The following is management's discussion and analysis of certain significant
factors that have affected our financial position and operating results during
the periods included in the accompanying condensed consolidated financial
statements, as well as information relating to the plans of our current
management. This report includes forward-looking statements. Generally, the
words "believes," "anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters
set forth in this report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those projected. Undue reliance
should not be placed on these forward-looking statements which speak only as of
the date hereof. We undertake no obligation to update these forward-looking
statements.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance, or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results.
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States ("GAAP"). These accounting principles
require us to make certain estimates, judgments, and assumptions. We believe
that the estimates, judgments, and assumptions upon which we rely are reasonable
based upon information available to us at the time that these estimates,
judgments, and assumptions are made. These estimates, judgments, and assumptions
can affect the reported amounts of assets and liabilities as of the date of the
financial statements as well as the reported amounts of revenues and expenses
during the periods presented. Our financial statements would be affected to the
extent there are material differences between these estimates.
The following discussion should be read in conjunction with our unaudited
financial statements and the related notes that appear elsewhere in this
Quarterly Report on Form 10-Q.
THE COMPANY
Ozop Energy Solutions, Inc. (the "Company," "we," "us" or "our") was originally
incorporated as Newmarkt Corp. on July 17, 2015, under the laws of the State of
Nevada.
On December 11, 2020, the Company formed Ozop Energy Systems, Inc. ("OES"), a
Nevada corporation and a wholly owned subsidiary of the Company. OES was formed
to be a manufacturer and distributor of renewable energy products.
On October 29, 2020, the Company formed a new wholly owned subsidiary, Ozop
Surgical Name Change Subsidiary, Inc., a Nevada corporation ("Merger Sub"). The
Merger Sub was formed under the Nevada Revised Statutes for the sole purpose and
effect of changing the Company's name to "Ozop Energy Solutions, Inc." That same
day the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement") with the Merger Sub and filed Articles of Merger (the "Articles of
Merger") with the Nevada Secretary of State, merging the Merger Sub into the
Company, which were stamped effective as of November 3, 2020. As permitted by
the Section 92.A.180 of the Nevada Revised Statutes, the sole purpose and effect
of the filing of Articles of Merger was to change the name of the Company from
Ozop Surgical Corp. to "Ozop Energy Solutions, Inc."
Stock Purchase Agreement
On July 10, 2020, the Company entered into a Stock Purchase Agreement (the
"SPA") with Power Conversion Technologies, Inc., a Pennsylvania corporation
("PCTI"), and Catherine Chis ("Chis"), PCTI's Chief Executive Officer ("CEO")
and its sole shareholder. Under the terms of the SPA, the Company acquired one
thousand (1,000) shares of PCTI, which represents all of the outstanding shares
of PCTI, from Chis in exchange for the issuance of 47,500 shares of the
Company's Series C Preferred Stock, 18,667 shares of the Company's Series D
Preferred Stock, and 500 shares of the Company's Series E Preferred Stock to
Chis. The Acquisition is being accounted for as a business combination and was
treated as a reverse acquisition for accounting purposes with PCTI as the
accounting acquirer in accordance with Financial Accounting Standards Board
Accounting Standards Codification Topic 805, Business Combinations ("ASC 805").
In accordance with the accounting treatment for a reverse acquisition, the
Company's historical financial statements prior to the reverse merger were and
will be replaced with the historical financial statements of PCTI prior to the
reverse merger, in all future filings with the U.S. Securities and Exchange
Commission (the "SEC"). The consolidated financial statements after completion
of the reverse merger have and will include the assets, liabilities and results
of operations of the combined company from and after the closing date of the
reverse merger.
25
PCTI designs, develops, manufactures and distributes standard and custom power
electronic solutions. PCTI serves clients in several industries including energy
storage, shore power, DEWs, microgrid, telecommunications, military,
transportation, renewable energy, aerospace and mission critical defense
systems. Customers include the United States military, other global military
organizations and many of the world's largest industrial manufacturers. All of
its products are manufactured in the United States. Because of the Company's
product scope and the high-power niche that their products occupy, the Company
is aggressively targeting the rapidly growing renewable and energy storage
markets. The Company's mission is to be a global leader for high power
electronics with a standard of continued innovation.
