NOTE
2 – GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As of September 30, 2020, the Company had an accumulated deficit of $8,173,098 and a
working capital deficit of $4,635,877. In addition, the Company has generated losses since inception. These factors, among
others, raise substantial doubt about the ability of the Company to continue as a going concern.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to most other countries
and infections have been reported globally. Because COVID-19 infections have been reported throughout the United States, certain
federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing
the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will
depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the
COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional
preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued
business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it
may have a material adverse impact on our business, financial condition and results of operations. Management expects that its
business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business
and the duration for which it may have an impact cannot be determined at this time.
Management’s
Plans
As
a public company, management believes it will be able to access the public equities market for fund raising for product development
and regulatory approvals, sales and marketing and as we expand our distribution in the US market, we will need to meet increasing
inventory requirements.
On
July 10, 2020, the Company entered into the SPA with PCTI, and Chis, PCTI’s CEO and its sole shareholder (see Note 1). This
transaction takes PCTI public, and allows us to drive future investments into the energy storage market, which Forbes estimates
will grow from $59 billion in 2019 to $546 billion by 2035, PCTI’s products, technologies and expertise are a linchpin of
this emerging industry.
The
accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
Basis
of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. Accordingly,
they do not contain all information and footnotes required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present
the financial position of the Company as of September 30, 2020, and the results of operations and cash flows for the periods presented.
The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the operating
results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes thereto included in the Company’s Current Report on Form
8-K/A filed on September 25, 2020, which includes the historical financial information of PCTI.
The
unaudited condensed consolidated financial statements include the accounts of the Company and PCTI and the Company’s other
wholly owned subsidiaries Ozop LLC, Ozop HK and Spinus, LLC (“Spinus”). All intercompany accounts and transactions
have been eliminated in consolidation.
Emerging
Growth Companies
The
Company qualifies as an “emerging growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take
advantage of the benefits of this extended transition period.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally
insured limits
Sales
Concentration and credit risk
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine
months ended September 30, 2020, and 2019, and their accounts receivable balance as of September 30, 2020:
|
|
Sales %
Three Months
Ended
September 30,
2020
|
|
|
Sales %
Three Months
Ended
September 30,
2019
|
|
|
Sales
%
Nine Months
Ended
September 30,
2020
|
|
|
Sales
%
Nine Months
Ended
September 30,
2019
|
|
|
Accounts
receivable
balance
September 30,
2020
|
|
Customer A
|
|
|
29
|
%
|
|
|
-
|
%
|
|
|
60
|
%
|
|
|
-
|
%
|
|
$
|
-
|
|
Customer B
|
|
|
19
|
%
|
|
|
-
|
%
|
|
|
14
|
%
|
|
|
-
|
%
|
|
|
-
|
|
Customer C
|
|
|
23
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
34,011
|
|
Customer D
|
|
|
12
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
|
Customer E
|
|
|
-
|
%
|
|
|
29
|
%
|
|
|
-
|
%
|
|
|
12
|
%
|
|
|
-
|
|
Customer F
|
|
|
-
|
%
|
|
|
16
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
|
Customer G
|
|
|
-
|
%
|
|
|
12
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
|
Customer H
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
31
|
%
|
|
|
-
|
|
Customer I
|
|
|
-
|
%
|
|
|
14
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
|
As
disclosed in the above table, PCTI, historically does not have year to year many recurring clients as the Company produces capital
equipment for its’ customers.
Accounts
Receivable
The
Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through
a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes
collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated
losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience.
Inventory
Inventories
are valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Inventory costs
include material, labor and manufacturing overhead. In evaluating the net realizable value of inventory, management also considers,
if applicable, other factors, including known trends, market conditions, currency exchange rates and other such issues.
The
components of inventories at September 30, 2020, and December 31, 2019, are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
116,953
|
|
|
$
|
116,329
|
|
Work in process
|
|
|
45,585
|
|
|
|
845,218
|
|
Finished goods
|
|
|
9,643
|
|
|
|
10,266
|
|
|
|
$
|
172,181
|
|
|
$
|
971,813
|
|
Purchase
concentration
The
principal purchases by the Company is comprised of parts and raw materials that the Company assembles and manufactures and sells
to its customers. Following is a summary of suppliers who accounted for more than ten percent (10%) of the Company’s purchases
for the three and nine months ended September 30, 2020, and 2019:
|
|
Purchase %
Three Months
Ended September 30,
2020
|
|
|
Purchase %
Three Months
Ended September 30,
2019
|
|
|
Purchase %
Nine Months
Ended September 30,
2020
|
|
|
Purchase %
Nine Months
Ended
September 30,
2019
|
|
Supplier A
|
|
|
11
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Supplier B
|
|
|
15
|
%
|
|
|
-
|
%
|
|
|
10
|
%
|
|
|
-
|
%
|
Supplier C
|
|
|
18
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Supplier D
|
|
|
-
|
%
|
|
|
17
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Supplier E
|
|
|
-
|
%
|
|
|
14
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Supplier F
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
15
|
%
|
|
|
-
|
%
|
Supplier G
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
26
|
%
|
|
|
-
|
%
|
Suppliers
to the Company vary from period to period dependent upon our customer’s order specifications. In any specific reporting
period, we may be relying on certain vendors, however these vendors will vary dependent on the parts and materials needed. The
Company believes its relationships with all of the above vendors is good, and we are not reliant on any particular vendor for
future needs.
Property,
plant and equipment
Property
and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives
of the assets.
The
Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the
carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Office equipment
|
|
$
|
113,025
|
|
|
$
|
78,851
|
|
Less: Accumulated Depreciation
|
|
|
(77,465
|
)
|
|
|
(63,642
|
)
|
Property and Equipment, Net
|
|
$
|
35,560
|
|
|
$
|
15,199
|
|
Depreciation
expense was $3,562 and $6,784 for the three and nine months ended September 30, 2020, respectively, and $1,815 and $5,445 for
the three and nine months ended September 30, 2019, respectively.
Intangible
Assets
Intangible
assets primarily represent purchased patent and license rights. The Company amortizes these costs over the shorter of the legal
life of the patent or its estimated economic life using the straight-line method. The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows
to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets. For the three and nine months ended September
30, 2020, the Company recorded amortization expense of $10,417. In accordance with ASC 350, “Intangibles—Goodwill
and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are
tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.
Goodwill
Goodwill
is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and
liabilities assumed in a business acquisition. The Company reviews the goodwill allocated to each of our reporting units for possible
impairment annually and whenever events or changes in circumstances indicate carrying amount may not be recoverable. When assessing
goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less
than its’ carrying amount.
Goodwill
is tested annually for impairment on January 1, and at any time upon occurrence of certain events or changes in circumstances.
In assessing the qualitative factors, the
Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit.
The identification of relevant events and circumstances, and how these may impact a reporting unit’s fair value or carrying
amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic
conditions, industry, and market considerations, cost factors, overall financial performance and share price trends, and making
the assessment as to whether each relevant factor will impact the impairment test positively or negatively and the magnitude of
any such impact.
The
carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing
goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit,
the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit.
Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to
our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value
of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets
acquired and liabilities assumed that are assigned to the reporting unit.
The transaction with PCTI resulted in recognizing goodwill of $11,201,145 (see Note 1).
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance
obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance
obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. Under ASC 606, revenue
is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service
has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable;
and (4) the collectability of the fee is reasonably assured. Other than The Company has no outstanding contracts with any of its’
customers. The Company recognizes revenue when title, ownership, and risk of loss pass to the customer, all of which occurs upon
shipment or delivery of the product and is based on the applicable shipping terms.
For
contracts with customers, ownership of the goods and associated revenue are transferred to customers at a point in time, generally
upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Advance
payments are typically required for commercial customers and are recorded as current liability until revenue is recognized. Advance
payments are not required for government customers. The majority of contracts typically require payment within 30 to 60 days after
transfer of ownership to the customer.
For
the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions,
credits and discounts, rebates and price protection, or other similar privileges.
There
was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and nine months ended
September 30, 2020, and 2019.
