OZOP ENERGY SOLUTIONS, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements. While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern. THE COMPANY Ozop 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. 10 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 and a wholly owned subsidiary of the Company and was formed as a holding company. On October 29, 2021, EV Insurance Company, Inc. (“EVCO”) was formed as a captive insurer that reinsures in the State of Delaware. EVCO (DBA “OZOP Plus”) is a wholly owned subsidiary of Ozop Capital. OES operates 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 battery and solar photovoltaics (PV) installations. Equipment Distributor: OES operates in 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. On February 22, 2023, with an effective date of March 1, 2023, the Company entered into a Sublease for a Single Subleasee Agreement (the “Sublease”) with the landlord and a third party for the office and warehouse in Carlsbad California. Pursuant to the Sublease agreement, the third party will be responsible for all of the Company’s lease obligations through May 31, 2026, the lease termination date. The Company and the subleasee have agreed to work together regarding any existing Company inventory in the facility. OES currently is focused on solar panel sales to other distributors and large installation companies. Modular Energy Distribution System: The Neo-Grid TM System comprises 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 the license rights to the Neo-Grid TM System, a proprietary system (patent pending), for the capture and distribution of electrical energy for the EV market. The Neo-Grid 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-Grid TM System leverages this accelerated growth by offering (1) charging locations that can be installed with reduced delays, restricted areas or load limits and (2) EV charger electricity that is produced from renewable sources claiming little to no carbon footprint. OES has developed a business plan for the Neo-Grid TM System for the distribution of electrical energy providing a solution to the inevitable stress to the existing grid infrastructure. The Company has completed its’ research and development of the Neo-Grid TM System as well as completed the first set of engineered technical drawings. This first stage of the engineered technical drawings 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 solution. 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. 11 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 can 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. Discontinued Operations On September 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceeding which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as a gain or loss from discontinued operations in the accompanying consolidated financial statements for the years ended December 31, 2023, and 2022. Results of Operations for the years ended December 31, 2023, and 2022: Revenue For the year ended December 31, 2023, the Company generated revenue of $4,760,705 compared to $16,629,450 for the year ended December 31, 2022. 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: Year ended December 31, 2023 2022 Sourced and distributed products $ 4,544,855 $ 16,537,350 Design and installation 215,850 92,100 Total $ 4,760,705 $ 16,629,450 Sales of sourced and distributed products (solar product) were lower for the year ended December 31, 2023, compared to December 31, 2022. The Company believes the lower revenues were due to higher interest rates affecting homeowners’ ability and desire for residential rooftop solar installations as well as competitors lowering their selling prices to try to capture a part of the lower demand. These factors also resulted in our customers having excess inventory on hand and the cancellation of orders. Cost of sales For the years ended December 31, 2023, and 2022, the Company recognized $5,367,636 and $15,281,791, respectively, of cost of sales. Year ended December 31, 2023 2022 Sourced and distributed products $ 3,871,658 $ 15,281,791 Inventory write down 1,495,978 - $ 5,367,636 $ 15,281,791 During the year ended December 31, 2023, the Company reviewed its inventory valuation to determine if the historical cost of its solar panels was less than their net realizable value. Management also considers, if applicable, other factors, including known trends, market conditions, and other such issues. Based on current market conditions related to solar panels including but not limited to reduced selling prices in the industry and the abundance of inventory supply in the market, management determined that the net realizable value of certain of the Company’s inventory required a lower of cost or market adjustment of $1,495,978 (the “Inventory Adjustment”) to the historical cost of inventory purchased. Year ended December 31, 2023 2022 Gross margin (loss) (12.7 )% 8.1 % For the year ended December 31, 2023, the decrease in gross margin compared to the year ended December 31, 2022, is a result of the $1,495,978 inventory write down. 12 Operating expenses Total operating expenses for the years ended December 31, 2023, and 2022, were $5,644,981 and $5,959,344, respectively. The operating expenses were comprised of: Year ended December 31, 2023 2022 Management fees, related parties $ 960,000 $ 1,090,000 Stock-based compensation, other -0- 136,249 Termination costs 1,755,082 -0- Salaries, taxes, and benefits 962,807 1,303,265 Professional and consulting fees 1,002,560 1,885,700 Advertising and marketing 64,616 51,441 Rent and office expenses 151,941 285,076 Insurance 232,637 278,885 General and administrative, Other 515,338 928,728 Total $ 5,644,981 $ 5,959,344 Effective January 1, 2022, the Company entered into an employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway received a $250,000 contract renewal bonus (included in the year ended December 31, 2022) and receives 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, OES began compensating Mr. Conway $20,000 in March 2022, and OED began compensating Mr. Conway $20,000 per month beginning in April 2022. There was no stock-based compensation for the year ended December 31, 2023. Stock based compensation, other, for the year ended December 31, 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 year ended December 31, 2022, the Company included $135,000 in stock compensation expense. ● $1,249 of amortization of stock compensation for shares issued in April 2021. Termination costs of $1,755,082 for the year ended December 31, 2023, was a result of storage fees for goods that remained at a third-party warehouse and purchase order termination fees charged by the Company’s solar panel supplier, all of which was in connection with an early termination of vendor agreement. Salaries, taxes, and benefits decreased for the year ended December 31, 2023, compared to December 31, 2022. The decrease was a result of the termination on November 1, 2022, of all Ozop Energy Systems California employees. The decrease was partially offset by Ozop Engineering and Design (“OED”) and EV Insurance (“EV”) company having employees for the full year in 2023 and OED beginning in April 2022, and EV in October 2022, respectively. Year ended December 31, 2023 2022 Ozop Energy Systems $ 277,641 $ 953,504 Ozop Engineering and Design 549,128 314,586 EV Insurance Company 136,038 35,175 Total $ 962,807 $ 