Results of Operations for the three months ended March 31, 2021 and 2020:
The following discussion relates to the historical financial statements of PCTI
for the 2020 period, and for the period ended March 31, 2021, the consolidated
financial statements include the assets, liabilities and results of operations
of PCTI and Ozop.
Revenue
For the three months ended March 31, 2021, the Company generated revenue of
$795,554, compared to $892,590 for the three months ended March 31, 2020. All of
the revenues were related to PCTI. A different customer was responsible for a
significant amount of the revenue. In the 2021 period one customer accounted for
$757,021 (95%), while in the 2020 period a different customer accounted for
$819,817 (92%) of revenues.
Cost of sales
For the three months ended March 31, 2021, the Company recognized226,909 of cost
of sales compared to $663,323, for the three months ended March 31, 2020. The
significant increase of gross margin from approximately 27% for the prior period
compared to approximately 71% for the current period is a result of the order
shipped in the 2021 period was at a higher margin.
Operating expenses
Total operating expenses for the three months ended March 31, 2021, and 2020,
were $5,789,470 and $152,500, respectively. The operating expenses were
comprised of:
Three Months Ended March 31,
2021 2020
Wages and management fees, related parties $ 315,008 $ -
Stock-based compensation
4,902,000 -
Salaries, taxes and benefits 186,580 98,630
Professional and consulting fees 172,325 5,350
Advertising and marketing 22,590 6,106
Rent and office expenses 41,394 16,494
Insurance 12,075 5,979
General and administrative, other 137,498 19,941
Total $ 5,789,470 $ 152,500All of the above amounts include consolidated expenses incurred by PCTI and Ozop
for the three months ended March 31, 2021, and only PCTI for the three months
ended March 31, 2020.
Wages and management fees- related parties, include amounts paid to our CEO and
to the President of PCTI, our wholly-owned subsidiary. Both the CEO and
President are eligible for additional bonuses as approved by the Board of
Directors of the Company. Beginning January 1, 2021, the CEO is to be
compensated $20,000 per month, and the President of PCTI monthly compensation
was $13,000. For the three months ended ended March 31, 2021, the Company's
CEO's total compensation was $279,999 and PCTI's President was compensated
$35,009.
26
Stock based compensation for the three months ended March 31, 2021, of
$2,902,000 is comprised of the following stock issuances:
? 10,000,000 shares issued for services. The shares were valued at $0.0056 per
share, the date the Company agreed to issue the shares. During the three
months ended March 31, 2021, the Company included $56,000 in stock
compensation expense.
? 10,000,000 shares issued pursuant to a consulting agreement dated February
24, 2021 (see Note 11). The shares were valued at $0.2836 per share. During
the three months ended March 31, 2021, the Company included $2,836,000 in
stock compensation expense.
? 5,000,000 shares of common stock to be issued in the aggregate to two new
employees pursuant to their offers of employment dated March 31, 2021. The
shares were valued at $0.23 per share. During the three months ended March 31,
2021, the Company included $460,000 in stock compensation expense for the
5,000,000 shares of common stock to be issued. The shares were issued in April
2021.
? Issuance of 2,000 shares of Series E Preferred Stock, with a redemption value
of $1,000 per share, resulting in stock compensation expense of $2,000,000 for
the three months ended March 31, 2021.
Salaries, taxes and benefits increased for the three months ended March 31,
2021, compared to the same period in 2020. The increase was a result of
increased sales and administrative personnel at PCTI, as well as $40,000 paid
for signing bonuses to the two new OES employees. OES now has annual payroll of
gross payroll of $360,000 with additional personnel to be hired by the end of
the quarter ending June 30, 2021. The additional personnel are for sales as well
as administrative and warehouse support.
Professional and consulting fees increased for the three months ended March 31,
2021, compared to March 31, 2020. The increase was due to accounting and
auditing expenses of Ozop included in the current period, the engagement of
various consultants by OES as we initiate their business plan regarding
distribution of renewable energy products, as well as an increase in legal fees
in the current period.
Advertising and marketing expenses increased for the three months ended March
31, 2021, compared to March 31, 2020. The increase was related to marketing
programs during 2021, including brand awareness programs for both PCTI and Ozop.
