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 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 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. 12 On August 19, 2021, the Company formed Ozop Capital Partners, Inc. (“Ozop Capital”), a Delaware corporation and a wholly owned subsidiary of the 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 insurance company 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. 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 customers systems to coordinate the understanding of electrical usage with the relationship between lighting design and lighting controls, by developing more efficient ecofriendly designs. We work with architects, engineers, facility managers, electrical contractors and engineers. On June 11, 2024, the Company formed Automated Room Controls, Inc. (“ARC”) a Nevada corporation, as a wholly owned subsidiary of the Company. ARC was created to address a significant need in the lighting controls industry. We believe that easy deployment and creative applications can transform lighting controls into essential tools for enhancing the utility and ambiance of any space. The Company’s mission is to deliver cutting-edge technology that simplifies complex control needs, ensuring seamless integration and exceptional performance. 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. 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. 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. 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 October 23, 2024, Ozop Capital Partners, Inc. entered into an agreement with Empire Auto Protect (“Empire”). Under the agreement, Empire will white label Royal Administration’s Fully Charged VSC, to be marketed as Empire Plus. OZOP Plus will be ceded the battery premium portion of all of the Empire Plus VSC’s contracted. 13 ARC has developed 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 proceedings which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as income from discontinued operations in the accompanying consolidated financial statements for the years ended December 31, 2025, and 2024. Results of Operations for the years ended December 31, 2025, and 2024: Revenue For the year ended December 31, 2025, the Company generated revenue of $307,421 compared to $1,342,653 for the year ended December 31, 2024. Revenues from Ozop Energy Systems, Inc. (“OES”) and Automated Room Controls, Inc. (“ARC”) are classified as sourced and distributed products. Ozop Engineering and Design (“OED”) revenues are classified as design and installation. Sales are summarized as follows: Year ended December 31, 2025 2024 Sourced and distributed products $ 105,709 $ 1,042,022 Design and installation 201,712 300,631 Total $ 307,421 $ 1,342,653 Sales of sourced and distributed products for the year ended December 31, 2024, included $728,640, pursuant to the YHS Settlement. Excluding this, sales of sourced and distributed products (solar product) were significantly lower for the year ended December 31, 2025, compared to December 31, 2024. 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 our decision to not currently place additional orders for solar products. Sales of sourced and distributed products for the year ending December 31, 2025, also includes $93,613 of revenues from ARC, which started to generate revenue during 2025. Design and installation revenues decreased for the year ended December 31, 2025, compared to December 31, 2024, as the prior year included $162,000 for a one-time large installation job. Cost of sales and gross margin For the years ended December 31, 2025, and 2024, the Company recognized $220,765 and $1,187,180, respectively, of cost of sales. Year ended December 31, 2025 2024 Sourced and distributed products $ 80,454 $ 945,931 Design and installation 140,311 107,224 Inventory write down - 134,025 $ 220,765 $ 1,187,180 14 During the year ended December 31, 2024, 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 $134,025 (the “Inventory Adjustment”) to the historical cost of inventory purchased. Design and installation cost of sales is comprised of OED’s labor costs for each job. Year ended December 31, 2025 2024 Gross margin 28.2 % 11.6 % The increase in gross margin percentage is primarily related to the Inventory Adjustment of $134,025 during the year ended December 31, 2024, causing a lower gross margin that year. The Company recognized a gross margin on solar products (OES) of 11.8% for the year ended December 31, 2025, compared to (3.6%) for the year ended December 31, 2024. The gross margin on design and installation of 30.4% for the year ended December 31, 2025, compared to 64.3% for the year ended December 31, 2024, a result of a customer agreement effective October 1, 2024, who compensates the Company based on hourly rate for actual hours worked as compared to a higher daily rate the Company received from other customers during the year ended December 31, 2024. ARC products had a gross margin of 25.5% for the year ended December 31, 2025. Operating expenses Total operating expenses for the years ended December 31, 2025, and 2024, were $3,058,483 and $3,619,155, respectively. The operating expenses were comprised of: Year ended December 31, 2025 2024 Management fees, related parties $ 960,000 $ 960,000 Travel expenses 39,806 95,784 Stock compensation expense 40,000 - Salaries, taxes, and benefits 500,505 839,027 Professional and consulting fees 844,500 770,982 Advertising and marketing 68,194 106,705 Rent and office expenses 73,135 151,940 Research and development costs 46,832 183,897 Building repairs and maintenance 58,207 53,318 Insurance 193,524 202,668 General and administrative, Other 233,780 254,834 Total $ 3,058,483 $ 3,619,155 Effective January 1, 2022, the Company entered into an employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway 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. Currently, the subsidiaries of Ozop Capital, OES and OED, each compensates Mr. Conway $20,000 per month. Travel expenses decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, as the Company had lower travel expenses related to Systems and OED as a result of decreased sales. 