Advertising
and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the nine months ended September 30, 2020, and 2019, the Company
recorded $47,325 and $232, respectively, of advertising and marketing expenses.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the three and
nine months ended September 30, 2020, and 2019, the Company did not record any research and development expenses.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives
and Hedging Activities.
Applicable
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The
Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated
from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of this note transaction and the effective conversion price embedded in this note. Debt discounts
under these arrangements are amortized over the term of the related debt to their stated date of redemption.
The
Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment
standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at
their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting
liabilities.
Fair
Value of Financial Instruments
The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation
techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
●
|
Level
1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar
assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
●
|
Level
3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine
fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets,
accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values
because of the short maturity of these instruments.
The
following table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as
of September 30, 2020, for each fair value hierarchy level:
September 30, 2020
|
|
Derivative
Liabilities
|
|
|
Total
|
|
Level I
|
|
$
|
-
|
|
|
$
|
-
|
|
Level II
|
|
$
|
-
|
|
|
$
|
-
|
|
Level III
|
|
$
|
2,250,953
|
|
|
$
|
2,250,953
|
|
Leases
Effective July 10,
2020, the Company began accounting for leases under ASU 2016-02 (see Note 14), applying the package of practical expedients
to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any
expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial
direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract
the Company assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves
the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use
of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We allocate the consideration
in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
Operating
lease ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not
provide an implicit rate, the Company use an incremental borrowing rate of 7.5%, based on the information available at
the adoption date in determining the present value of future payments. Operating lease expense is recognized pursuant to
on a straight-line basis over the lease term and is included in rent in the condensed consolidated statements of operations.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers
it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax
benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred
as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of
the reporting periods presented.
Foreign
Currency Translation
The
accounts of the Company’s Hong Kong subsidiary are maintained in Hong Kong dollars and the accounts of the U.S. companies
are maintained in USD. The accounts of the Hong Kong subsidiary were translated into USD in accordance with Accounting Standards
Codification (“ASC”) Topic 830, Foreign Currency Matters. According to Topic 830, all assets and liabilities were
translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates and statement
of comprehensive income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments
are reported under other comprehensive income in accordance with ASC Topic 220, Comprehensive Income. Gains and losses resulting
from the foreign currency transactions are reflected in the statements of comprehensive income.
Relevant
exchange rates used in the preparation of the consolidated financial statements are as follows for the period ended September
30, 2020, (Hong Kong dollar per one U.S. dollar):
|
|
September 30,
2020
|
|
Balance sheet date
|
|
|
.1290
|
|
Average rate for statements of operations and comprehensive loss
|
|
|
.1289
|
|
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during
each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock,
common stock equivalents and other potentially dilutive securities outstanding during the period. As of September 30, 2020, and
2019, the Company’s dilutive securities are convertible into approximately 9,744,058,757 shares of common stock. There were
no dilutive securities as of September 30, 2019. This amount is not included in the computation of dilutive loss per share because
their impact is antidilutive. The following table represents the classes of dilutive securities as of September 30, 2020:
|
|
September 30,
2020
|
|
Common stock to be issued
|
|
|
1,350
|
|
Convertible preferred stock
|
|
|
9,421,359,558
|
|
Convertible notes payable
|
|
|
322,697,849
|
|
|
|
|
9,744,058,75
|
|
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize a lease
liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU
is effective for fiscal years and interim periods within those years beginning after December 15, 2018.
In
January 2017, the FASB issued ASU No. 217-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.
The amendments simplify the subsequent measurement of goodwill and eliminate the two-step goodwill impairment test. The Company
will perform its annual, or interim, goodwill impairment test by comparing the fair value
of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which
the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should
be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment losses
on goodwill cannot be reversed once recognized. The ASU is effective prospectively for fiscal years and interim periods
within those years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. We do not anticipate any material impact on the condensed consolidated financial
statements.
Other
than the above there have no recent accounting pronouncements or changes in accounting pronouncements during the period
ended September 30, 2020, that are of significance or potential significance to the Company.
NOTE
4 – INTANGIBLE ASSETS
Patents
as of September 30, 2020, consist of the following:
|
|
September 30, 2020
|
|
Patents and license rights
|
|
$
|
151,041
|
|
Accumulated amortization
|
|
|
(10,417
|
)
|
Net carrying amount
|
|
$
|
140,624
|
|
Amortization
expense for the three and nine months ended September 30, 2020, was $10,417.
NOTE
5 - CONVERTIBLE NOTES PAYABLE
Since
the transaction with PCTI is being accounted for as a business combination and was treated as a reverse acquisition for accounting
purposes with PCTI as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting Standards Codification
Topic 805, Business Combinations (“ASC 805”). In accordance with the accounting treatment for a reverse acquisition,
the Company’s historical financial statements prior to the reverse merger were and will be replaced with the historical
financial statements of PCTI prior to the reverse merger. The consolidated financial statements after completion of the reverse
merger have and will include the assets, liabilities and results of operations of the combined company from and after the closing
date of the reverse merger. Accordingly, as of July 10, 2020, PCTI assumed the liabilities of the Company, including the convertible
note balances.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 15% convertible note issued by the Company
on August 18, 2017, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, dated February
18, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest
closing prices of the common stock for the thirty prior trading days including the day upon which a notice of conversion is received.
As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $2,086.
On July 10, 2020, PCTI (the accounting
acquirer) assumed the balance of a past-due 15% convertible note issued by the Company on September 13, 2017. As of September 30,
2020, and July 10, 2020, the outstanding principal balance of this note was $25,000.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible note issued by the Company on February
26, 2020, pursuant to a Securities Purchase Agreement. The SPA includes customary representations, warranties and covenants by
the Company and customary closing conditions. In conjunction with this note, the Company issued a warrant to purchase 2,212,500
shares of common stock at an exercise price of $0.03, subject to adjustments and expiring on the five-year anniversary of the
Issuance Date. As of July 10, 2020, the outstanding principal balance of this note was $132,750 with a carrying value of $66,176,
net of unamortized discounts of $66,574. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts
of $66,574 was charged to interest expense. For the period from July 11, 2020 to September 30, 2020, the investor converted a
total of $132,750 of the face value and $7,943 of accrued interest into 83,214,457 shares of common stock at an average conversion
price of $0.0017. As of September 30, 2020, the outstanding principal balance of this note was $-0-.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible note issued by the Company on February
26, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, dated March 3, 2020
with a maturity date of February 26, 2021. This note, as amended, is convertible into common stock at a conversion price equal
to a 70% discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which
a notice of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $798,750. For
the period from July 11, 2020 to September 30, 2020, the investor converted a total of $798,750 of the face value and $147,549
of accrued interest into 496,756,528 shares of common stock at an average conversion price of $0.0019. As of September
30, 2020, the outstanding principal balance of this note was $-0-.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible note issued by the Company on August 21,
2019, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement, with a maturity date of
August 21, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the
lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is
received. As of July 10, 2020, the outstanding principal balance of assigned note was $155,632. For the period from July 11, 2020
to September 30, 2020, the investor converted a total of $155,632 of the face value and $48,306 of accrued interest into 219,963,737
shares of common stock at an average conversion price of $0.0009. As of September 30, 2020, the outstanding principal balance
of this note was $-0-.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
March 9, 2020, (the “Issuance Date”) to an investor. This note matures 6 months after the Issuance Date. This note
is convertible into shares of the Company’s common stock beginning on the Issuance Date at $.25 for the first three months
after the Issuance Date. After the first three months after the Issuance Date, the conversion price shall be equal to the lower
of (i) $.25 or 50% of the lowest trading price for the thirty trading days prior to the conversion. As of July 10, 2020, the outstanding
principal balance of this note was $80,000 with a carrying value of $53,333, net of unamortized discounts of $26,667. For the
period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $26,667 was charged to interest expense.
