OZOP ENERGY SOLUTIONS, INC. 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 theSecurities 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 ofthe 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 inthe 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 COMPANYOzop Energy Solutions, Inc. (the "Company," "we," "us" or "our") was originally incorporated asNewmarkt Corp. onJuly 17, 2015 , under the laws of theState of Nevada .
OnDecember 11, 2020 , the Company formedOzop Energy Systems, Inc. ("OES"), aNevada corporation and a wholly owned subsidiary of the Company. OES was formed to be a manufacturer and distributor of renewable energy products. 32
OnOctober 29, 2020 , the Company formed a new wholly owned subsidiary,Ozop Surgical Name Change Subsidiary, Inc. , aNevada 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 theNevada Secretary of State, merging the Merger Sub into the Company, which were stamped effective as ofNovember 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 fromOzop Surgical Corp. to "Ozop Energy Solutions, Inc. " OnAugust 19, 2021 , the Company formedOzop Capital Partners, Inc. ("Ozop Capital "), aDelaware corporation. The Company is the majority shareholder ofOzop Capital withPJN Holdings LLC , aNew York limited liability company, being the minority shareholder.Ozop Capital was formed as a holding company and seeks to develop a captive insurance company.Brian Conway was appointed as the sole officer and director ofOzop Capital and has voting control ofOzop Capital . Stock Purchase Agreement
OnJuly 10, 2020 , the Company entered into a Stock Purchase Agreement (the "SPA") withPower Conversion Technologies, Inc. , aPennsylvania corporation ("PCTI"), andCatherine 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 ofPCTI , which represents all of the outstanding shares ofPCTI , 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 withPCTI as the accounting acquirer in accordance withFinancial 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 ofPCTI prior to the reverse merger, in all future filings with theU.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.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 includethe United States military, other global military organizations and many of the world's largest industrial manufacturers. All of its products are manufactured inthe 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.
Stock Redemption Agreement
OnJuly 13, 2021 , the Company entered into a Definitive Agreement (the "Agreement") with Chis to purchase the 47,500 shares of the Company's Series C Preferred Stock held by Chis and the 18,667 shares of the Company's Series D Preferred Stock held by Chis for the total purchase price of$11,250,000 .
Results of Operations for the three and nine months ended
The following discussion relates to the historical financial statements ofPCTI for the 2020 period, and for the period endedSeptember 30, 2021 , the consolidated financial statements include the assets, liabilities and results of operations ofPCTI and Ozop. 33 Revenue For the three and nine months endedSeptember 30, 2021 , the Company generated revenue of$4,783,342 and$6,852,929 , compared to$246,951 and$1,493,592 for the three and nine months endedSeptember 30, 2020 . Sales are summarized as
follows:
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Sourced and distributed products $ 4,716,608 $ - $ 5,971,590 $ -
Manufactured products 66,734 246,951 881,339 1,493,592
Total $ 4,783,342 $ 246,951 $ 6,852,929 $ 1,493,592
Cost of sales
For the three and nine months ended September 30, 2021 , the Company recognized
$4,485,316 and $5,926,693 , respectively, of cost of sales compared to $271,510
and $1,366,672 , for the three and nine months ended September 30, 2020 ,
respectively.
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Sourced and distributed products $ 4,370,680 $ - $ 5,575,557 $ -
Manufactured products 114,636 271,510 351,136 1,366,672
Total $ 4,485,316 $ 271,510 $ 5,926,693 $ 1,366,672
Based on the above cost of sales, gross margin (loss) was 6.2% and 13.5% for the
three and nine months ended September 30, 2021 , respectively, compared to 9.9%
and 8.5% for the three and nine months ended September 30, 2020 , respectively.
The increase of gross margin for the current periods is a result of the
manufactured orders shipped in the 2021 period was at a higher margin than the
manufactured orders were in the three and six months ended September 30, 2020 .
While the improved margin was partially offset by the lower margins we
recognized on the sourced and distributed products, gross profit dollars
increased from the sale of sourced and distributed products. While management
expects the sourced and distributed margins to rise during the remainder of 2021
and beyond, the overall margin of the Company will decrease due to significantly
higher revenues that will be coming from the sourced and distributed products.
While the overall margin will be reduced the higher gross profit dollars
generated from the higher sourced and distributed products revenues will benefit
the Company.