15 Stock based compensation of $40,000 during the year ended December 31, 2025, related to the Company issuing an aggregate of 40,000 post reverse split (200,000,000 prior to the reverse split) shares of common stock pursuant to a Service Agreement (including amendments) with a third party. Salaries, taxes, and benefits decreased for the year ended December 31, 2025, compared to December 31, 2024. Ozop Energy Systems (“OES”) currently has 1 employee with an aggregate annual salary of $72,000 and focused on general and administrative functions. The solar distribution of this vertical is being managed by our financial consultant and the Company’s CEO. Effective July 1, 2025, OED has two part-time employees paid on an hourly basis for hours spent on travel to and from a job and hours spent on the job. Effective October 1, 2025, the hourly compensation of $40,323 was expensed to cost of sales. Prior to October 1, 2025, OED had full time employees and allocated $99,988 and $85,878 of salaries to cost of sales for the years ended December 31, 2025, and 2024, respectively.ARC is being managed by our financial consultant, our OES employee, and the Company’s CEO. During 2024, Ozop Capital Partners had 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 Company allocates salaries and related expenses to the appropriate subsidiary for where their services are being performed. The expenses per subsidiary, included in operating expenses for the years ended December 31, 2025, and 2024, are as follows: Year ended December 31, 2025 2024 Ozop Energy Systems $ 134,234 $ 217,226 Ozop Engineering and Design 70,832 354,100 Ozop Capital Partners/EV Insurance Company 137,679 125,530 Automated Room Controls 157,760 142,171 Total $ 500,505 $ 839,027 Professional and consulting fees increased for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase is due to the Company received $125,000 pursuant to the YHS settlement, that was credited to legal fees for the year ended December 31, 2024. Advertising and marketing expenses decreased for the year ended December 31, 2025, compared to December 31, 2024, as result of the Company attending less trade shows in the current year compared to the prior year. Research and development costs decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, due to the development and testing of the ARC products substantially occurred during the year ending December 31, 2024. Insurance expenses decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024. The decrease was the result of the Company not renewing the credit insurance policy for OES, which terminated April 30, 2024. The Company estimates that the monthly insurance expense to be approximately $15,000 per month. Rent and office expense (including storage, supplies, utilities, and internet costs) decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, because of $71,208 expenses incurred by OES for storage fees in the year ended December 31, 2024, (no such storage fees in the year ended December 31, 2025). During the year ended December 31, 2025, the Company sold their building and entered into a new lease agreement effective September 1, 2025. General and administrative expense other, decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024. There were decreases in depreciation ($28,182), meals and entertainment ($16,891), investor relation expenses ($4,861) and other net decreases ($1,218), which were substantially offset by increases in merchant, credit card and bank fees $11,519, transfer agent and filing fees $15,562, freight expenses $3,017. 16 Other (Income) Expenses Other expense, net for the year ended December 31, 2025, was $5,740,716 compared to $2,738,052 for the year ended December 31, 2024, and were as follows. Year ended December 31, 2025 2024 Interest expense $ 4,205,938 $ 4,014,997 Loss (gain) on change in fair value of derivatives 1,621,028 (1,005,585 ) Gain on sale of building to a related party (86,250 ) - Gain on litigation settlement - (271,360 ) Total other expense, net $ 5,740,716 $ 2,738,052 The increase in interest expense for the year ended December 31, 2025, is primarily a result of new amortization related to the initial debt discounts for new convertible notes and new promissory notes issued, including the Exchange Agreement, partially offset by the amortization period of certain note discounts that were completed during the year ended December 31, 2024. For the year ended December 31, 2025, the Company recognized a loss on the change in the fair value of derivatives. For the year ended December 31, 2024, the Company recognized gains on the change in the fair value of derivatives. For the years ended December 31, 2025, and 2024, the Company recognized a gain of $86,250 for the sale of a building to a related party and a gain of $271,360 on the settlement with YHS, respectively. Net loss Net loss attributable to the Company for the year ended December 31, 2025, was $8,712,543 compared to $6,198,161, for the year ended December 31, 2024. 