OZOP ENERGY SOLUTIONS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements. 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 December 11, 2020, the Company formed Ozop Energy Systems, Inc. (“OES”), a Nevada corporation and a wholly owned subsidiary of the Company. OES was formed to be a manufacturer and distributor of renewable energy products. 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 from Ozop Surgical Corp. to “Ozop Energy Solutions, Inc.” On August 19, 2021, the Company formed Ozop Capital Partners, Inc. (“Ozop Capital”), a Delaware corporation is a wholly owned subsidiary of the Company. Ozop Capital was formed as a holding company to seek to develop a captive insurance company. Brian Conway was appointed as the sole officer and director of Ozop Capital and has voting control of Ozop Capital. On October 29, 2021, EV Insurance Company, Inc. (“EVCO”) was formed as a captive insurer that reinsures in the State of Delaware. EVCO is a wholly owned subsidiary of Ozop Capital. On January 7, 2022, EVCO filed with New Castle County, Delaware DBA OZOP Plus. 3 OES is actively engaged in the renewable, electric vehicle (“EV”), energy storage and energy resiliency sectors. We are engaged in multiple business lines that include project development as well as equipment distribution. Our solar and energy storage projects involve large-scale battery and solar photovoltaics (PV) installations. Our utility-scale storage business model is based on an arbitrage business model in which we install multiple 1+ megawatt batteries, charge them with off-peak grid electricity under contract with the utility, then sell the power back during peak load hours at a premium, as dictated by prevailing electricity tariffs. Equipment Distributor: OES has entered the component supply/distribution side of the renewable, resiliency and energy storage industries distributing the core components associated with residential and commercial solar PV systems as well as onsite battery storage and power generation. In April 2021, the Company signed a five- year lease (beginning June 1, 2021) of approximately 8,100 SF in California, for office and warehouse space to support the sales and distribution of our west coast operations. The components we are distributing include PV panels, solar inverters, solar mounting systems, stationary batteries, onsite generators and other associated electrical equipment and components that are all manufactured by multiple companies, both domestic and international. These core products are sourced from management-developed relationships and are distributed through our existing network and our in-house sales team. Solar PV: Our PV business model involves the design and construction of electrical generating PV systems that can sell power to the utilities or be used for off grid use as part of our developing Neo-Grids solution. The Neo-Grid TM System, patent pending, was developed for the off-grid distribution of electricity to remove or reduce the dependency on utilities that currently burdens the EV Charging sectors. It will also reduce or eliminate the lengthy permitting processes and streamline the installations of those EV chargers. Modular Energy Distribution System: The Neo-Grid TM System patent pending, consists of the design, engineering, installation, and operational methodologies as well as the financial arbitrage of how we produce, capture and distribute electrical energy for the EV markets. OES has acquired th rough a license the rights to a proprietary system, the Neo-Grids TM System (patent pending), for the capture and distribution of electrical energy for the EV market. The Neo-Grids TM System will serve both the private auto and the commercial sectors. The exponential growth of the EV industry has been accelerated by the recent major commitments of most of the major car manufacturers. Our Neo-Grids TM System leverages this accelerated growth by offering (1) charging locations that can be rapidly installed in restricted areas or load limits and (2) EV charger electricity that is produced from renewable sources having little to no carbon footprint. OES has developed a business plan for the Neo Grid TM distribution system, a solution to alleviate the stress on the existing grid-tied infrastructure. The Company has completed its’ Neo Grid TM research and development as well as the first stage that includes the specifications and engineered technical drawings. This completion of the first stage of allows us to move forward with stage two, as well as to begin to construct the first prototype or proof of concept, (“PoC”). Our PoC design is partially reliant on auto manufacturers establishing standardizations of the actual charging/discharging protocols of the batteries such as on-board inverters as well as bi-directional capabilities in electric vehicles, which have