Rent and office expense (including supplies, utilities and internet costs)
increased for the three months ended March 31, 2021 compared to the three months
ended March 31, 2020. The increase was the result of including in the current
period, rent and office expense of approximately $14,986 for Ozop.
Other Income (Expenses)
Other expenses, net, for the three months ended March 31, 2021, and 2020, was
$204,271,543 and $7,349, respectively, and were as follows.
Three Months Ended
March 31,
2021 2020
Interest expense $ 39,237,294 $ 7,349
Amortization of debt discount 1,417,456 -
Loss on change in fair value of derivatives 52,197,902 -
Loss on debt restructure 16,450,000
Loss on extinguishment of debt 94,968,891 -
Total other expense, net $ 204,271,543 $ 7,349The increase in other expense is primarily a result of loss on extinguishment of
debt related to the market value of shares of common stock issued in excess of
the debt and accrued interest extinguished. The Company also issued 175,000,000
shares of restricted common stock related to the restructure of the deferred
liability (see Note 9). The shares were valued at $0.094 per share and the
Company recognized $16,450,000 of restructuring costs. Included in interest
expense is the initial $38,907,939 of fair value related to the issuance of
300,000,000 warrants. In addition, the increases were the result of the
amortization of debt discounts and losses on changes in fair values of
derivatives, related to convertible notes and warrants.
27
Net loss
The net loss for the three months ended March 31, 2021, was $209,492,368,
compared to net income of $69,418 for the three months ended March 31, 2020. The
increase was primarily a result of an increase in other expenses of
$204,264,194, $4,902,000 in stock based compensation expenses as well as the
operating results discussed above.
Liquidity and Capital Resources
Currently, our current capital and our other existing resources will be
sufficient to provide the working capital needed for our current business,
however, additional capital will be required to meet our debt obligations, and
to further expand our business. We may be unable to obtain the additional
capital required. If we are unable to generate capital or raise additional funds
when required it will have a negative impact on our business development and
financial results. These conditions raise substantial doubt about our ability to
continue as a going concern as well as our recurring losses from operations,
deficit in equity, and the need to raise additional capital to fund operations.
This "going concern" could impair our ability to finance our operations through
the sale of debt or equity securities. Management's plans in regard to these
factors are discussed below and also in Note 2 to the condensed consolidated
financial statements filed herein.
For the three months ended March 31, 2021, we primarily funded our business
operations with $12,000,000 of proceeds received pursuant to the issuances of
promissory notes. Of the proceeds, $3,000,000 was used for the redemption of
3,000 shares of Series E Preferred Stock.
As of March 31, 2021, we had cash of $9,792,364 as compared to $1,808,476 at
December 31, 2020. As of March 31, 2021, we had current liabilities of
$83,313,472 (including $65,778,694 of non-cash derivative liabilities), compared
to current assets of $11,225,181, which resulted in a working capital deficit of
$72,088,291. The current liabilities are comprised of accounts payable, accrued
expenses, convertible debt, derivative liabilities and notes payable.
In December 2019, a novel strain of coronavirus (COVID-19) emerged. Because
COVID-19 infections have been reported throughout the United States, certain
federal, state and local governmental authorities have issued stay-at-home
orders, proclamations and/or directives aimed at minimizing the spread of
COVID-19. The ultimate impact of the COVID-19 pandemic on the Company's
operations is unknown and will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the duration of the
COVID-19 outbreak, new information which may emerge concerning the severity of
the COVID-19 pandemic, and any additional preventative and protective actions
that governments, or the Company, may direct, which may result in an extended
period of continued business disruption, and reduced operations. Any resulting
financial impact cannot be reasonably estimated at this time but it may have a
material adverse impact on our business, financial condition and results of
operations. Management expects that its business will be impacted to some
degree, but the significance of the impact of the COVID-19 outbreak on the
Company's business and the duration for which it may have an impact cannot be
determined at this time.