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, 2025, the Company had an accumulated deficit of $233,581,184 and a working capital deficit of $39,740,819. As of December 31, 2025, the Company was in default of $18,714,423 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 not be sufficient to provide the working capital needed for our current business, and, 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, 2025, we primarily funded our business operations with the existing cash on hand as of January 1, 2025, cash received from collection of accounts receivable, $573,000 from the issuances of convertible notes payable, $392,168 received from sales of common stock, $100,000 received in the sale of building to a related party, and $350,000 from the issuances of promissory notes payable. 17 As of December 31, 2025, we had cash of $266,431 as compared to $797,139 as of December 31, 2024. As of December 31, 2025, we had current liabilities of $40,178,567, compared to current assets of $437,748, which resulted in a working capital deficit of $39,740,819. The current liabilities are comprised of accounts payable and accrued expenses, related party liabilities, convertible debt, derivative liabilities, lease obligations, deferred liability, notes payable, and liabilities of discontinued operations. Operating Activities For the year ended December 31, 2025, net cash used in operating activities was $1,792,386 compared to $1,850,146 for the year ended December 31, 2024. For the year ended December 31, 2025, our net cash used in operating activities was primarily attributable to the net loss of $8,712,543, the gain on the sale of building to a related party of $86,250, adjusted by the loss on the change in fair value of derivatives of $1,621,028, non-cash interest expense of $1,166,614, stock based compensation of $40,000, and amortization and depreciation of $208,553. Net changes of $3,970,212 in operating assets and liabilities reduced the cash used in operating activities. For the year ended December 31, 2024, our net cash used in operating activities was primarily attributable to the net loss of $6,198,161, the gain on the change in fair value of derivatives of $1,005,585, adjusted by non-cash interest expense of $1,119,461, the inventory write-down of $134,025 and amortization and depreciation of $214,372. Net changes of $3,889,315 in operating assets and liabilities reduced the cash used in operating activities. Investing Activities For the year ended December 31, 2025, the net cash used in investing activities was $53,490, resulting from the sale of the building to a related party of $100,000, less a loan to related party of $150,000, and the purchase of office and computer equipment of $3,490. For the year ended December 31, 2024, the net cash used in investing activities was $11,114 primarily due to purchase of office and computer equipment. Financing Activities For the year ended December 31, 2025, the net cash provided by financing activities was $1,315,168 of which $573,000 was net proceeds received from issuance of convertible notes, $392,168 from the sales of common stock to GHS, net of issuance costs, and $350,000 from the issuances of promissory notes payable. For the year ended December 31, 2024, the net cash provided by financing activities was $1,212,370, from the sales of common stock to GHS, net of issuance costs. Critical Accounting Policies and Estimates The Company’s consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of its consolidated financial statements and related disclosures requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements. The Company bases its estimates on historical experience, known trends and events and various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more details in Note 3 to our financial statements appearing elsewhere in this Annual Report on Form 10-K. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. The SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our management believes that given current facts and circumstances, there are no material estimates or assumptions with levels of subjectivity and judgement necessary to be considered critical accounting policies and estimates, except for following. 18 Convertible Instruments and Derivatives 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. If the instrument contains embedded conversion features or other terms that require bifurcation under ASC 815, these features are separated from the host contract and recorded as derivative liabilities at fair value. Derivative liabilities are remeasured at fair value at each reporting date, with changes in fair value recognized in the consolidated statements of operations. The Company accounts for derivative financial instruments in accordance with Accounting Standards Codification (ASC) 815, Derivatives and Hedging. Under this guidance, the Company evaluates whether an embedded feature within a financial instrument is required to be accounted for separately as a derivative. Embedded derivatives that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that are not eligible for the scope exceptions under ASC 815, are bifurcated from the host instrument and accounted for as separate derivative financial instruments. These derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value, with changes in fair value recognized in the consolidated statements of operations in the period in which they occur. The Company uses the Monte Carlo simulation valuation method to estimate the fair value of (i) the embedded conversion feature that is required to be bifurcated from the debt host contract and (ii) warrants under certain circumstances (collectively, the derivative financial instruments). The Monte Carlo simulation valuation method requires the input or use of highly subjective assumptions, including the expected volatility of the Company’s common stock, which management estimates based on implied and/or historical volatility over a comparable period. Changes in this subjective input assumption could materially affect the fair value estimate of the derivative financial instruments. 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.