAL STATEMENTS

 

Table of Contents

 

    Page
Report of Independent Registered Public Accounting Firm   F-1
     
Balance Sheets as of December 31, 2019 and 2018   F-2
     
Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018  

F-3

     
Statements of Stockholders’ Deficit as of December 31, 2019 and 2018   F-4
     
Statements of Cash Flows for the years ended December 31, 2019 and 2018   F-5
     
Notes to Financial Statements   F-6-F-29

 

     
 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Ozop Surgical Corp.

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Ozop Surgical Corp. (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive loss, stockholders’ deficit, and cash flows for each of two years in the periods ending December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, 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. As of December 31, 2019, the Company had a stockholders’ deficit of $5,167,116 and a working capital deficit of $7,475,421. In addition, the Company has generated losses since inception. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the accompanying financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Prager Metis CPA’s LLC  
   
We have served as the Company’s auditor since 2018  
   
Hackensack, New Jersey  
May 14, 2020  

 

F-1

 

 

Ozop Surgical, Corp

Consolidated Balance Sheet

 

    December 31,  
    2019     2018  
ASSETS            
Current Assets                
Cash   $ 10,877     $ 50,903  
Advance to vendor     -       86,149  
Prepaid expenses     8,404       16,457  
Accounts receivable     -       45,818  
Inventory     378,061       -  
Total Current Assets     397,343       199,327  
                 
Property and equipment, net     357,987       7,199  
Goodwill     2,197,265       239,151  
License Rights, net of accumulated amortization     2,896,722       213,542  
TOTAL ASSETS   $ 5,849,316     $ 659,219  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Liabilities                
Current Liabilities                
Accounts payable and accrued expenses   $ 458,818     $ 298,319  
Accounts payable and accrued expenses, related parties     470,886       552,806  
Liability for common stock payable     245,000       -  
Convertible notes payable, net of discounts     1,694,227       564,102  
Current portion of notes payable     1,556,804       392,838  
Current portion of license fee payable     984,089       -  
Derivative liabilities     2,462,940       1,199,514  
Total Current Liabilities     7,872,764       3,007,579  
Long Term Liabilities                
Notes payable     1,440       -  
License fee payable     250,000       -  
Put option payable     2,892,228       -  
TOTAL LIABILITIES     11,016,432       3,007,579  
                 
Stockholders’ Deficit                
Preferred stock (10,000,000 shares authorized, par value $0.001, no shares issued and outstanding) Series C Preferred Stock (50,000 shares authorized and issued and outstanding, par value $0.001, December 31, 2019)     50       -  
Common stock (4,990,000,000 shares authorized par value $0.001; 219,035 and 29,068 shares issued and outstanding December 31, 2019, and 2018, respectively)     219       29  
Deferred stock compensation     (49,033 )     (269,167 )
Common stock to be issued (1,350 shares issuable December 31, 2019)     1       -  
Additional paid in capital     5,090,936       1,988,897  
Accumulated Deficit     (10,208,905 )     (4,068,747 )
Stock subscription receivable     (7,600 )     (7,600 )
Accumulated comprehensive gain     7,216       8,228  
Total Stockholders’ Deficit     (5,167,116 )     (2,348,360 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 5,849,316     $ 659,219  

 

See notes to consolidated financial statements.

 

F-2

 

 

Ozop Surgical, Corp

Consolidated Statement of Comprehensive Loss

 

    For the Year Ended December 31,  
    2019     2018  
Revenue   $ 316,865     $ 157,458  
Cost of goods     56,511       39,692  
Gross profit     260,354       117,767  
                 
Operating expenses:                
General and administrative, related parties     478,000       553,401  
General and administrative, other     1,702,027       919,566  
Research and development     75,434       88,572  
Bad debt expense     92,767       -  
Impairment     364,374       -  
Total operating expenses     2,712,602       1,561,539  
                 
Operating loss     (2,452,248 )     (1,443,772 )
                 
Other (income) expenses:                
Interest expense     2,173,110       1,675,001  
Loss on change in fair value of derivatives     653,551       33,786  
Loss (Gain) on extinguishment of debt     861,249       (661,854 )
Total Other Expenses     3,687,910       1,046,933  
                 
Loss before provision for income taxes     (6,140,158 )     (2,490,705 )
Income tax provision     -       -  
Net loss   $ (6,140,158 )   $ (2,490,705 )
                 
Other comprehensive income (loss):                
Foreign currency translation adjustment     (1,012 )     122  
Comprehensive loss   $ (6,141,170 )   $ (2,490,583 )
                 
Loss per share   $ (110.01 )     (97.73 )
                 
Weighted average shares outstanding                
Basic and diluted     55,816       25,486  

 

See notes to consolidated financial statements.