only recently been established. As the market growth rate of EV’s continues to rise, the stress on the existing grid-tied infrastructure shows the need for the continued development of our Neo-Grid TM System as a viable solution. OES management has decades of experience in the renewable, storage and resilient energy businesses and associated markets, which include but are not limited to project finance, project development, equipment finance, construction, utility protocol, regulatory policy and technology assessment. Ozop Plus markets vehicle service contracts (“VSC’s”) for electric vehicles (EV’s) that offer consumers to be able to purchase additional months and miles above the manufacturer’s warranty and to also bring added value to EV owners by utilizing our partnerships and strengths in the energy market to offer unique and innovative services. Among EV owners’ concerns are the EV battery repair and replacement costs, range anxiety, environmental responsibilities, roadside assistance, and the accelerated wear on additional components that EV vehicles experience. Management believes that the Ozop Plus marketed VSC’s will give “peace of mind” to the EV buyer. ● In May 2022, the Company entered into an agreement with GS Administrators, Inc., a member of Houston-based GSFSGroup. Under the agreement, the Company will market GSFSGroup’s EV VSC’s in all states (except, California, Florida, Massachusetts and Washington) to Ozop’s network of new and used franchised dealerships and other eligible entities. In addition to acting as an agent for the marketing, Ozop also has the right to white label the product under its’ Ozop Plus brand. Ozop’s role won’t be limited to marketing the product. GSFSGroup plans to tap into Ozop’s experience relative to battery collection and disposal and has agreed to insurance risk sharing in connection with the insurance policies that back the VSC’s. GSFSGroup is working on getting the approvals needed for the above four (4) states. 4 ● On June 22, 2022, the Company entered into an Agent Agreement with Royal Administration Services, Inc. (“Royal”). Under the agreement, the Company will market Royal’s EV VSC’s and has the right to white label it under Ozop Plus. Royal has agreed to allow Ozop Plus on all VSC’s, marketed by Royal and the Company, to assume all of the risk related to the electric battery at an agreed upon premium. The battery premium is dependent on the consumer’s selection of the duration of the VSC, the miles selected for coverage and the type of vehicle that the consumer has purchased, with a key component being the kWh size of the battery. These VSC’s have a maximum of 10 years and 150,000 miles and cover new and used cars from model year 2017 and newer. Royal’s VSCs are now effective in 35 states and the others have various waiting times or approvals needed. ● On October 13, 2022, EVCO entered into a Reinsurance Contract (the “Contract”) with American Bankers Insurance Company of Florida (“ABIC” or the “Ceding Company”). Royal is the Administrator of the Contract. Pursuant to the terms of the Contract, ABIC will cede 100% of the battery coverage portion of all electric vehicle service contracts to EVCO. On the same date ABIC and EVCO also entered into a Trust Agreement, whereas EVCO as the reinsurer agrees to deposit an amount equal to unearned premium reserves, plus losses reported but unpaid, plus the estimated amount of losses incurred but not reported to the trust account. Permissible investments (with a maturity of no more than five (5) years) of the assets of the Trust account include: ○ U.S. Treasury Securities ○ Cash or cash instruments ○ U.S agency issues ○ Other investments as Ceding Company approves On February 25, 2022, the Company formed Ozop Engineering and Design, Inc. (“OED”) a Nevada corporation, as a wholly owned subsidiary of the Company. OED was formed to become a premier engineering and lighting control design firm. OED offers product and design support for lighting and solar projects with a focus on fast lead times and technical support. OED and our partners are able to offer the resources needed for lighting, solar and electrical design projects. OED will provide its’ customers systems to coordinate the understanding of electrical usage with the relationship between lighting design and lighting controls, by developing more efficient ecofriendly designs by working with architects, engineers, facility managers, electrical contractors and engineers. Stock Purchase Agreement and Stock Redemption Agreement On July 10, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Under the terms of the SPA, the Company acquired one thousand (1,000) shares of PCTI, which represents all of the outstanding shares of PCTI, from Chis in exchange for the issuance of 47,500 shares of the Company’s Series C Preferred Stock, 18,667 shares of the Company’s Series D Preferred Stock, and 500 shares of the Company’s Series E Preferred Stock to Chis. On July 13, 2021, the Company entered into a Definitive Agreement (the “Agreement”) with Chis to purchase the 47,500 shares of the Company’s Series C Preferred Stock held by Chis and the 18,667 shares of the Company’s Series D Preferred Stock held by Chis for the total purchase price of $11,250,000.The Agreement was closed on July 27, 2021. 