As of September 30, 2020, the outstanding principal balance and carrying value of this note was $80,000.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 22% convertible note issued by the Company on
December 5, 2018, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on April 17,
2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing
prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of
July 10, 2020, the outstanding principal balance of assigned note was $352,695. For the period from July 11, 2020 to September
30, 2020, the investor converted a total of $352,695 of the face value and $89,295 of accrued interest into 273,028,909 shares
of common stock at an average conversion price of $0.0016. As of September 30, 2020, the outstanding principal balance
of this note was $-0-.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 22% convertible note issued by the Company on
October 19, 2018, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement on April 24,
2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the lowest closing
prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is received. As of
September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $67.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on
April 27, 2020, (the “Issuance Date”) to an investor. This note matures on April 27, 2021 and is convertible into
shares of common stock at a conversion price equal to 50% of the lowest traded price for the twenty-five prior trading days including
the day upon which a conversion notice is received by the Company. As of July 10, 2020, the outstanding principal balance of this
note was $60,000 with a carrying value of $11,500, net of unamortized discounts of $48,500. For the period from July 11, 2020
to September 30, 2020, amortization of the debt discounts of $13,500 was charged to interest expense. As of September 30, 2020,
the outstanding principal balance of this note is $60,000 with a carrying value of $25,000, net of unamortized discounts of $35,000.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a convertible note issued by the Company on August 23, 2019,
with a maturity date of May 23, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase Agreement
on April 28, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount to the
lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion is
received. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was $14,831.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
April 28, 2020, (the “Issuance Date”) to an investor. This note matures 12 months after the date of issuance. This
note is convertible into shares of the Company’s common stock beginning on the date which is 180 days from the issuance
date of this note, at a conversion price equal to 58% multiplied by the lowest closing bid price during the 20- trading day period
ending on the last completed trading date in the OTC Markets prior to the date of conversion. As of July 10, 2020, the outstanding
principal balance of this note was $53,000 with a carrying value of $10,158, net of unamortized discounts of $42,842. For the
period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $11,925 was charged to interest expense.
As of September 30, 2020, the outstanding principal balance of this note is $53,000 with a carrying value of $22,083, net of unamortized
discounts of $30,917.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
May 4, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the
date which is 180 days from the issuance date of this note, at a conversion price equal to the lower of $0.50 or 58% multiplied
by the average of the two lowest closing trading price or bid price during the 20- trading day period ending on the last completed
trading date in the OTC Markets prior to the date of conversion. In conjunction with this note, the Company issued a warrant to
purchase 3,666,666 shares of common stock at an exercise price of $0.015, subject to adjustments and expiring on the five-year
anniversary of the Issuance Date. As of July 10, 2020, the outstanding principal balance of this note was $110,000 with a carrying
value of $18,860, net of unamortized discounts of $91,140. For the period from July 11, 2020 to September 30, 2020, amortization
of the debt discounts of $25,369 was charged to interest expense. As of September 30, 2020, the outstanding principal balance
of this note is $110,000 with a carrying value of $44,229, net of unamortized discounts of $65,771.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
May 5, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance
Date at $03 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion
price shall be equal to the lower of (i) $.03 or 50% of the lowest trading price for the thirty-five trading days prior to the
conversion. As of July 10, 2020, the outstanding principal balance of this note was $162,000 with a carrying value
of $62,100, net of unamortized discounts of $99,900. In conjunction with this note, the Company issued a warrant to purchase 4,325,000
shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year anniversary of the
Issuance Date. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $72,900 was charged
to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $162,000 with a carrying value
of $135,000, net of unamortized discounts of $27,000.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
May 7, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
on May 7, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for
the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. As of July 10,
2020, the outstanding principal balance of this note was $30,000 with a carrying value of $5,000, net of unamortized discounts
of $25,000. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $6,875 was charged
to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $30,000 with a carrying value
of $11,875, net of unamortized discounts of $18,125.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a convertible note issued by the Company on January 8, 2020,
with a maturity date of January 8, 2021, and purchased by an investor (the “Purchaser”) pursuant to a Debt Purchase
Agreement on May 15, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70% discount
to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice of conversion
is received. As of July 10, 2020, the outstanding principal balance of assigned note was $115,500, with a carrying value of $56,306,
net of unamortized discounts of $59,194. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts
of $59,194 was charged to interest expense. For the period from July 11, 2020 to September 30, 2020, the investor converted a
total of $115,067 of the face value and $2,408 of accrued interest and fees into 88,500,000 shares of common stock at an average
conversion price of $0.00133. As of September 30, 2020, the outstanding principal balance of this note is $433.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a convertible note issued by the Company on November 27,
2019, with a maturity date of November 27, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt
Purchase Agreement on May 15, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70%
discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice
of conversion is received. As of September 30, 2020, and July 10, 2020, the outstanding principal balance of assigned note was
$296.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on
May 28, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
on May 28, 2021 and is convertible into shares of common stock at a conversion price equal to 50% of the lowest traded price for
the twenty-five prior trading days including the day upon which a conversion notice is received by the Company. As of July 10,
2020, the outstanding principal balance of this note was $30,000 with a carrying value of $3,250, net of unamortized discounts
of $26,750. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts of $6,750 was charged
to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $30,000 with a carrying value
of $10,000, net of unamortized discounts of $20,000.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due convertible note issued by the Company on May
29, 2019, with a maturity date of May 29, 2020, and purchased by an investor (the “Purchaser”) pursuant to a Debt
Purchase Agreement on May 28, 2020. This note, as amended, is convertible into common stock at a conversion price equal to a 70%
discount to the lowest closing prices of the common stock for thirty prior trading days including the day upon which a notice
of conversion is received. As of July 10, 2020, the outstanding principal balance of assigned note was $31,043. For the period
from July 11, 2020 to September 30, 2020, the investor converted a total of $31,043 of the face value and $53,337 of accrued interest
and fees into 86,262,262 shares of common stock at an average conversion price of $0.001. As of September 30, 2020, the note balance
is $-0-.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
June 1, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance
Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion
price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the
conversion. As of July 10, 2020, the outstanding principal balance of this note was $127,500 with a carrying value of $27,625,
net of unamortized discounts of $99,875. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts
of $57,375 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $127,500
with a carrying value of $85,000, net of unamortized discounts of $42,500. In conjunction with this note, the Company issued a
warrant to purchase 6,375,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the
five-year anniversary of the Issuance Date.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 12% convertible promissory note issued by the Company on
June 11, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
12 months after the date of issuance. This note is convertible into shares of the Company’s common stock beginning on the
date which is 180 days from the issuance date of this note, at a conversion price equal to 58% multiplied by the lowest closing
bid price during the twenty- trading day period ending on the last completed trading date in the OTC Markets prior to the date
of conversion. As of July 10, 2020, the outstanding principal balance of this note was $53,000 with a carrying value of $4,417,
net of unamortized discounts of $48,583. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts
of $11,792 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $53,000
with a carrying value of $16,209, net of unamortized discounts of $36,791.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on
June 30, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance
Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion
price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the
conversion. As of July 10, 2020, the outstanding principal balance of this note was $129,500 with a carrying value of $8,375,
net of unamortized discounts of $121,125. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts
of $ was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is $129,500 with
a carrying value of $65,750, net of unamortized discounts of $63,750. In conjunction with this note, the Company issued a warrant
to purchase 6,375,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring on the five-year
anniversary of the Issuance Date.
On
July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a 15% convertible promissory note issued by the Company on
July 8, 2020, (the “Issuance Date”) to an investor, pursuant to a Securities Purchase Agreement. This note matures
6 months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance
Date at $0.025 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion
price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the
conversion. As of July 10, 2020, the outstanding principal balance of this note was $250,000 with a carrying value of $-0-, net
of unamortized discounts of $250,000. For the period from July 11, 2020 to September 30, 2020, amortization of the debt discounts
of $114,583 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note is
$250,000 with a carrying value of $114,583, net of unamortized discounts of $135,417. In conjunction with this note, the Company
issued a warrant to purchase 12,500,000 shares of common stock at an exercise price of $0.02, subject to adjustments and expiring
on the five-year anniversary of the Issuance Date.
