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. Modular Energy Distribution System: The NeoVolt ™ System comprises 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. Our NeoVolt 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. The Company has developed a business plan for NeoVolt™, a scalable battery storage solution that aims to relieve the stress on existing grid infrastructure by providing distributed energy storage. With the first stage of engineered technical drawings completed, we are advancing to stage two and preparing to construct the initial prototype or proof of concept (PoC). NeoVolt™ is designed with advanced features, including automatic adoption of connected devices and dynamic load balancing through a master-slave configuration. These capabilities enable NeoVolt™ to seamlessly integrate with and manage energy flows across multiple devices. Furthermore, the PoC is contingent upon recent advancements in EV charging and discharging standardizations, including on-board inverters and bi-directional capabilities, to ensure compatibility and efficiency in both residential and commercial applications. 3 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 specializes in lighting commissioning services. On September 27, 2024, OED signed an agreement with Leviton Manufacturing Co, Inc., to serve as a field service technician for their advanced lighting control systems. On June 11, 2024, the Company formed Automated Room Controls, Inc. (“ARC”). ARC is developing products to be 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, 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 and nine months ended September 30, 2024, and 2023. 4 Results of Operations for the three and nine months ended September 30, 2024, and 2023: Revenue For the three and nine months ended September 30, 2024, the Company generated revenue of $74,286 and $1,267,980, respectively, compared to $172,559 and $4,205,083 for the three and nine months ended September 30, 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 September 30, Nine months ended September 30, 2024 2023 2024 2023 Sourced and distributed products $ 51,104 $ 155,009 $ 1,005,878 $ 4,127,633 Design and installation 23,182 17,550 262,102 77,450 Total $ 74,286 $ 172,559 $ 1,267,980 $ 4,205,083 Sales for the nine months ended September 30, 2024, included $728,640, pursuant to the YHS Settlement. Excluding this, sales of sourced and distributed products (solar products) were significantly lower for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 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 and nine months ended September 30, 2024, as the Company received additional and larger installation jobs. Cost of sales For the three and nine months ended September 30, 2024, the Company recognized $50,863 and $989,955, respectively, of cost of sales, compared to $126,438 and $4,255,030, respectively, for the three and nine months ended September 30, 2023. Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Sourced and distributed products $ 43,440 $ 126,438 $ 916,627 $ 3,630,030 Design and installation 7,423 - 73,328 - Inventory write down - - - 625,000 Total $ 50,863 $ 126,438 $ 989,955 $ 4,255,030 During the nine months ended September 30, 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 $625,000 (the “Inventory Adjustment”) to the historical cost of inventory purchased. Gross margin of sourced and distributed products was 15% and 8.9% for the three and nine months ended September 30, 2024, respectively, compared to 18.4% and 12.1% (prior to the Inventory Adjustment) for the three and nine months ended September 30, 2023, respectively. The downward trend in gross profit margin is due to the continued decline in selling price because of market competition. Design and installation cost of sales is comprised of OED’s labor costs for each job. 5 Operating expenses Total operating expenses for the three and nine months ended September 30, 2024, were $963,460 and $2,740,395, respectively, compared to $2,637,795 and $4,670,627, respectively, for the three and nine months ended September 30, 2023. The operating expenses were comprised of: Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Wages and management fees, related parties, including stock-based compensation $ 240,000 $ 240,000 $ 720,000 $ 720,000 Salaries, taxes, and benefits 220,094 212,240 618,271 733,334 Professional and consulting fees 219,144 213,392 596,381 734,338 Advertising and marketing 6,805 15,911 35,354 47,081 Rent and office expenses 18,969 16,689 131,395 88,118 Insurance 43,536 71,815 151,526 188,412 Travel 13,950 32,215 77,307 106,398 Termination costs - 1,755,082 - 1,755,082 General and administrative, other 200,962 80,451 410,161 297,864 Total operating expenses $ 963,460 $ 2,637,795 $ 2,740,395 $ 4,670,627 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 and nine months ended September 30, 2024, and 2023, the Company recorded expenses to Mr. Conway of $240,000 and $720,000, respectively. Salaries, taxes, and benefits increased for the three months and decreased for the nine months ended September 30, 2024, compared to the three and nine months ended September 30, 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 $498,000. OED has allocated $7,423 and $73,328, respectively, of salaries to cost of sales for the three and nine months ended September 30, 2024, and employees with an annual salary of $210,000 are being expensed effective July 1, 2024, to Automated Room Controls, Inc, (“ARC”). Ozop Capital Partners has one employee with annual compensation of $125,000 (terminated in July 2024), and hired a new employee on September 3, 2024, with an annual salary of $144,000. The expenses per subsidiary included in operating expenses for the three and nine months ended September 30, 2024, and 2023, are as follows: Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Ozop Energy Systems $ 51,787 $ 70,956 $ 162,325 $ 213,051 Ozop Engineering and Design 81,679 107,697 301,326 418,832 Automated Room Controls, Inc. 58,917 - 58,917 - Ozop Capital Partners/EV Insurance Company 27,711 33,587 95,703 101,451 Total $ 220,094 $ 212,240 $ 618,271 $ 733,334 Professional and consulting fees increased slightly for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, and decreased for the nine months ended September 30, 2024, compared to the nine months ended September 30, 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 and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023. Rent and office expense (including storage, supplies, utilities, and internet costs) increased for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023. The increase for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, is the result of $71,208, for the current nine months of 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. Effective May 7, 2024, there is not any additional storage charges. 