5 Results of Operations for the three and nine months ended September 30, 2022 and 2021: Revenue For the three and nine months ended September 30, 2022, the Company generated revenue of $3,928,918 and $11,614,117, respectively, compared to $4,716,607 and $5,971,589 for the three and nine months ended September 30, 2021, respectively. Revenues from Ozop Energy Systems, Inc. (“OES”) are classified as sourced and distributed products. Ozop Engineering and design (“OED”) operations began in the quarter ended June 30, 2022, and are classified as design and installation. Sales are summarized as follows: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Sourced and distributed products $ 3,907,318 $ 4,716,607 $ 11,576,017 $ 5,971,589 Design and installation 21,600 - 38,100 - Total $ 3,928,918 $ 4,716,607 $ 11,614,117 $ 5,971,589 As it did for most of the industry; OES’s importing of solar panels issues that began in the 4 th quarter of 2021, continued 2022. Covid issues continued to be disruptive to a continual source of product from foreign manufacturers as well as ocean freight backlogs and covid issues that plagued the port of arrivals related to the unloading of containers and the eventual customs clearance of the imported goods. An announcement by the U.S. Department in March 2022 stated it would investigate allegations that solar panel manufacturers in Southeast Asia are using Chinese-made parts and evading U.S. tariffs has raised alarms concerning both trade and environmental policy The department announced March 28 that it would investigate claims by California-based solar panel manufacturer that solar energy equipment manufacturers in Cambodia, Malaysia, Thailand and Vietnam have close business ties to companies in China that produce the raw materials and some components of solar panel assemblies. On June 6, 2022, President Biden waived tariffs on solar panels from there four Southeast Asian nations for two years and invoked the Defense Production Act to spur domestic solar panel manufacturing at home. The tariff exemption will serve as a “bridge” while U.S. manufacturing ramps up. Based on the above situation, the Company placed approximately $14,422,000 of purchase orders for solar panels and as of the date of the filing of this report has fully paid and received approximately $7,265,000 of this product. Additionally, the Company has made approximately $1,499,000 of additional deposits to vendors, resulting in a remaining balance of $5,658,000 of open purchase orders to vendors, to assure product delivery of approximately $7.2 million with a forecasted delivery of $3.9 million in Q4 2022 and $3.3 million in Q1 2023. The Company was expecting to receive additional product in Q3 2022, that has been delayed until Q4 2022, which impacted revenues for the three and nine months ended September 30, 2022. Based on the above and the Company’s current on-hand inventory, management anticipates the potential for a significant increase in fourth quarter sales over Q3 2022 sales. Cost of sales For the three and nine months ended September 30, 2022, the Company recognized $3,598,918 and $10,634,170, respectively of cost of sales, compared to $4,370,680 and $5,575,557 for the three and nine months ended September 30, 2021, respectively. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Sourced and distributed products $ 3,598,918 $ 4,370,680 $ 10,634,170 $ 5,575,558 Total $ 3,598,918 $ 4,370,680 $ 10,634,170 $ 5,575,558 Based on the above cost of sales, gross margin was 8.4% for the three and nine months ended September 30, 2022, compared to 7.3% and 6.6% for the three and nine months ended September 30, 2021, respectively. The increase of gross margin for the three and nine months is a result of the mix of customer sales. 6 Operating expenses Total operating expenses for the three and nine months ended September 30, 2022, were $1,514,524 and $4,648,920, compared to $1,708,102 and $11,309,256 for the three and none months ended September 30, 2021, respectively. The operating expenses were comprised of: Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Wages and management fees, related parties, including stock-based compensation $ 220,000 $ 70,000 $ 850,000 $ 3,559,999 Stock-based compensation, other - 668,711 136,249 5,784,656 Salaries, taxes and benefits 411,411 275,375 996,321 397,889 Professional and consulting fees 495,820 292,278 1,674,319 830,365 Advertising and marketing 8,045 9,487 13,233 20,263 Rent and office expense 63,287 62,378 186,228 103,928 Insurance 88,256 62,961 222,547 89,609 General and administrative 227,705 266,912 600,023 522,547 Total operating expenses $ 1,514,524 $ 1,708,102 $ 4,648,920 $ 11,309,256 Wages and management fees- related parties, are amounts paid to our CEO. 