On
February 26, 2020, (the “Issuance Date”) PCTI issued a 12% Convertible Promissory Note (the “Note”), in
the principal amount of $106,950, to an investor. This note matures 12 months after the Issuance Date. This note is convertible
into shares of the Company’s common stock beginning on the Issuance Date at 55% of the lowest trading price for the twenty-five
trading days prior to the conversion. If the trading price cannot be calculated for such security on such date, the trading price
shall be the fair market value as mutually determined by the Company and the investor for which the calculation of the trading
price is required in order to determine the conversion price. PCTI received proceeds of $85,000 on February 26, 2020, and the
Note included an original issue discount of $13,950 and lender costs of $8,000. This note proceeds will be used by the Company
for general working capital purposes. The Note also requires a daily payment via ACH of $400. On June 25, 2020, the Note was amended
to add $111,225 of additional principal to the outstanding balance. Pursuant to the PCTI transaction with Ozop, on July
10, 2020, the conversion price is equal to 45% multiplied by the lowest closing bid price during the twenty-five-trading day period
ending on the last completed trading date in the OTC Markets prior to the date of conversion. Accordingly, the Company determined
the conversion feature of the Notes represented an embedded derivative since the note is convertible into a variable number of
shares upon conversion, as the note was not considered to be conventional debt under ASC 815 and the embedded conversion feature
was bifurcated from the debt host and accounted for as a derivative liability. The embedded feature included in the note resulted
in an initial debt discount of $85,000, interest expense of $135,786 and initial derivative liability of $220,786. For the nine
months ended September 30, 2020, amortization of the debt discounts of $54,793 was charged to interest expense. For the nine
months ended September 30, 2020, principal payments of $56,400 were paid. As of September 30, 2020, the outstanding principal
balance of this note was $161,775 with a carrying value of $116,935, net of unamortized discounts of $44,840.
On
July 15, 2020, (the “Issuance Date”) the Company issued a 15% convertible promissory note, in the principal amount
of $127,500, to an investor. This note matures 6 months after the Issuance Date. This note is convertible into shares of the Company’s
common stock beginning on the Issuance Date at $0.011 for the first three months after the Issuance Date. After the first three
months after the Issuance Date, the conversion price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price
for the thirty-five trading days prior to the conversion. The Company received proceeds of $102,000 on July 22, 2020, and this
note included an original issue discount of $25,500. This note proceeds will be used by the Company for general working capital
purposes. In conjunction with this note, the Company issued a warrant to purchase 6,375,000 shares of common stock at an exercise
price of $0.02, subject to adjustments and expiring on the five-year anniversary of the Issuance Date. The Company allocated the
proceeds to the debt of $82,068 and to the warrant $19,932 based on the relative fair value. The embedded conversion feature
included in this note resulted in an initial derivative liability of $207,699, a debt discount of $82,068 with the excess
of $125,541 charged to interest expense of $125,541. For the nine months ended September 30, 2020, amortization of
the debt discounts of $53,125 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of
this note was $127,500 with a carrying value of $53,125, net of unamortized discounts of $74,375.
On July 29, 2020, (the “Issuance Date”)
the Company issued a 15% convertible promissory note, in the principal amount of $127,500, to an investor. This note matures 6
months after the Issuance Date. This note is convertible into shares of the Company’s common stock beginning on the Issuance
Date at $0.011 for the first three months after the Issuance Date. After the first three months after the Issuance Date, the conversion
price shall be equal to the lower of (i) $.025 or 50% of the lowest trading price for the thirty-five trading days prior to the
conversion. The Company received proceeds of $100,000 on August 3, 2020, and this note included an original issue discount of
$25,500. This note proceeds will be used by the Company for general working capital purposes. In conjunction with this note,
the Company issued a warrant to purchase 12,750,000 shares of common stock at an exercise price of $0.01, subject to adjustments
and expiring on the five-year anniversary of the Issuance Date. The Company allocated the proceeds to the debt $61,733 and warrant
$40,267 based on the relative fair value. The embedded conversion feature included in this note resulted in an initial derivative
liability of $198,239, a debt discount of $61,733 with the excess of $136,506 charged to interest expense. For the
nine months ended September 30, 2020, amortization of the debt discounts of $42,500 was charged to interest expense. As of September
30, 2020, the outstanding principal balance of this note was $127,500 with a carrying value of $42,500, net of unamortized discounts
of $85,000.
A
summary of the convertible note balance as of September 30, 2020, is as follows:
|
|
September 30, 2020
|
|
|
|
|
|
Principal balance
|
|
$
|
1,544,489
|
|
Unamortized discount
|
|
|
(682,982
|
)
|
Ending balance, net
|
|
$
|
861,507
|
|
NOTE
6 – DERIVATIVE LIABILITIES
The
Company determined the conversion feature of the convertible notes, which all contain variable conversion rates, represented an
embedded derivative since the notes were convertible into a variable number of shares upon conversion. Accordingly, the notes
are not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host
and accounted for as a derivative liability.
The
Company valued the derivative liabilities at September 30, 2020, at $2,250,953. The Company used the Monte Carlo simulation valuation
model with the following assumptions as of September 30, 2020, risk free interest rates at 0.11%, and volatility of 85% to 94%.
The initial derivative liabilities for convertible notes issued from July 11, 2020 to September 30, 2020, used the following assumptions;
risk-free interest rates from 0.12% to 0.17% and volatility of 96% to 106%.
A
summary of the activity related to derivative liabilities for the period from July 10, 2020 to September 30, 2020, is as follows:
Balance- July 10, 2020, assumed pursuant to PCTI transaction
|
|
$
|
8,743,231
|
|
Issued during period
|
|
|
626,534
|
|
Converted or paid
|
|
|
(7,308,426
|
)
|
Change in fair value recognized in operations
|
|
|
189,614
|
|
Balance- September 30, 2020
|
|
$
|
2,250,953
|
|
NOTE
7 – NOTES PAYABLE
The
Company has the following note payables outstanding:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Note payable bank, interest at 7.75%, matures December 26,2020
|
|
$
|
156,648
|
|
|
$
|
174,444
|
|
Note payable bank, interest at 6.5%, matures December 26, 2020
|
|
|
341,400
|
|
|
|
349,962
|
|
Economic Injury Disaster Loan
|
|
|
10,000
|
|
|
|
-
|
|
Paycheck Protection Program loan
|
|
|
100,400
|
|
|
|
-
|
|
Notes payable, interest at 8%, matured January 5, 2020, currently in default
|
|
|
45,000
|
|
|
|
-
|
|
Other, due on demand, interest at 6%
|
|
|
50,000
|
|
|
|
-
|
|
Note payable $210,000 face value, interest at 18%, matures June 23, 2022, net of discount of $30,260
|
|
|
179,740
|
|
|
|
-
|
|
Note payable $203,000 face value, interest at 12%, matures June 25, 2021, net of discount of $19,935
|
|
|
183,065
|
|
|
|
-
|
|
Note payable $750,000 face value, interest at 12%, matures August 24, 2021, net of discount of $500,151
|
|
|
249,839
|
|
|
|
-
|
|
Sub- total notes payable
|
|
|
1,316,102
|
|
|
|
542,406
|
|
Less long-term portion, net of discount
|
|
|
290,140
|
|
|
|
-
|
|
Current portion of notes payable, net of discount
|
|
$
|
1,015,962
|
|
|
$
|
542,406
|
|
On October 26, 2016, PCTI entered into a $210,000
note payable with a bank. On July 24, 2020, due to defaults with the terms of the note, the note was amended with the outstanding
balance due December 26, 2020 and the interest rate changed to 7.75%. Borrowings are collateralized by substantially all of the
assets of PCTI and the personal guarantee of PCTI’s President. At September 30, 2020 and December 31, 2019, $150,646
and $174,444, respectively, was outstanding on the note payable.
On
September 25, 2019, PCTI renewed their $350,000 promissory note with a bank that provides for borrowings of up to $350,000. Interest
is due monthly and the principal was due on April 12, 2020, however, on July 24, 2020, due to PCTI being in default with agreement
was amended with a change in the maturity date to December 26, 2020, and the interest rate changed to the prime rate plus 3.25%
(6.5% at September 30, 2020). Borrowings are collateralized by substantially all of the assets of PCTI and the personal guarantee
of PCTI’s President. At September 30, 2020 and December 31, 2019, $347,588 and $349,962, respectively, was outstanding
on the promissory note.