Operating expenses
Total operating expenses for the three and nine months endedSeptember 30, 2021 , were$1,890,619 and$12,039,394 , respectively, compared to$4,830,641 and$5,151,483 for the three and nine months endedSeptember 30, 2020 , respectively. For the three and nine months endedSeptember 30, 2020 , operating expenses were those ofPCTI only throughJuly 10, 2020 . Subsequent toJuly 10, 2020 and for the three and nine months endedSeptember 30, 2021 , operating expenses were comprised ofPCTI , Ozop,OES and Ozop Capital . The operating expenses were
comprised of:
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2021 2021 2020 2020
Wages and management fees,
related parties, including
stock-based compensation $ 125,583 $ 3,701,665 $ 4,415,919 $ 4,415,919
Stock-based compensation, other 668,711 5,784,656 - -
Salaries, taxes and benefits 362,801 791,294 96,285 287,917
Professional and consulting fees 291,047 857,254 168,472 187,259
Advertising and marketing 9,882 38,426
44,158 47,325
Rent and office expense 82,232 172,463 46,374 71,820
Insurance 76,308 133,822 34,321 44,246General and administrative 274,055 559,814
25,112 96,997
Total operating expenses $ 1,890,619 $ 12,039,394 $ 4,830,641 $ 5.151.483
34
Wages and management fees- related parties, include amounts paid to our CEO and to the President (resignedJuly 2021 ) ofPCTI . The CEO is eligible for additional bonuses as approved by the Board of Directors of the Company. BeginningJanuary 1, 2021 , the CEO is compensated$20,000 per month and effectiveSeptember 1, 2021 , an additional$10,000 per month for the management ofOzop Capital . For the three and nine months endedSeptember 30, 2021 , the Company's CEO's total compensation was$70,000 and$3,559,999 . Included in the compensation was stock-based compensation of$2,850,000 related to the issuance of Series E Preferred Stock, for the nine months endedSeptember 30, 2021 . The Company recorded expenses forPCTI's President (resignedJuly 2021 ) of$55,583 and$141,666 for the three and nine months endedSeptember 30, 2021 , respectively.
Stock based compensation, other for the three and nine months ended
? 5,000,000 shares issued in
agreement. The Company valued the shares at
of the common stock on the date of the agreement), and
as deferred stock compensation, to be amortized over the one-year term of the
agreement. For the nine months ended
in stock-based compensation expense.
? 10,000,000 shares issued in
agreement. The Company valued the shares at
price of the common stock on the date of the agreement), and
recorded as deferred stock-based compensation, to be amortized over the
one-year term of the agreement. For the three and nine months ended September
30, 2021, the Company recorded
stock-based compensation expense.
? 5,000,000 shares issued in
shares at
of the agreement), and
expense for the nine months ended
? 10,000,000 shares issued for services. The shares were valued at
share, the date the Company agreed to issue the shares. For the nine months
ended
expense.
? 10,000,000 shares issued pursuant to a consulting agreement dated February
24, 2021 (see Note 12). The shares were valued at
nine months ended
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
shares were valued at
2021, the Company included
5,000,000 shares of common stock.
? Issuance of 200 shares and 950 shares of Series E Preferred Stock, with a
redemption value of
of
? 5,000,000 shares of common stock to be issued in the aggregate to two
employees pursuant to their offers of employment dated
shares were valued at
September 30, 2021 , the Company included$372,500 in stock compensation expense for the 5,000,000 shares of common stock. 35
? 452,080 shares of common stock issued for services (see Note 12). The shares
were valued at
date of the agreement), and
expense for the three and nine months ended September 30, 2021 .
Salaries, taxes and benefits increased for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020. Included in the increase are the cost of OES employees in the 2021 periods compared to the 2020 periods. TheCalifornia operation of OES has annual gross payroll of approximately$538,000 . In addition to theCalifornia employees, OES has annual gross payroll of$309,000 covering business development, sales, administration and IT. Professional and consulting fees increased for the three and nine months endedSeptember 30, 2021 , compared to the three and nine months endedSeptember 30, 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 the Company's business plan regarding distribution of renewable energy products, the inclusion ofOzop Capital's consultants as well as an increase in legal fees in the current period. The Company's consolidated current monthly consulting fees is$109,000 .
Advertising and marketing expenses decreased for the three and nine months endedSeptember 30, 2021 , compared to the three and nine months endedSeptember 30, 2020 . The decrease was related to marketing programs during the three months endedSeptember 30, 2020 , including brand awareness programs for bothPCTI
and Ozop.