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”). Mr. Conway’s compensation as adjusted was $20,000 per month, and effective September 1, 2021, Mr. Conway began to receive $10,000 per month from Ozop Capital. Effective January 1, 2022, the Company entered into a new employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway received a $250,000 contract renewal bonus and will receive an annual compensation of $240,000 from the Company and will also be eligible to receive bonuses and equity grants at the discretion of the BOD. The Company also agreed to compensate Mr. Conway for services provided directly to any of the Company’s subsidiaries. Ozop Capital increased Mr. Conway’s compensation to $20,000 per month in January 2022 and OES began compensating Mr. Conway $20,000 in March 2022. Below is a summary of wages and management fees: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 CEO management fees $ 220,000 $ 70,000 $ 850,000 $ 709,999 Stock-based compensation - - - 2,850,000 Total other (income) expense $ 220,000 $ 70,000 $ 850,000 $ 3,559,999 Stock based compensation for the nine months ended September 30, 2022, of $136,429 is comprised of the following: ● 5,000,000 shares of common stock issued in the aggregate to two employees pursuant to their offers of employment dated March 31, 2021. The shares were valued at $0.027 per share. During the nine months ended September 30, 2022, the Company included $135,000 in stock compensation expense. ● $1,249 of amortization of stock compensation for shares issued in April 2021. Stock based compensation, other for the three and nine months ended September 30, 2021, of $668,711 and $5,784,656 is comprised of the following stock issuances: ● 5,000,000 shares issued in April 2021 pursuant to a one-year consulting agreement. The Company valued the shares at $0.20 per share (the market price of the common stock on the date of the agreement), and $1,000,000 was recorded as deferred stock compensation, to be amortized over the one-year term of the agreement. For the three and nine months ended September 30, 2021, $250,000 and $583,562, respectively, is included in stock-based compensation expense. 7 ● 10,000,000 shares issued in April 2021 pursuant to a one-year consulting agreement. The Company valued the shares at $0.0076 per share (the market price of the common stock on the date of the agreement), and $76,000 was recorded as deferred stock-based compensation, to be amortized over the one-year term of the agreement. For the three and nine months ended September 30, 2021, the Company recorded $21,211 and $55,595, respectively, as stock-based compensation expense. ● 5,000,000 shares issued in April 2021 for services. The Company valued the shares at $0.1392 per share (the market price of the common stock on the date of the agreement), and $696,000 is included in stock-based compensation expense for the nine months ended September 30, 2021. ● 10,000,000 shares issued for services. The shares were valued at $0.0056 per share, the date the Company agreed to issue the shares. For the nine months ended September 30, 2021, the Company included $56,000 in stock compensation expense. ● 10,000,000 shares issued pursuant to a consulting agreement dated February 24, 2021 (see Note 12). The shares were valued at $0.2386 per share. For the nine months ended September 30, 2021, the Company included $2,386,000 in stock compensation expense. ● 5,000,000 shares of common stock to be issued in the aggregate to two new employees pursuant to their offers of employment dated March 31, 2021. The shares were valued at $0.23 per share. For the nine months ended September 30, 2021, the Company included $460,000 in stock compensation expense for the 5,000,000 shares of common stock. ● Issuance of 200 shares and 950 shares of Series E Preferred Stock, with a redemption value of $1,000 per share, resulting in stock compensation expense of $1,150,000 for the nine months ended September 30, 2021. ● 5,000,000 shares of common stock to be issued in the aggregate to two employees pursuant to their offers of employment dated March 31, 2021. The shares were valued at $0.0745 per share. For the three and nine months ended September 30, 2021, the Company included $372,500 in stock compensation expense for the 5,000,000 shares of common stock. ● 452,080 shares of common stock issued for services (see Note 12). The shares were valued at $0.0553 per share (the market price of the common stock on the date of the agreement), and $25,000 