6 Insurance expense decreased for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023. The decrease was the result of the Company not renewing the credit insurance policy for OES, which terminated April 30, 2024. Termination costs of $1,755,082 for the three and nine months ended September 30, 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. Other (Income) Expenses Other (income) expense, net, for the three and nine months ended September 30, 2024, was $1,153,046 and $2,349,872, respectively, compared to ($2,265,254) and $1,576,860, respectively, for the three and nine months ended September 30, 2023, and were as follows. Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Interest expense $ 1,056,866 $ 1,039,735 $ 3,170,633 $ 3,300,944 (Gain) loss on change in fair value of derivatives 96,180 (3,304,989 ) (549,401 ) (1,724,084 ) Gain on litigation settlement - - (271,360 ) - Total other (income) expense, net $ 1,153,046 $ (2,265,254 ) $ 2,349,872 $ 1,576,860 The increase in other expense, net for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, is primarily a result of the Company recognizing a gain of $3,304,989 in the three months ended September 30, 2023, on the change in the fair value of derivatives compared to a loss of $96,180 in the three months ended September 30, 2024. For the nine months ended September 30, 2024, the Company recognized a gain of $549,401 compared to a gain of $1,724,084 for the nine months ended September 30, 2023, respectively, on the change in the fair value of derivatives. Additionally for the nine months ended September 30, 2024, the Company recognized a gain of $271,360 on the settlement with YHS. Net loss Net loss attributable to the Company for the three and nine months ended September 30, 2024, was $2,093,083 and $4,808,669, respectively, compared to $321,058 and $6,281,346, respectively, for the three and nine months ended September 30, 2023. The change for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, was a combination of a decrease in gross profit of $22,698, reduced operating expenses of $1,674,335 (mostly related to the loss associated with early termination of vendor agreement of $1,755,082 for the three months ended September 30, 2023), and increased other expenses, net, of $3,418,300, as described above. The change for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, was a combination of an increase in gross profit of $327,972, reduced operating expenses of $1,930,232 (mostly related to the loss associated with early termination of vendor agreement of $1,755,082 for the nine months ended September 30, 2023), and increased other expenses, net, of $773,012, as described above. 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 September 30, 2024, the Company had an accumulated deficit of $223,479,149 and a working capital deficit of $30,760,584 (including derivative liabilities of $666,677). As of September 30, 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. 7 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 nine months ended September 30, 2024, we primarily funded our business operations with the existing cash on hand as of January 1, 2024, cash received from accounts receivable, and $979,048 received from sales of common stock. As of September 30, 2024, we had cash of $1,354,636 as compared to $1,446,029 as of December 31, 2023. As of September 30, 2024, we had current liabilities of $32,398,711 (including $666,677 of derivative liabilities), compared to current assets of $1,638,127, which resulted in a working capital deficit of $30,760,584. 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 nine months ended September 30, 2024, net cash used in operating activities was $1,059,327 compared to $901,293 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, our net cash used in operating activities was primarily attributable to the net loss of $4,808,669, the gain on the change in fair value of derivatives of $549,401, adjusted by non-cash items of interest expense of $998,970, and amortization and depreciation of $160,988. Net changes of $3,142,358 in operating assets and liabilities reduced the cash used in operating activities. For the nine months ended September 30, 2023, our net cash used in operating activities was primarily attributable to the net loss of $6,281,346, and the gain on the change in fair value of derivatives of $1,724,084, adjusted by non-cash items of the termination expense of $1,755,082, interest expense of $1,138,067, the inventory write-down of $625,000 and amortization and depreciation of $172,470. Net changes of $3,429,606 in operating assets and liabilities reduced the cash used in operating activities. Investing Activities For the nine months ended September 30, 2024, and 2023 the net cash used in investing activities was $11,114 and $2,162, respectively, primarily due to purchase of office and computer equipment. Financing Activities For the nine months ended September 30, 2024, the net cash provided by financing activities was $979,048, net of issuance costs, from the sales of common stock to GHS. For the nine months ended September 30, 2023, the net cash provided by financing activities was $500,537. During the nine months ended September 30, 2023, we received $1,200,537, net of issuance costs, from the sales of common stock to GHS. During the nine months ended September 30, 2023, we made payments of $700,000 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: 8 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. 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.