1,303,265 13 Ozop Energy Systems currently has 2 employees with an aggregate annual salary of $204,000 and focused on the battery storage system, information technology and general and administrative functions. The solar distribution of this vertical is being managed by our financial consultant and the Company’s CEO. OED currently has five employees with an aggregate annual compensation of $478,000 and a daily consultant when needed. EV Insurance Company has one employee with annual compensation of $125,000. Professional and consulting fees decreased for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease is due to the expiration of certain consulting contracts and accounting fees. These decreases were partially offset by increases in legal expenses and auditing fees. Advertising and marketing expenses increased for the year ended December 31, 2023, compared to December 31, 2022. The increases were related to website development, lead generation costs, and trade show participation. Rent and office expenses (including supplies, utilities, and internet costs) decreased for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease was a result that effective March 1, 2023, OES subleased the Carlsbad office and warehouse to a third party. Insurance expenses decreased for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease was the result of the termination of the west coast employees in November 2022, resulting in no health insurance and workers compensation expenses related thereto. The decrease was reduced by the health insurance costs for OED for the full year ended December 31, 2023, compared to less than a full year for the year ended December 31, 2022. The Company estimates that the monthly insurance expense to be approximately $20,000 per month. General and administrative expenses decreased from $928,728 for the year ended December 31, 2022, to $515,338 for the year ended December 31, 2023. There were decreases in credit card fees of $130,384, building expenses of $144,998, investor relations of $92,702, freight out of $79,251, and travel and meals and entertainment of $31,064. These decreases of $478,399 were partially offset by increases in depreciation expense of $28,851 and other increases of $36,158. Other Income (Expenses) Other expense, net for the year ended December 31, 2023, was $1,139,220 compared to Other income, net, for the year ended December 31, 2022, of $10,763,570 and were as follows. Year ended December 31, 2023 2022 Interest expense $ 4,351,333 $ 8,438,861 (Gain) loss on change in fair value of derivatives (3,212,113 ) (19,202,431 ) Total other expense (income), net $ 1,139,220 $ (10,763,570 ) The decrease in interest expense for the year ended December 31, 2023, is primarily a result of the amortization period of certain note discounts that were completed in 2022. For the year ended December 31, 2023, the Company recognized gains on the change in the fair value of derivatives less than the gains for the year ended December 31, 2022. Net income (loss), attributable to the Company Net loss attributable to the Company for the year ended December 31, 2023, was $7,369,681 compared to net income attributable to the Company for the year ended December 31, 2022, of $6,025,812. The change was primarily a result of the gain on the change in fair value of derivatives of $3,212,113 for the year ended December 31, 2023, compared to $19,202,431 for the year ended December 31, 2022. The loss for the year ended December 31, 2023, also included the termination costs of $1,755,082 and inventory write down costs of $1,495,978. Liquidity and Capital Resources 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 December 31, 2023, the Company had an accumulated deficit of $218,670,480 and a working capital deficit of $27,002,353 (including derivative liabilities of $1,216,078). As of December 31, 2023, the Company was in default of $3,315,000 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. 14 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 in Note 2 to the consolidated financial statements filed herein. For the year ended December 31, 2023, we primarily funded our business operations with the existing cash on hand as of January 1, 2023, and $1,828,263 received from sales of common stock. As of December 31, 2023, we had cash of $1,446,029 as compared to $1,369,210 as of December 31, 2022. As of December 31, 2023, we had current liabilities of $29,782,234 (including $1,216,078 of non-cash derivative liabilities), compared to current assets of $2,779,881, which resulted in a working capital deficit of $27,002,353. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, lease obligations, deferred liability, notes payable and liabilities of discontinued operations. Operating Activities For the year ended December 31, 2023, net cash used in operating activities was $799,282 compared to $8,599,296 for the year ended December 31, 2022. For the year ended December 31, 2023, our net cash used in operating activities was primarily attributable to the net loss of $7,369,681, the gain on the change in fair value of derivatives of $3,212,113, and $250,000 of income on forfeited customer deposit, adjusted by non-cash items of the termination expense of $1,755,082, interest expense of $1,465,518, the inventory write-down of $1,495,978 and amortization and depreciation of $230,134. Net changes of $5,107,251 in operating assets and liabilities reduced the cash used in operating activities. For the year ended December 31, 2022, our net cash used in operating activities was primarily attributable to the net income of $5,496,140, adjusted by non- cash interest expense of $5,938,622, stock-based compensation of $136,249 and the non-cash expenses of amortization and depreciation of $191,818. This was offset by the gain on the fair value changes in derivatives related to warrants and convertible notes of $19,202,431. Net changes of $1,551,000 in operating assets and liabilities increased the cash used in operating activities. Investing Activities For the year ended December 31, 2023, the net cash used in investing activities was $2,162, compared to $65,202 for the year ended December 31, 2022. 15 Financing Activities For the year ended December 31, 2023, the net cash provided by financing activities was $878,263, compared to $3,401,514 for the year ended December 31, 2022. During the year ended December 31, 2023, we received $1,828,263, net of issuance costs, from the sales of common stock to GHS, and we made payments of $950,000 for notes payable. During the year ended December 31, 2022, we received $2,510,000 of proceeds from the issuance of $3,020,000 promissory note and $1,141,514, net of issuance costs, from the sales of common stock to GHS. During the year ended December 31, 2022, we made payments of $250,000 for notes payable. Critical Accounting Estimates Our significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies to be most critical to the judgement and estimates used in the preparation of our financial statements: 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. 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. 16 OFF BALANCE SHEET ARRANGEMENTS We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for smaller reporting companies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Financial Statement Schedules appearing on pages F1-F27 of this annual report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.