is included in stock-based compensation expense for the three and nine months ended September 30, 2021. Salaries, taxes and benefits increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021. The increase was a result of the current periods including $268,091 and $767,438, respectively, compared to $275,375 and $397,889 for the three and nine months ended September 30, 2021, respectively, of expenses related to OES and $143,320 and $198,882 for the three and nine months ended September 30, 2022, respectively, for OED. OES now has annual gross payroll of approximately $512,000 and an additional $351,000 on an annual basis of personnel focused on the Company’s battery storage vertical. OED currently has five employees with an aggregate annual compensation of $457,000. Professional and consulting fees increased for the three and nine months ended September 30, 2022, compared to September 30, 2021. The increases are due to increases in accounting expenses of Ozop and its’ subsidiaries in the current three- and nine-month periods and consultants engaged in the second quarter of 2021 by Ozop Capital Partners that have been engaged for the entire nine months ended September 30, 2022, as Ozop Plus initiates its business plan regarding vehicle service contracts on electric vehicles. Advertising and marketing expenses decreased for the three and nine months ended September 30, 2022, compared to September 30, 2021. The decreases were related to marketing programs during 2021, including brand awareness programs for Ozop. 8 Rent and office expense (including supplies, utilities and internet costs) remained the same for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, and increased for the nine months ended September 30, 2022, compared to the none months ended September 30, 2021. The increase is the result of including in the current period, rent and office expense of approximately $147.916 for the nine months ended September 30, 2022, compared to $69,221 for the nine months ended September 30, 2021, for OES. The Company estimates that the monthly OES rent and office expense for the California operation to be approximately $18,000 per month. Insurance expense increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021. The increase was the result of including in the current three- and nine-month periods, insurance expense of approximately $68,465 and $201,413, respectively, for the three and nine months ended September 30, 2022, compared to $62,961 and $89,609 for the three and nine months ended September 30, 2021, for OES. OED’s insurance expense was $19,790 and $21,135 for the three and nine months ended September 30, 2022. The Company estimates that the monthly OES and OED insurance expense to be approximately $30,000 per month. Other Income (Expenses) Other income, net was $513,156 and $8,501,649 for the three and nine months ended September 30, 2022, respectively, compared to other income, net of $13,314,765 for the three months ended September 30, 2021, and other expenses of $186,842,894 for the nine months ended September 30, 2021, and were comprised of as follows: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Interest expense $ 1,424,554 $ 4,123,535 $ 6,812,834 $ 49,062,523 (Gain) loss on change in fair value of derivatives (1,937,710 ) (17,483,300 ) (15,314,483 ) 25,892,783 Loss on extinguishment of debt - - - 95,437,587 Debt restructure expense - - - 16,450,000 Total other (income) expense $ (513,156 ) $ (13,314,765 ) $ (8,501,649 ) $ 186,842,894 The decrease in other income, net, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, is primarily a result of the reduced gain on the change in fair value of the derivatives and the reduced interest expense related to the amortization of debt discounts associated with the maturity dates of certain of the company’s promissory notes. Other expenses for the nine months ended September 30, 2021 , includes the loss on extinguishment of debt related to the market value of shares of common stock issued in excess of the debt and accrued interest extinguished. The Company also issued 175,000,000 shares of restricted common stock related to the restructure of the deferred liability. The shares were valued at $0.094 per share and the Company recognized $16,450,000 of restructuring costs. Also included in interest expense for the nine months ended September 30, 2021, is the initial $38,907,939 of fair value related to the issuance of 300,000,000 warrants. In addition, the amortization of debt discounts of $8,810,332 and losses on changes in fair values of derivatives, related to convertible notes and warrants. Net income (loss) Net loss for the three months ended September 30, 2022, was $534,988 compared to net income of $11,714,722 for the three months ended September 30, 2021. The change was primarily a result of the reduced gain on the change in fair value of derivatives in the current period compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, the Company had net income $4,975,556 compares to a net loss of $197,989,599 for the nine months ended September 30, 2021. The loss for the nine months ended September 30, 2021, was primarily a result of the other expenses descried above as well as $7,965,945 of stock- based compensation expenses included in the operating expenses for the nine months ended September 30, 2021. 