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 unaudited 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. 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 consolidated 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. 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. Equipment Distributor: 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. The Company 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. Our Neo-Grid TM System offers (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. 3 The Company 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. 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. 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. 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. OED is developing a product branded OZOP ARC. OZOP ARC is an advanced lighting controls system, intricately engineered to integrate sophisticated wired and wireless technologies. At its core, it employs a hybrid network topology that facilitates both resilient wired connections and flexible wireless communications, making it suitable for complex infrastructural environments. The system is equipped with an array of sensors and control nodes, enabling precise light management and energy usage monitoring. With support for protocols such as DALI and Zigbee, alongside the capability for seamless integration with IoT platforms, OZOP ARC offers a comprehensive solution for intricate lighting networks. This system is designed not just for control and efficiency, but also for adaptability to diverse architectural and electrical layouts, embodying a technical solution for advanced, energy-conscious lighting management. 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 income from discontinued operations in the accompanying unaudited consolidated financial statements for the three months ended March 31, 2024, and 2023. 4 Results of Operations for the three months ended March 31, 2024, and 2023: Revenue For the three months ended March 31, 2024, the Company generated revenue of $251,722 compared to $2,791,198 for the three months ended March 31, 2023. Revenues from Ozop Energy Systems, Inc. (“OES”) are classified as sourced and distributed products. Revenues from Ozop Engineering and Design (“OED”) are classified as design and installation. Sales are summarized as follows: Three months ended March 31, 2024 2023 Sourced and distributed products $ 75,222 $ 2,758,798 Design and installation 176,500 32,400 Total $ 251,722 $ 2,791,198 Sales of sourced and distributed products (solar product) were significantly lower for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. 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. Design and installation revenues increased for the three months ended March 31, 2024, as the Company received additional and larger installation jobs. Cost of sales For the three months ended March 31, 2024, and 2023, the Company recognized $115,445 and $2,394,700, respectively, of cost of sales. Three months ended March 31, 2024 2023 Sourced and distributed products $ 63,331 $ 2,394,700 Design and installation 52,114 - Total $ 115,445 $ 2,394,700 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. Pursuant to the Inventory Adjustment, the Company recognized a gross margin on solar products of 15.8% for the three months ended March 31, 2024, compared to 13.2% for the three months ended March 31, 2023. Design and installation cost of sales is comprised of OED’s labor costs for each job. Operating expenses Total operating expenses for the three months ended March 31, 2024, and 2023, were $968,763 and $1,069,762 respectively. The operating expenses were comprised of: Three months ended March 31, 2024 2023 Management fees, related parties $ 240,000 $ 240,000 Salaries, taxes, and benefits 193,494 266,804 Professional and consulting fees 254,827 281,008 Advertising and marketing 15,671 17,772 Rent and office expenses 83,604 55,116 Insurance 60,976 48,391 General and administrative, other 120,191 160,671 Total $ 968,763 $ 1,069,762 5 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. Effective January 1, 2022, the Company entered into a new employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway will receive 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. Currently, the subsidiaries of Ozop Capital, OES and OED, each compensates Mr. Conway $20,000 per month. For the three months ended March 31, 2024, and 2023, the Company recorded expenses to Mr. Conway of $240,000 or each period. Salaries, taxes, and benefits decreased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Ozop Energy Systems currently has 2 employees with an aggregate annual salary of $204,000 and focused on 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. OED has allocated $52,114 of salaries to cost of sales for the three months ended March 31, 2024. EV Insurance Company has one employee with annual compensation of $125,000. The expenses per subsidiary included in operating expenses for the three months ended March 31, 2024, and 2023, are as follows: Three months ended March 31, 2024 2023 Ozop Energy Systems $ 55,637 $ 79,701 Ozop Engineering and Design 103,716 152,852 EV Insurance Company 34,141 34,251 Total $ 193,494 $ 266,804 Professional and consulting fees decreased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease is due to the expiration of certain consulting contracts and legal fees related to the YHS litigation. These decreases were partially offset by increases in general legal expenses and auditing fees. Advertising and marketing expenses decreased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Rent and office expense (including storage, supplies, utilities, and internet costs) increased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase is the result of $55,890 expenses incurred by OES for storage fees, partially offset by decreased rent expense that on March 1, 2023, OES has subleased the Carlsbad office and warehouse to a third party. Insurance expense increased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was the result of increases in the Company’s general liability insurance. The Company estimates that the monthly insurance expense to be approximately $20,000 per month. 