On August 24, 2020 (the “Issue
Date”), the Company entered into a 12%, $750,000 face value promissory note with a third-party (the
“Holder”) due August 24, 2021 (the “Maturity Date”). Principal payments shall be made in six
instalments of $125,000 commencing 180 days from the Issue Date and continuing each 30 days thereafter for 5 months and the
final payment of principal and interest due on the Maturity Date. The Holder shall have the right from time to time, and at
any time following an event of default, as defined on the agreement, to convert all or any part of the outstanding and unpaid
principal, interest and any other amounts due into fully paid and non-assessable shares of common stock of the Company, at
the lower of i) the Trading Price (as defined in the agreement) during the previous five trading days prior to the Issuance
Date or ii) the volume weighted average price during the five trading days ending on the day preceding the conversion date.
The Company received proceeds of $663,000 on August 25, 2020, and the Company reimbursed the investor for expenses for legal
fees and due diligence of $87,000. For the nine months ended September 30, 2020, amortization of the costs of $9,063 was
charged to interest expense. In conjunction with this Note, the Company issued 2 common stock purchase warrants; each warrant
entitles the Holder to purchase 122,950,819 shares of common stock at an exercise price of $0.0061, subject to adjustments
and expires on the five-year anniversary of the Issue Date. The warrants issued resulted in a debt discount of $471,307, with
the offset to additional paid in capital. For the nine months ended September 30, 2020, amortization of the debt discount of
$49,094 was charged to interest expense. As of September 30, 2020, the outstanding principal balance of this note was
$750,000 with a carrying value of $249,839, net of unamortized discounts of $500,151.
On April 20, 2020, PCTI was granted
a loan from a bank in the amount of $100,400, pursuant to the Paycheck Protection Program (“PPP”) under Division A,
Title I of the CARES Act, which was enacted March 27, 2020. The loan matures on April 20, 2022 and bears interest at a rate of
1.0% per annum, payable monthly beginning on November 20, 2020. The loan may be prepaid at any time prior to maturity with no
prepayment penalties. Under the terms of the loan, a portion or all of the loan is forgivable to the extent the loan proceeds
are used to fund qualifying payroll, rent and utilities during a designated twenty-four-week period. Payments are deferred until
the SBA determines the amount to be forgiven. The Company intends to utilize the proceeds of the PPP loan in a manner which will
enable qualification as a forgivable loan. However, no assurance can be provided that all or any portion of the PPP loan will
be forgiven. The balance on this PPP loan was $10,400 as of September 30, 2020 and has been classified as a long-term liability
in notes payable.
On
July 14, 2020, PCTI received $10,000 grant under the Economic Injury Disaster Loan (“EIDL”) program. Up to $10,000
of the EIDL can be forgiven as long as such funds were utilized to provide working capital. The first payment due is deferred
one year. The entirety of the loan as of September 30, 2020 and has been classified as a long-term liability in notes payable.
The
following notes were assumed on July 10, 2020, pursuant to the PCTI transaction:
On
June 23, 2020 (the “Execution Date”), the Company entered into a Loan and Securities Purchase Agreement with a third-
party (the “Lender”). Pursuant to the agreement in exchange for a $210,000 Promissory Note, inclusive of an original
issue discount of $35,000 the Company received proceeds of $175,000 from the Lender. The note carries an interest rate of 18%
and matures and is due in one lump sum on the 24- month anniversary (the “Maturity Date”) of the Execution Date. For
the first nine months interest may accrue on a monthly basis, and the Company has the option to pay the monthly interest or add
such interest to the principal balance of the note. Commencing on the tenth month of the note, all accrued interest, if any, shall
be added to the principal amount of the note, and interest on the new principal amount shall become due and payable on a monthly
basis. Should the Company default on making any interest payments following the initial nine-months, or paying the note by the
Maturity Date, the note shall automatically be converted into an 18% convertible debenture.
On
June 25, 2020 (the “Issue Date”), the Company entered into a 12%, $203,000 face value promissory note with a third-party
(the “Holder”) due June 25, 2021 (the “Maturity Date”). Principal payments shall be made in six instalments
of $33,333 commencing 180 days from the Issue Date and continuing each 30 days thereafter for 5 months and the final payment of
principal and interest due on the Maturity Date. The Holder shall have the right from time to time, and at any time following
an event of default, as defined on the agreement, to convert all or any part of the outstanding and unpaid principal, interest
and any other amounts due into fully paid and non-assessable shares of common stock of the Company, at the lower of i) the Trading
Price (as defined in the agreement) during the previous five trading days prior to the Issuance Date or ii) the volume weighted
average price during the five trading days ending on the day preceding the conversion date. The Company received proceeds of $176,000
on June 26, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $27,000. In conjunction
with this Note, the Company issued 2 common stock purchase warrants; each warrant entitles the Holder to purchase 10,000,000 shares
of common stock at an exercise price of $0.02, subject to adjustments and expires on the five-year anniversary of the Issue Date.
NOTE
8 – DEFERRED LIABILITY
On
September 2, 2020, PCTI entered into an Agreement (the “Agreement”) with a third- party. Pursuant to the terms of
the Agreement, in exchange for $750,000, PCTI agreed to pay the third-party a perpetual three percent (3%) payment of revenues,
as defined in the Agreement. Payments are due ninety (90) days after each calendar quarter, with the first payment due on or before
March 31, 2021, for revenues for the quarter ending December 31, 2020. The Company has recorded the $750,000 as deferred liability
on the September 30, 2020, consolidated condensed balance sheet.
NOTE
9 – RELATED PARTY TRANSACTIONS
Employment
Agreement
On
July 10, 2020, pursuant to the PCTI transaction, the Company assumed an employment contract entered into on February 28, 2020,
between the Company and Mr. Conway (the “Employment Agreement”). Pursuant to the terms of the Employment Agreement,
Mr. Conway is to receive an annual salary of $120,000, for his position of CEO of the Company, payable monthly. Mr. Conway was
issued 2,500 shares of Series C Preferred Stock. The Company valued the shares at $5,000. On August 28, 2020, Mr. Conway was issued
1,333 shares of Series D Preferred stock and 500 shares of series E Preferred Stock. The Series D Preferred Stock is convertible
in the aggregate into three times the number of shares of common stock outstanding at the time of conversion. Mr. Conway owns
6.67% of the issued and outstanding Series D Preferred Stock, and based on the 3,107,037,634 shares outstanding on August 28,
2020, Mr. Conway’s Preferred Stock is convertible into 621,253,401 shares of common stock. Based on the share price of the
common stock on that date of $0.0065, the shares were valued at $4,286,648 and recognized as compensation on the accompanying
unaudited condensed consolidated Statement of Comprehensive Loss.
Management
Fees and related party payables
For
the three and nine months ended September 30, 2020, and 2019, the Company recorded expenses to its officers in the following amounts:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
CEO, parent
|
|
$
|
96,771
|
|
|
$
|
-
|
|
|
$
|
96,771
|
|
|
$
|
-
|
|
President, subsidiary
|
|
|
32,500
|
|
|
|
-
|
|
|
|
32,500
|
|
|
|
-
|
|
Total
|
|
$
|
129,271
|
|
|
$
|
-
|
|
|
$
|
129,271
|
|
|
$
|
-
|
|
As
of September 30, 2020, and December 31, 2019, included in related party payable is $10,308 and $27,909, respectively, for the
amounts owed the CEO of PCTI.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Leases
On
October 25, 2019 PCTI executed a non-cancellable lease of office and industrial space totaling 11,800 square feet in Zelienople,
PA., which began December 1, 2019 and expires on November 30, 2022. The lease terms include a monthly rent of $7,000 (see Note
12). The Company also pays $3,400 on a month to month basis for its corporate office in Warwick, New York.
Licenses
On
February 1, 2018, Spinus entered into an Intellectual Property Licensing Agreement (the “Licensing Agreement”). The
Company assumed the obligations under the Licensing Agreement and pledged the assets of Spinus as security. Pursuant to the terms
of the Licensing Agreement, in consideration of $250,000 Spinus has the exclusive rights to certain patents and the non-exclusive
rights to other patents. The patents surround mechanical or inflatable expandable interbody implant products. The Company paid
the $250,000 on November 20, 2018. The Company also will pay a royalty of 7% of net sales on any product sold utilizing any of
the patents. There have not been any sales of the licensed products and accordingly, no royalties have been incurred.