9 Liquidity and Capital Resources The accompanying condensed 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, 2022, the Company had an accumulated deficit of $212,351,054 and a working capital deficit of $23,000,162 (including derivative liabilities of $5,652,218). As of September 30, 2022, the Company was in default of $14,142,588 plus accrued interest on debt instruments due to non-payment upon maturity dates. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for one year from the date of the issuance of these financial statements. 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. Currently, 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. If we are unable to generate capital or raise additional funds when required it will have a negative impact on our business development and financial results. These conditions raise substantial doubt about our ability to continue as a going concern as well as our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. This “going concern” could impair our ability to finance our operations through the sale of debt or equity securities. Management’s plans in regard to these factors are discussed below and also in Note 2 to the condensed consolidated financial statements filed herein. As of September 30, 2022, we had cash of $2,063,235 as compared to $6,767,167 at December 31, 2021. As of September 30, 2022, we had current liabilities of $29,794,842 (including $5,652,218 of non-cash derivative liabilities), compared to current assets of $6,794,680, which resulted in a working capital deficit of $23,000,162. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, customer deposits, lease obligations, notes payable and liabilities of discontinued operations. In December 2019, a novel strain of coronavirus (COVID-19) emerged. 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, 2022, net cash used in operating activities was $5,185,222 compared to $6,350,242 for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, our net cash used in operating activities was primarily attributable to the net income of $4,445,884, adjusted by non- cash interest expense of $5,020,528, stock-based compensation of $136,249 and the non-cash expenses of amortization and depreciation of $132,924. This was offset by the gain on the fair value changes in derivatives related to warrants and convertible notes of $15,314,483. Net changes of $246,943 in operating assets and liabilities decreased the cash used in operating activities. For the nine months ended September 30, 2021, our net cash used in operating activities was primarily attributable to the net loss of $197,989,599, adjusted by loss on debt extinguishment of $95,437,589, non- cash interest expense of $47,838,062 (including $38,907,939 for the initial fair value of the 300,000,000 warrants issued), losses on the fair value changes in derivatives related to warrants and convertible notes of $25,892,783, debt restructuring costs of $16,450,000, stock-based compensation of $8,634,656 and the non-cash expenses of interest and amortization and depreciation of $62,438. Net changes of $2,241,716 in operating assets and liabilities increased the cash used in operating activities, primarily as a result of the start-up of the Company’s California operations in the support of inventory and accounts receivable. 10 Investing Activities For the nine months ended September 30, 2022, the net cash used in investing activities was $198,632, compared to $109,769 for the nine months ended September 30, 2021. The amounts for both periods were a result of the Company purchasing office furniture and equipment. Financing Activities For the nine months ended September 30, 2022, the Company received shares proceeds of $814,625, net of issuance costs. During the nine months ended September 30, 2021, net cash provided by financing activities was $8,475,000. We received $12,000,000 of proceeds from the issuances of $13,310,000 face value of promissory notes, $13,100,000 (net of costs) from the Series D SPA. During the nine months ended September 30, 2021, the Company acquired 47,500 shares of Series C Preferred Stock and 18,667 shares of Series D Preferred Stock from Chis for $11,250,000, redeemed 5,000 shares of the Series E Preferred Stock for $5,000,000 and repaid $375,000 of notes payable. 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.