 

F-3

 

 

OZOP SURGICAL CORP

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

YEAR ENDED DECEMBER 31, 2019

 

    Common stock    

Common stock

to be issued

   

Series B

Preferred Stock

   

Series C

Preferred Stock

   

Deferred

Stock

   

Stock

Subscription

   

Accumulated

comprehensive

   

Additional

Paid-in

   

Retained

Earnings

   

Total

Stockholders’

Equity

 
    Shares     Amount     Shares     Amount     Shares     Amount     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     185,296       185       -       -       -       -       -       -       -       -       -       2,256,224       -       2,256,410  
                                                                                                                 
Shares issued and to be issued for services     3,471       3       1,350       1       -       -       -       -       (581,250 )     -       -       628,866       -       47,620  
                                                                                                                 
Amortization of deferred stock compensation     -       -       -       -       -       -       -       -       801,384       -       -       -       -       801,384  
                                                                                                                 
Shares issued in private placement     200       0       -       -       -       -       -       -       -       -       -       100,000       -       100,000  
                                                                                                                 
Shares of Series B Preferred Stock issued     -       -       -       -       1,000,000       1,000       -       -       -       -       -       67,000       -       68,000  
                                                                                                                 
Shares of Series C Preferred Stock issued and Series B Preferred Stock cancelled     -       -       -       -       (1,000,000 )     (1,000 )     50,000       50       -       -       -       950       -       -  
                                                                                                                 
Shares issued for acquisition     1,000       1       -       -       -       -       -       -       -       -       -       48,999       -       49,000  
                                                                                                                 
Foreign currency translation adjustment     -       -       -       -       -       -       -       -       -       -       (1,012 )     -       -       (1,012 )
                                                                                                                 
Net loss for the year ended December 31, 2019     -       -       -       -       -       -       f       -       -       -       -       -       (6,140,158 )     (6,140,158 )
Balances December 31, 2019     219,035     $ 219       1,350     $ 1       -     $ -       50,000     $ 50     $ (49,033 )   $ (7,600 )   $ 7,216     $ 5,090,936     $ (10,208,905 )   $ (5,167,116 )

 

OZOP SURGICAL CORP

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

YEAR ENDED DECEMBER 31, 2018

 

                                                                                  Total
    Common stock     Common stock to be issued     Series B Preferred Stock     Series C Preferred Stock     Deferred Stock    

Stock

Subscription

   

Accumulated

comprehensive

   

Additional

Paid-in

   

Retained

Earnings

    Stockholders’ Equity
    Shares     Amount     Shares     Amount     Shares     Amount     Shares           Amount     Compensation     Receivable     income     Capital     (deficit)     (Deficit)
Balances January 1, 2018     13,000     $ 13       -     $ -       -     $ -                $             $ -     $ -     $ 8,106     $ 154,360     $ (1,578,042 )   $(1,415,563)
                                                                                                                 
Issue 7,600 shares for subscription agreements     7,600       8       -       -       -       -       -               -       -       (7,600 )     -       7,592       -     -
                                                                                                                 
Cancel 600 shares of common stock     (600 )     (1 )     -       -       -       -       -               -       -       -       -       1       -     -
                                                                                                                 
Issue 5,000 shares for Spinus acquisition     5,000       5       -       -       -       -       -               -       -       -       -       264,016       -     264,021
                                                                                                                 
Effect of reverse merger     2,798       3       -       -       -       -       -               -       -       -       -       (51,196 )     -     (51,193)
                                                                                                                 
Redemption of shares     (2,000 )     (2 )     -       -       -       -       -               -       -       -       -       (349,998 )     -     (350,000)