Agreements
On
March 4, 2019, the Company entered into a Separation Agreement (the “Separation Agreement”) with Salman J. Chaudhry,
pursuant to which the Company agreed to pay Mr. Chaudry $227,200 (the “Outstanding Fees”) in certain increments as
set forth in the Separation Agreement. As of September 30, 2020, and December 31, 2019, the balance owed Mr. Chaudhry is $162,085.
On
July 10, 2020, PCTI assumed a contract entered into by the Company on June 5, 2020, for media relations services with a third-party.
Pursuant to the Agreement, the Company will pay the consultants $10,000 per month for the development and execution of a comprehensive
media relations plan.
On
July 24, 2020, PCTI, the Company’s wholly owned subsidiary, entered into a three- month consulting agreement with a third-party.
Pursuant to the agreement, the Company will pay the consultant $10,000 per month and the consultant will provide services, including,
but not limited to, identifying PCTI’s best path forward into the renewable energy and energy storage industries as well
as advance their presence in the maritime/transportation industry.
On
July 29, 2020, PCTI entered into a three-month Performance Solutions Agreement (the “PSA”), with automatic monthly
renewals, until terminated either arty on a thirty (30) day written notice to the other party. Pursuant to the PSA, the Company
will pay a monthly fee of $5,000 for services including social media and search engine optimization.
On
September 2, 2020, PCTI entered into an Agreement (the “Agreement”) with a third- party. Pursuant to the terms of
the Agreement, in exchange for $750,000, PCTI agreed to pay the third-party a perpetual three percent (3%) payment of revenues,
as defined in the Agreement (see Note 7).
NOTE
11 – STOCKHOLDERS’ EQUITY
Common
stock
During
the period from July 11, 2020 to September 30, 2020, holders of an aggregate of $1,585,937 in principal and $259,418 of accrued
interest and fees of convertible notes issued by the Company and assumed by PCTI on July 10, 2020, converted their debt into 1,181,993,984
shares of our common stock at an average conversion price of $0.0016 per share. The Company also issued 106,528,473 shares of
common stock upon the cashless exercise of common stock purchase warrants.
As
of September 30, 2020, the Company has 4,990,000,000 shares of $0.001 par value common stock authorized and there are 3,140,453,186
shares of common stock issued and outstanding.
Preferred
stock
As
of September 30, 2020, 10,000,000 shares have been authorized as preferred stock, par value $0.001 (the “Preferred Stock”),
which such Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of
Directors may determine from time to time.
On
July 7, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s
Series C Preferred Stock. Under the terms of the Amendment to Certificate of Designation of Series C Preferred Stock, 50,000 shares
of the Company’s preferred remain designated as Series C Preferred Stock. The holders of Series C Preferred Stock have no
conversion rights and no dividend rights. For so long as any shares of the Series C Preferred Stock remain issued and outstanding,
the Holder thereof, voting separately as a class, shall have the right to vote on all shareholder matters equal to sixty-seven
(67%) percent of the total vote. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued 47,500 shares of Series C
preferred Stock to Chis. As of September 30, 2020, there were 50,000 shares of Series D Preferred Stock issued and outstanding,
of which 2,500 are issued to Mr. Conway.
On
July 7, 2020, the Company filed a Certificate of Designation with the State of Nevada of the Company’s Series D Preferred
Stock. Under the terms of the Certificate of Designation of Series D Preferred Stock, 20,000 shares of the Company’s preferred
stock have been designated as Series D Convertible Preferred Stock. The holders of the Series D Convertible Preferred Stock shall
not be entitled to receive dividends. The holders as a group may, at any time convert all of the shares of Series D Convertible
Preferred Stock into a number of fully paid and nonassessable shares of common stock determined by multiplying the number of issued
and outstanding shares of common stock of the Company on the date of conversion, by 3. Except as provided in the Certificate of
Designation or as otherwise required by law, no holder of the Series D Convertible Preferred Stock shall be entitled to vote on
any matter submitted to the shareholders of the Company for their vote, waiver, release or other action. The Series D Convertible
Preferred Stock shall not bear any liquidation rights. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued 18,667
shares of Series D preferred Stock to Chis, and on August 28, 2020. Pursuant to Mr. Conway’s employment agreement, the Company
issued 1,333 shares of Series D Preferred Stock to Mr. Conway. As of September 30, 2020, there were 20,000 shares of Series D
Preferred Stock issued and outstanding.
On
July 7, 2020, the Company filed a Certificate of Designation with the State of Nevada of the Company’s Series E Preferred
Stock. Under the terms of the Certificate of Designation of Series E Preferred Stock, 3,000 shares of the Company’s preferred
stock have been designated as Series E Preferred Stock. The holders of the Series E Convertible Preferred Stock shall not be entitled
to receive dividends. No holder of the Series E Preferred Stock shall be entitled to vote on any matter submitted to the shareholders
of the Corporation for their vote, waiver, release or other action, except as may be otherwise expressly required by law. At any
time, the Corporation may redeem for cash out of funds legally available therefor, any or all of the outstanding Preferred Stock
(“Optional Redemption”) at $1,000 (one thousand dollars) per share. The shares of Series E Preferred Stock have not
been registered under the Securities Act of 1933 or the laws of any state of the United States and may not be transferred without
such registration or an exemption from registration. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued 500 shares
of Series E preferred Stock to Chis, and on August 28, 2020. Pursuant to Mr. Conway’s employment agreement, the Company
issued 500 shares of Series E Preferred Stock to Mr. Conway. As of September 30, 2020, there were 1,000 shares of Series E Preferred
Stock issued and outstanding.
NOTE
12 - OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
On October 25, 2019
PCTI executed a non-cancellable lease for office and industrial space which began December 1, 2019 and expires on November 30,
2022. Operating lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at
the lease commencement date. The interest rate used to determine the present value is our incremental borrowing rate, estimated
to be 7.5%, as the interest rate implicit in most of our leases is not readily determinable. Prior to July 10, 2020, PCTI recorded
monthly lease expense pursuant to the lease agreement and effective July 10, 2020, pursuant to the PCTI transaction, operating
lease expense is recognized pursuant to ASC Topic 842. Leases (Topic 842) over the lease term. During the three and nine
months ended September 30, 2020, the Company recorded $21,278 and $63,278, respectively, and $21,125 and $63,375 for the three
and nine months ended September 30, 2019, respectively, for this lease.
In adopting Topic
842, the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new
standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not
elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company.
In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. During the nine
months ended September 30, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities
of $185,139.
Right-of-
use assets are summarized below:
|
|
September 30, 2020
|
|
Office and warehouse lease
|
|
$
|
185,139
|
|
Less accumulated amortization
|
|
|
(17,639
|
)
|
Right-of-us assets, net
|
|
$
|
167,500
|
|
Operating
lease liabilities are summarized as follows:
|
|
September 30, 2020
|
|
Lease liability
|
|
$
|
167,500
|
|
Less current portion
|
|
|
(73,945
|
)
|
Long term portion
|
|
$
|
93,555
|
|
Maturity
of lease liabilities are as follows:
|
|
Amount
|
|
For the three months ending December 31, 2020
|
|
$
|
21,000
|
|
For the year ending December 31, 2021
|
|
|
84,000
|
|
For the eleven months ending November 30, 2022
|
|
|
77,000
|
|
Total
|
|
$
|
182,000
|
|
Less: present value discount
|
|
|
(14,500
|
)
|
Lease liability
|
|
$
|
167,500
|
|
NOTE
13 – SUBSEQUENT EVENTS
From
October 1, 2020, through November 20, 2020, the Company has issued 123,357,984 shares of common stock upon the conversion of $293,449
of principal, accrued interest and fees of convertible notes.