6 Other (Income) Expenses Other expense, net, for the three months ended March 31, 2024, was $594,882 compared to $1,859,651 for the three months ended March 31, 2023, and were as follows. Three months ended March 31, 2024 2023 Interest expense $ 1,056,887 $ 1,221,533 (Gain) loss on change in fair value of derivatives (462,005 ) 638,118 Total other (income) expense, net $ 594,882 $ 1,859,651 The decrease in interest expense for the three months ended March 31, 2024, is primarily a result of the amortization period of certain note discounts that were completed in 2023. Interest expense on the face value of the principal balances of the notes payable increased due to the increased rate as a result of note defaults and extended maturity dates. For the three months ended March 31, 2024, the Company recognized a gain of $462,005 on the change in the fair value of derivatives compared to a loss of $638,118 for the three months ended March 31, 2023. Net loss Net loss attributable to the Company for the three months ended March 31, 2024, was $1,423,795 compared to $2,527,552 for the three months ended March 31, 2023. The change was primarily a result of the gain of $462,005 on the change in fair value of derivatives for the three months ended March 31, 2024, compared to a loss of $638,115 for the three months ended March 31, 2023. The decrease in gross profit for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, partially offset the gain on the change in the fair value of derivatives. Liquidity and Capital Resources The accompanying unaudited 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 March 31, 2024, the Company had an accumulated deficit of $220,094,725 and a working capital deficit of $28,047,674 (including derivative liabilities of $754,073). As of March 31, 2024, 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. 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 unaudited consolidated financial statements filed herein. For the three months ended March 31, 2024, we primarily funded our business operations with the existing cash on hand as of January 1, 2024, cash received from accounts receivable, and $350,555 received from sales of common stock. As of March 31, 2024, we had cash of $1,154,964 as compared to $1,446,029 as of December 31, 2023. As of March 31, 2024, we had current liabilities of $30,435,548 (including $754,073 of derivative liabilities), compared to current assets of $2,387,874, which resulted in a working capital deficit of $28,047,674. 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. 7 Operating Activities For the three months ended March 31, 2024, net cash used in operating activities was $641,620 compared to net cash provided by operating activities of $611,373 for the three months ended March 31, 2023. For the three months ended March 31, 2024, our net cash used in operating activities was primarily attributable to the net loss of $1,423,795, the gain on the change in fair value of derivatives of $462,005, adjusted by non-cash items of interest expense of $332,990, and amortization and depreciation of $52,870. Net changes of $861,893 in operating assets and liabilities reduced the cash used in operating activities. For the three months ended March 31, 2023, our net cash provided by operating activities was primarily attributable to the net loss of $2,527,552, adjusted by non-cash items of the loss on the fair value change of derivatives of $638,118, interest expense of $500,568, and amortization and depreciation of $55,912. Net changes of $1,949,690 in operating assets and liabilities added to the cash provided by operating activities. Investing Activities There were no investing activities for the three months ended March 31, 2024. For the three months ended March 31, 2023, the net cash used in investing activities was $2,162. Financing Activities For the three months ended March 31, 2024, the net cash provided by financing activities was $350,555, net of issuance costs, from the sales of common stock to GHS. For the three months ended March 31, 2023, the net cash used in financing activities was $23,607. During the three months ended March 31, 2023, we received $526,393, net of issuance costs, from the sales of common stock to GHS. During the three months ended March 31, 2023, we made payments of $550,000 for notes payable. Critical Accounting Policies and Estimates 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 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. 8 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. 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 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.