Rent and office expense (including supplies, utilities and internet costs) increased for the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 . The increase was the result of including in the current three- and nine-month periods, rent and office expense of approximately$11,415 and$34,542 , respectively for Ozop, and$50,570 and$69,011 , respectively for OES. The Company estimates that the monthly OES rent and office expense for theCalifornia operation to be approximately$18,000
per month. Other Income (Expenses) Other (income) expenses, for the three and nine months endedSeptember 30, 2021 , and 2020, were as follows: Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Interest expense$ 4,130,983 $ 1,531,256 $ 49,006,069 $ 1,661,308 (Gain) loss on change in fair value of derivatives (17,483,300 ) 189,612 25,892,783 189,612 (Gain) loss on extinguishment of debt - (12,807 ) 95,437,587 (12,807 ) Debt restructure expense - - 16,450,000 -
Total other (income) expense
For the three months endedSeptember 30, 2021 , the Company recognized a gain on the change in fair value of derivatives. The gain was partially offset by interest expense related to the amortization of debt discounts. The increase in other expense for the nine months endedSeptember 30, 2021 , 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 for the nine months endedSeptember 30, 2021 , 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. Net loss For the three months endedSeptember 30, 2021 , the Company recorded net income of$11,714,723 compared to net loss of$6,563,262 for the three months endedSeptember 30, 2020 . The change was a result of the other income recognized in the current quarter as described above, partially offset by the operating results described above. For the nine months endedSeptember 30, 2021 , the increase in the loss to$197,989,597 compared to the nine months endedSeptember 30, 2020 , was primarily a result of an increase in other expenses of$185,038,326 as described above, and an increase of$4,348,008 in stock-based compensation expenses as well as the operating results discussed above. 36
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 nine months endedSeptember 30, 2021 , we primarily funded our business operations with$12,000,000 of proceeds received pursuant to the issuances of promissory notes and$13,100,000 received from the Series D SPA (see Note 13). Of the proceeds,$5,000,000 was used for the redemption of 5,000 shares of Series E Preferred Stock and$11,250,000 was used for the redemption of Chis's Series C and Series D Preferred Stock (see Note 11). As ofSeptember 30, 2021 , we had cash of$3,915,057 as compared to$1,808,476 atDecember 31, 2020 . As ofSeptember 30, 2021 , we had current liabilities of$39,898,712 (including$26,515,186 of non-cash derivative liabilities), compared to current assets of$9,277,298 , which resulted in a working capital deficit of$30,621,414 . The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, customer deposits, lease obligations and notes payable. InDecember 2019 , a novel strain of coronavirus (COVID-19) emerged. Because COVID-19 infections have been reported throughoutthe 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 nine months endedSeptember 30, 2021 , net cash used in operating activities was$6,230,871 compared to$878,327 for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , our net cash used in operating activities was primarily attributable to the net loss of$197,989,597 , adjusted by loss on debt extinguishment of$95,437,589 , non- cash interest expense of$47,842,575 (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$25,892,783 , debt restructuring costs of$16,450,000 , stock-based compensation of$8,834,656 and the non-cash expenses of interest and amortization and depreciation of$126,634 . Net changes of$2,625,212 in operating assets and liabilities increased the cash used in operating activities, primarily as a result of the start-up of the Company'sCalifornia operations in the support of inventory and accounts receivable. For the nine months endedSeptember 30, 2020 , net cash used in operating activities from continuing operations was$878,327 compared to$36,262 for the nine months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , our net cash used in operating activities was primarily attributable to the net loss of$6,862,676 , adjusted by stock-based compensation of$4,286,648 , the non-cash expenses of interest and amortization and depreciation of$1,447,935 and losses on the fair value changes in derivatives of$189,612 . Net changes of$72,960 in operating assets and liabilities reduced the cash used in operating activities. 37 Investing Activities For the nine months endedSeptember 30, 2021 , the net cash used in investing activities was$109,767 , compared to$454,616 net cash provided by investing activities for the nine months endedSeptember 30, 2020 . The current period amount was a result of the Company purchasing office furniture and equipment. For the nine months endedSeptember 30,2020 , the amount included$16,233 for purchases of office furniture and equipment as well as$470,849 cash acquired in thePCTI transaction. Financing Activities For the nine months endedSeptember 30, 2021 , the net cash provided by financing activities was$8,447,219 , compared to$2,102,593 for the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , we received$12,000,000 of proceeds from the issuances of$13,30,000 face value of promissory notes and$13,100,000 (net of costs) from the Series D SPA. During the nine months endedSeptember 30, 2021 , the Company acquired 47,500 shares of Series C Preferred Stock and 18,667 shares of Series D Preferred Stock from Chis or$11,250,000 , redeemed 5,000 shares of the Series E Preferred Stock for$5,000,000 , and repaid$389,147 of notes payable and$13,634 to shareholders. For the nine months endedSeptember 30, 2020 , the Company received proceeds of$750,000 pursuant to an obligation to pay a perpetual 1.8% fee of revenues,$400,000 in advances from Affiliate,$663,000 from the issuance of notes payable,$289,000 from the issuance of convertible notes payable,$100,400 from the Payroll Protection Program,$42,420 from shareholders and made payments on notes payable of$46,224 and paid$56,765 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 inthe United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of theSEC . Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted inthe 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 ofSeptember 30, 2021 , and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months endedSeptember 30, 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 onMay 15, 2021 . The unaudited condensed consolidated financial statements include the accounts of the Company andPCTI and the Company's other wholly owned subsidiariesOzop Energy Systems, Inc. ,Ozop LLC, Ozop HK and Spinus, LLC ("Spinus"), and the Company's majority owned subsidiaryOzop Capital Partners, Inc. All intercompany accounts and transactions have been eliminated in consolidation. 38 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted inthe 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. Revenue Recognition EffectiveJanuary 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 and nine months endedSeptember 30, 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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