Operating Activities
For the three months ended March 31, 2021, net cash used in operating activities
was $966,126 compared to cash provided by operating activities of $32,999 for
the three months ended March 31, 2020. For the three months ended March 31,
2021, our net cash used in operating activities was primarily attributable to
the net loss of $209,492,368, adjusted by loss on debt extinguishment of
$94,968,892, non- cash interest expense of $40,414,627 (including $38,907,939
for the initial fair value of the 300,000,000 warrants issued), losses on the
fair value changes in derivatives related to warrants and convertible notes of
$52,197,902, debt restructuring costs of $16,450,000, stock-based compensation
of $4,902,000 and the non-cash expenses of interest and amortization and
depreciation of $8,327. Net changes of $415,506 in operating assets and
liabilities reduced the cash used in operating activities.
For the year ended March 31, 2020, net cash provided by operating activities of
$32,999 was primarily attributable to the net income of $69,418 reduced by the
net changes of $36,420 in operating assets and liabilities.
28
Investing Activities
For the three months ended March 31, 2021, the net cash used in investing
activities was $35,306, compared to $392 for the three months ended March 31,
2020. The amounts for both periods were a result of the Company purchasing
office furniture and equipment.
Financing Activities
For the three months ended March 31, 2021, the net cash provided by financing
activities was $8,985,320, compared to $101.240 for the three months ended March
31, 2020. During the three months ended March 31, 2020, we received $12,000,000
of proceeds from the issuances of $13,30,000 face value of promissory notes.
During the three months ended March 31, 2021, the Company redeemed 3,000 shares
of the Series E Preferred Stock for $3,000,000 and repaid $3,089 of notes
payable and $11,591 to shareholders.
For the three months ended March 31, 2020, the Company received $85,000 from the
issuance of a note payable $32,691 from shareholders and made payments on notes
payable of $11,669 and paid $4,782 to shareholders.
OFF BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements including arrangements that would
affect our liquidity, capital resources, market risk support and credit risk
support or other benefits.
Critical Accounting Policies
Our significant accounting policies are described in more details in the notes
to our financial statements appearing elsewhere in this Quarterly Report on Form
10-Q. We believe the following accounting policies to be most critical to the
judgement and estimates used in the preparation of our unaudited condensed
consolidated financial statements:
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and with the
instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC.
Accordingly, they do not contain all information and footnotes required by
accounting principles generally accepted in the United States of America for
annual financial statements. In the opinion of the Company's management, the
accompanying unaudited condensed consolidated financial statements contain all
the adjustments necessary (consisting only of normal recurring accruals) to
present the financial position of the Company as of March 31, 2021, and the
results of operations and cash flows for the periods presented. The results of
operations for the three months ended March 31, 2021, are not necessarily
indicative of the operating results for the full fiscal year or any future
period. These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements and related notes thereto
included in the Company's Annual Report on Form 10-K filed on May 15, 2021. The
unaudited condensed consolidated financial statements of the Company include the
consolidated accounts of the Company and its' wholly owned subsidiaries; PCTI,
Ozop LLC, Ozop HK and Spinus. All intercompany accounts and transactions have
been eliminated in consolidation.
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.
29
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 - Revenue from Contracts
with Customers. Under ASC 606, the Company recognizes revenue from the
commercial sales of products, licensing agreements and contracts to perform
pilot studies by applying the following steps: (1) identify the contract with a
customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each
performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied. For the comparative periods, revenue has
not been adjusted and continues to be reported under ASC 605 - Revenue
Recognition. Under ASC 605, revenue is recognized when the following criteria
are met: (1) persuasive evidence of an arrangement exists; (2) the performance
of service has been rendered to a customer or delivery has occurred; (3) the
amount of fee to be paid by a customer is fixed and determinable; and (4) the
collectability of the fee is reasonably assured. There was no impact on the
Company's financial statements as a result of adopting Topic 606 for the three
months ended March 31, 2021, and 2020.
Earnings (Loss) Per Share
The Company computes net loss per share in accordance with FASB ASC 260,
"Earnings per Share." ASC 260 requires presentation of both basic and diluted
earnings per share (EPS) on the face of the statement of operations. Basic EPS
is computed by dividing net income (loss) available to common shareholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period including stock options, using the treasury stock method, and
convertible notes and stock warrants, using the if-converted method. In
computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of
stock options, warrants and conversion of convertible notes. Diluted EPS
excludes all dilutive potential common shares if their effect is anti-dilutive.
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OZOP ENERGY SOLUTIONS, INC. 