On
October 8, 2020, the Company, through its wholly owned subsidiary, PCTI entered into a Consortium Agreement (the “Consortium
Agreement”) with Sterling PBES Energy Solution Ltd. (“SPBES”). Under the terms of the Consortium Agreement,
PCTI shall offer proposal, execution and service of contracts to supply agreed upon product solutions on behalf of SPBES in the
following markets: Marine Industrial Charging Sub-Stations, North America, Europe, the Middle East and North Africa, Southeast
Asia, South East Asia, South America and Australasia. SPBES shall be responsible for the project management of the product solutions.
On October 29,
2020, the Company formed a new wholly owned subsidiary, Ozop Surgical Name Change Subsidiary, Inc., a Nevada corporation (“Merger
Sub”). The Merger Sub was formed under the Nevada Revised Statutes for the sole purpose and effect of changing the Company’s
name to “Ozop Energy Solutions, Inc.” That same day the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with the Merger Sub and filed Articles of Merger (the “Articles of Merger”) with the
Nevada Secretary of State, merging the Merger Sub into the Company, which were stamped effective as of November 3, 2020. As permitted
by the Section 92.A.180 of the Nevada Revised Statutes, the sole purpose and effect of the filing of Articles of Merger was to
change the name of the Company to “Ozop Energy Solutions, Inc.”
On
November 13, 2020 (the “Issue Date”), the Company entered into a 12%, $1,000,000 face value promissory note with a
third-party (the “Holder”) due November 13, 2021 (the “Maturity Date”). Principal payments shall be made
in six instalments of $166,667 commencing 180 days from the Issue Date and continuing each 30 days thereafter for 5 months and
the final payment of principal and interest due on the Maturity Date. The Company received proceeds of $890,000 on November 20,
2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $110,000. In conjunction with this
Note, the Company issued 2 common stock purchase warrants; each warrant entitles the Holder to purchase 125,000,000 shares of
common stock at an exercise price of $0.008, subject to adjustments and expires on the five-year anniversary of the Issue Date.
On
November 16, 2020, (the “Issuance Date”) the Company issued a promissory note, in the principal amount of $250,000,
to an investor. The note carries a guaranteed interest payment of 15%, which is added to the principal on the Issuance Date. Principal
payments shall be made in six instalments of $57,500 commencing May 21, 2021, and continuing each 30 days thereafter for 4 months.
The Holder shall have the right from time to time, and at any time following an event of default, as defined on the agreement,
to convert all or any part of the outstanding and unpaid principal, interest and any other amounts due into fully paid and non-assessable
shares of common stock of the Company, This note is convertible into shares of the Company’s common stock beginning on the
Issuance Date at $0.01 for the first three months after the Issuance Date. After the first three months after the Issuance Date,
the conversion price shall be equal to the lower of (i) $.01 or the volume weighted average price of the common stock during the
five (5) Trading Day period ending on the day prior to conversion. The Company received proceeds of $200,000 on November 19, 2020,
and this note included an original issue discount of $50,000. This note proceeds will be used by the Company for general working
capital purposes. In conjunction with this note, the Company issued a warrant to purchase 35,000,000 shares of common stock at
an exercise price of $0.25, subject to adjustments and expiring on the five-year anniversary of the Issuance Date.
The
Company has evaluated subsequent events through the date the financial statements were issued. The Company has determined that
there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
quarterly report and other reports filed by Ozop Surgical Corp. (“we,” “us,” “our,” or the
“Company”), from time to time contain or may contain forward-looking statements and information that are based upon
beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by
Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only
predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,”
“estimate,” “expect,” “future,” “intend,” “plan” or the negative of
these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements.
Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although
the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities
laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements
to actual results.
Our
financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments,
and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments,
and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities
as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.
Our financial statements would be affected to the extent there are material differences between these estimates.
The
following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere
in this Quarterly Report on Form 10-Q.
THE
COMPANY
Ozop
Energy Solutions, Inc. (the “Company,” “we,” “us” or “our”) was originally incorporated
as Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada. On May 8, 2018, following the acquisition of Ozop Surgical,
Inc., we amended our Articles of Incorporation (the “Amendment”) to change our name from Newmarkt Corp. to Ozop Surgical
Corp. in order to reflect more accurately, at that time, the name of our core service offering and operations.
On July 10, 2020, the Company entered into
a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”),
and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Under
the terms of the SPA, the Company acquired one thousand (1,000) shares of PCTI, which represents all of the outstanding shares
of PCTI, from Chis in exchange for the issuance of 47,500 shares of the Company’s Series C Preferred Stock, 18,667 shares
of the Company’s Series D Preferred Stock, and 500 shares of the Company’s Series E Preferred Stock to Chis. The
Acquisition is being accounted for as a business combination and was treated as a reverse acquisition for accounting purposes
with PCTI as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting Standards Codification
Topic 805, Business Combinations (“ASC 805”). In accordance with the accounting treatment for a reverse acquisition,
the Company’s historical financial statements prior to the reverse merger were and will be replaced with the historical
financial statements of PCTI prior to the reverse merger, in all future filings with the U.S. Securities and Exchange Commission
(the “SEC”). The consolidated financial statements after completion of the reverse merger have and will include the
assets, liabilities and results of operations of the combined company from and after the closing date of the reverse merger.
PCTI
designs, develops, manufactures and distributes standard and custom power electronic solutions.
PCTI serves clients in several industries including energy storage, shore power, DEWs, microgrid, telecommunications, military,
transportation, renewable energy, aerospace and mission critical defense systems. Customers include the United States military,
other global military organizations and many of the world’s largest industrial manufacturers. All of its products are manufactured
in the United States. Because of the Company’s product scope and the high-power niche that their products occupy, the Company
is aggressively targeting the rapidly growing renewable and energy storage markets. The
Company’s mission is to be a global leader for high power electronics with a standard of continued innovation.
On
October 29, 2020, the Company formed a new wholly owned subsidiary, Ozop Surgical Name Change Subsidiary, Inc., a Nevada corporation
(“Merger Sub”). The Merger Sub was formed under the Nevada Revised Statutes for the sole purpose and effect of changing
the Company’s name to “Ozop Energy Solutions, Inc.” That same day the Company entered into an Agreement and
Plan of Merger (the “Merger Agreement”) with the Merger Sub and filed Articles of Merger (the “Articles of Merger”)
with the Nevada Secretary of State, merging the Merger Sub into the Company, which were stamped effective as of November 3, 2020.
As permitted by the Section 92.A.180 of the Nevada Revised Statutes, the sole purpose and effect of the filing of Articles of
Merger was to change the name of the Company to “Ozop Energy Solutions, Inc.”
Results
of Operations for the three and nine months ended September 30, 2020 and 2019:
Revenue
For
the three and nine months ended September 30, 2020, the Company’s revenues were $246,951 and $1,493,592, respectively, compared
to $176,582 and $416,778 for the three and nine months ended September 30, 2019.The increase in revenues is a result of
a delay in 2019, by a customer in making a substantial change to the specification and issuing a modification after the purchase
order was released for production. The project subsequently shipped in 2020.
Operating
expenses
Total
operating expenses for the three and nine months ended September 30, 2020, were $4,830,641 and $5,151,483, respectively, compared
to $101,820 and $314,433 for the three and nine months ended September 30, 2019, respectively. The operating expenses were comprised
of:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Wages and management fees- related parties
|
|
$
|
129,271
|
|
|
$
|
-
|
|
|
$
|
129,271
|
|
|
$
|
-
|
|
Stock-based compensation
|
|
|
4,286,648
|
|
|
|
-
|
|
|
|
4,286,648
|
|
|
|
-
|
|
Wages, taxes and benefits
|
|
|
125,554
|
|
|
|
72,877
|
|
|
|
287,917
|
|
|
|
234,436
|
|
Professional and consulting fees
|
|
|
162,622
|
|
|
|
8,599
|
|
|
|
187,259
|
|
|
|
15,355
|
|
Advertising and marketing
|
|
|
44,428
|
|
|
|
100
|
|
|
|
47,325
|
|
|
|
232
|
|
Rent, office expense and supplies
|
|
|
48,498
|
|
|
|
4,517
|
|
|
|
72,400
|
|
|
|
24,659
|
|
Insurance
|
|
|
19,133
|
|
|
|
6,443
|
|
|
|
44,246
|
|
|
|
21,647
|
|
General and administrative, other
|
|
|
14,487
|
|
|
|
9,284
|
|
|
|
96,917
|
|
|
|
17,664
|
|
Total
|
|
$
|
4,830,641
|
|
|
$
|
101,820
|
|
|
$
|
5,151,483
|
|
|
$
|
314,433
|
|
All
of the above amounts include expenses incurred by PCTI for the entire three- and nine-month periods ended September 30, 2020,
and 2019, respectively, and expenses incurred by Ozop for the period July 11, 2020 through September 30, 2020.
Wages
and management fees- related parties, includes compensation paid to our CEO and to the President of PCTI, our wholly-owned subsidiary.
Currently, the President is compensated $13,000 per month and the Company’s CEO monthly base compensation is $10,000. Both
the CEO and President are eligible for additional bonuses as approved by the Board of Directors of the Company. For the three
and nine months ended September 30, 2020, the Company’s CEO’s total compensation was $96,771 and PCTI’s President
was compensated $32,500.
Stock
based compensation for the three and nine months ended September 30, 2020, of $4,286,648, is related to 1,333 shares of Series
D Preferred Stock issued to Mr. Conwy on August
28, 2020, pursuant to his employment agreement. The Series D Preferred Stock is convertible in the aggregate into three times
the number of shares of common stock outstanding at the time of conversion. Mr. Conway’s owns 6.67% of the issued and outstanding
Series D Preferred Stock, and based on the 3,107,037,634 shares outstanding on August 28, 2020, Mr. Conway’s Preferred Stock
is convertible into 621,253,401 shares of common stock. Based on the share price of the common stock on that date of $0.0065,
the shares were valued at $4,286,648.
Wages,
taxes and benefits increased for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The
increase was a result of increased sales and administrative personnel at PCTI, in support of the increased revenues as well as
personnel hired for additional customer recruitment.
Professional
and consulting increased in the three and nine months ended September 30, 2020, compared to the same periods in 2019. The increase
was due to accounting and auditing expenses of PCTI, necessary in preparation of the transaction with Ozop, as well as expenses
incurred by Ozop for their public company filing requirements
Advertising
and marketing expenses increased in the three and nine months ended September 30, 2020,
compared to the same periods in 2019. The increase was related to marketing programs during the three months ended September
30, 2020, including brand awareness programs for both PCTI and Ozop.
Rent,
office expense and supplies include utilities as well. The expenses for the three and nine months ended September 30, 2010 increased
compared to the same periods in 2019. The increase was the result of including in the current three-and nine-month periods, rent
expense of $9,200 for Ozop beginning in July 2020.
Other
Income (Expenses)
Other expenses, net, for the three and nine
months ended September 30, 2020, was $1,708,061 and $1,838,113, respectively, compared to other expenses, net of
$12,203 and $41,656 for the three and nine months ended September 30, 2019, respectively, and were as follows.
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Interest expense
|
|
$
|
667,185
|
|
|
$
|
12,203
|
|
|
$
|
797,237
|
|
|
$
|
41,656
|
|
Amortization of debt discount
|
|
|
864,071
|
|
|
|
-
|
|
|
|
864,071
|
|
|
|
-
|
|
Loss on change in fair value of derivatives
|
|
|
189,612
|
|
|
|
-
|
|
|
|
189,612
|
|
|
|
-
|
|
Gain on extinguishment of debt
|
|
|
(12,807
|
)
|
|
|
-
|
|
|
|
(12,807
|
)
|
|
|
-
|
|
Total other expense, net
|
|
$
|
1,708,061
|
|
|
$
|
12,203
|
|
|
$
|
1,838,113
|
|
|
$
|
41,656
|
|
The
increase in other expense is primarily a result of amortization of debt discounts and losses on changes in fair values of derivatives
and interest expense on the convertible notes assumed by PCTI on July 10, 2020.
Net
loss
The
net loss for the three and nine months ended September 30, 2020, was $6,563,262 and $6,862,676 respectively, compared
to $70,708 and $371,975 for the three and nine months ended September 30, 2019, respectively. The increases are a result of the
changes discussed above.
Liquidity
and Capital Resources
Currently,
we have limited operating capital. Our current capital and our other existing resources will be sufficient to provide the working
capital needed for our current business, however, additional capital will be required to meet our debt obligations, 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 business development and financial results.
For the nine months ended September 30, 2020,
we primarily funded our business operations with $750,000 of proceeds received pursuant to an agreement to provide future
perpetual payments of 3% of revenues, $673,000 from the issuances of promissory notes, $289,000 of proceeds from the issuances
of convertible note financings as well as $400,000 advance from affiliate and $42,420 received from shareholders. Of the
proceeds, $82,757 was used for repayment of convertible notes and notes payable and $69,470 was paid back to shareholders.
As of September 30, 2020, we had cash of $1,706,257
as compared to $27,382 at December 31, 2019. As of September 30, 2020, we had current liabilities of $6,590,839 (including
$2,250,953 of non-cash derivative liabilities), compared to current assets of $1,954,962, which resulted in a working capital
deficit of $4,635,877. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative
liabilities and notes payable.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to most other countries
and infections have been reported globally. Because COVID-19 infections have been reported throughout the United States, certain
federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing
the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will
depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the
COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional
preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued
business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it
may have a material adverse impact on our business, financial condition and results of operations. Management expects that its
business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business
and the duration for which it may have an impact cannot be determined at this time.
Operating
Activities
For
the nine months ended September 30, 2020, net cash used in operating activities from continuing operations was $878,327
compared to $36,262 for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, our net cash used
in operating activities was primarily attributable to the net loss of $6,862,676, adjusted by stock-based compensation
of $4,286,648, the non-cash expenses of interest and amortization and depreciation of $1,447,935 and losses on the fair
value changes in derivatives of $189,612. Net changes of $72,960 in operating assets and liabilities reduced the cash used
in operating activities.
For
the nine months ended September 30, 2019, net cash used in operating activities of $36,262 was primarily attributable to the net
loss of $371,975, adjusted non-cash expenses of depreciation of $5,445, and net changes of $330,268 in operating assets and liabilities
reduced the cash used in operating activities.
Investing
Activities
For
the nine months ended September 30, 2020, the net cash provided by investing activities was $1,577,566, compared to $6,967 for
the nine months ended September 30, 2019. For the nine months ended September 30, 2020, the Company received proceeds of $750,000
pursuant to an obligation to pay a perpetual 3% fee of revenues, acquired $470,849 cash, $400,0 advance from affiliate
and $42,240 from shareholders. During the nine months ended September 30, 2020, the Company purchased $16,233 of office furniture
and equipment and repaid $69,470 to shareholders.
For
the nine months ended September 30, 2019, the principal investing activity included receiving $110,000 from shareholders and the
repayment of $99,891 to shareholders and the purchase of $3,142 of fixed assets.
Financing
Activities
For
the nine months ended September 30, 2020, the net cash provided by financing activities was $979,643, compared to cash used in
financing activities of $10,193 for the nine months ended September 30, 2019. During the nine months ended September 30, 2020,
we received $289,000 of proceeds from the issuances of convertible note financings, $673,000 from the issuances of promissory
notes and $100,400 from the Payroll Protection Program. During the nine months ended September 30, 2020, the Company repaid $82,757
of principal of convertible notes and notes payable.
For
the nine months ended September 30, 2019, the Company made payments on notes payable of $10,193.
OFF
BALANCE SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk
support and credit risk support or other benefits.
Critical
Accounting Policies
Our
significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in
this Quarterly Report on Form 10-Q. We believe the following accounting policies to be most critical to the judgement and estimates
used in the preparation of our unaudited financial statements:
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting
only of normal recurring accruals) to present the financial position of the Company as of September 30, 2020, and the results
of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September
30, 2020, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited
condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto
included in the Company’s Form 8-K/A filed on September 25, 2020.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance
obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance
obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. For the comparative
periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605,
revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and
determinable; and (4) the collectability of the fee is reasonably assured. The Company has no outstanding contracts with any of
is’ customers.
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.