OZOP ENERGY SOLUTIONS, INC. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to____________
Commission File Number: 000-55976
OZOP ENERGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 35-2540672 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
55 Ronald Reagan Blvd.
Warwick, NY 10990
(Address of principal executive offices) (zip code)
(845) 544-5112
(Registrant’s telephone number, including area code)
42 N Main St.
Florida NY 10921
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
| (Do not check if a smaller reporting company) | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 14, 2022, there were shares outstanding of the registrant’s common stock, $0.001 par value per share.
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
| 2 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 2,063,235 | $ | 6,632,194 | ||||
| Prepaid expenses | 51,547 | 139,455 | ||||||
| Accounts receivable | 328,407 | 1,292,800 | ||||||
| Inventory | 1,197,883 | 788,110 | ||||||
| Vendor deposits | 2,880,150 | 830,869 | ||||||
| Assets of discontinued operations | 273,457 | 570,317 | ||||||
| Total Current Assets | 6,794,680 | 10,253,745 | ||||||
| Operating lease right-of-use asset, net | 540,005 | 633,497 | ||||||
| Property and equipment, net | 901,371 | 112,441 | ||||||
| Other Assets | 13,408 | 568,249 | ||||||
| TOTAL ASSETS | $ | 8,249,464 | $ | 11,567,933 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 4,686,427 | $ | 2,813,835 | ||||
| Convertible notes payable, net of discounts | 25,000 | 25,000 | ||||||
| Current portion of notes payable, net of discounts | 17,442,588 | 12,422,060 | ||||||
| Customer deposits | 178,353 | 73,420 | ||||||
| Deferred liability | 591,464 | 750,000 | ||||||
| Derivative liabilities | 5,652,218 | 20,966,701 | ||||||
| Operating lease liability, current portion | 130,070 | 120,177 | ||||||
| Liabilities of discontinued operations | 1,088,722 | 1,238,849 | ||||||
| Total Current Liabilities | 29,794,842 | 38,410,043 | ||||||
| Long Term Liabilities | ||||||||
| Note payable, net of discount | 389,423 | 389,423 | ||||||
| Operating lease liability, net of current portion | 419,112 | 517,890 | ||||||
| TOTAL LIABILITIES | 30,603,378 | 39,317,356 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred stock ( shares authorized, par value $) Series C Preferred Stock ( shares authorized and and shares issued and outstanding, par value $) | 3 | 3 | ||||||
| Series D Preferred Stock ( shares authorized and shares issued and outstanding, par value $) | 1 | 1 | ||||||
| Series E Preferred Stock ( shares authorized, -- issued and outstanding, par value $) | ||||||||
| Common stock ( shares authorized par value $; (2022) and (2021) shares issued and outstanding) | 4,706,018 | 4,617,363 | ||||||
| Common stock to be issued; 637,755 shares as of September 30, 2022, and December 31, 2021 | 638 | 638 | ||||||
| Additional paid in capital | 197,325,192 | 196,464,222 | ||||||
| Treasury Stock | (11,249,934 | ) | (11,249,934 | ) | ||||
| Accumulated Deficit | (212,351,054 | ) | (217,326,611 | ) | ||||
| Total Ozop Energy Solutions, Inc. stockholders’ equity (deficit) | (21,569,136 | ) | (27,494,318 | ) | ||||
| Noncontrolling interest | (784,777 | ) | (255,105 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | (22,353,913 | ) | (27,749,423 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 8,249,464 | $ | 11,567,933 | ||||
See notes to condensed consolidated financial statements.
| F-1 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | 3,928,918 | $ | 4,716,607 | $ | 11,614,117 | $ | 5,971,589 | ||||||||
| Cost of goods sold | 3,598,134 | 4,370,680 | 10,634,170 | 5,575,557 | ||||||||||||
| Gross profit | 330,784 | 345,927 | 979,947 | 396,032 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative, related parties | 220,000 | 70,000 | 850,000 | 3,559,999 | ||||||||||||
| General and administrative, other | 1,294,524 | 1,638,102 | 3,798,920 | 7,749,257 | ||||||||||||
| Total operating expenses | 1,514,524 | 1,708,102 | 4,648,920 | 11,309,256 | ||||||||||||
| Loss from continuing operations | (1,183,739 | ) | (1,362,174 | ) | (3,668,974 | ) | (10,913,224 | ) | ||||||||
| Other (income) expenses: | ||||||||||||||||
| Interest expense | 1,424,554 | 4,123,535 | 6,812,834 | 49,062,523 | ||||||||||||
| (Gain) loss on change in fair value of derivatives | (1,937,710 | ) | (17,438,300 | ) | (15,314,483 | ) | 25,892,783 | |||||||||
| Loss on extinguishment of debt | 95,437,587 | |||||||||||||||
| Debt restructure expense | 16,450,000 | |||||||||||||||
| Total Other (Income) Expenses | (513,156 | ) | (13,314,765 | ) | (8,501,649 | ) | 186,842,894 | |||||||||
| Net income (loss) from continuing operations before income taxes | (670,583 | ) | 11,952,591 | 4,832,675 | (197,756,118 | ) | ||||||||||
| Income tax provision | ||||||||||||||||
| Net income (loss) from continuing operations | $ | (670,583 | ) | $ | 11,952,591 | 4,832,675 | (197,756,118 | ) | ||||||||
| Net loss from discontinued operations | (33,970 | ) | (237,869 | ) | (386,792 | ) | (233,481 | ) | ||||||||
| Net income (loss) | (704,553 | ) | 11,714,722 | 4,445,884 | (197,989,599 | ) | ||||||||||
| Less: net loss attributable to noncontrolling interest | (169,565 | ) | (529,672 | ) | ||||||||||||
| Net income (loss) attributable to Ozop Energy Solutions, Inc. | $ | (534,988 | ) | $ | 11,714,722 | $ | 4,975,556 | $ | (197,989,599 | ) | ||||||
| Income (loss) from continuing operations per share of common stock basic and fully diluted | $ | (0.00 | ) | $ | 0.00 | $ | 0.00 | $ | (0.05 | ) | ||||||
| Income (loss) from discontinuing operations per share of common stock basic and fully diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Income (loss) per share basic and fully diluted | $ | (0.00 | ) | $ | 0.00 | $ | 0.00 | $ | (0.05 | ) | ||||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic and diluted | 4,662,912,471 | 4,609,825,140 | 4,635,036,984 | 4,384,437,549 | ||||||||||||
See notes to condensed consolidated financial statements.
| F-2 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022
(Unaudited)
| Common stock to be issued | Series C Preferred Stock | Series D Preferred Stock | Common Stock | Treasury | Additional Paid-in | Accumulated | Noncontrolling | Total
Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Stock | Capital | Deficit | Interest | (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Balances January 1, 2022 | 637,755 | $ | 638 | 2,500 | $ | 3 | 1,334 | $ | 1 | 4,617,362,977 | $ | 4,617,363 | $ | (11,249,934 | ) | $ | 196,464,222 | $ | (217,326,611 | ) | $ | (255,105 | ) | $ | (27,749,423 | ) | ||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | 5,000,000 | 5,000 | 130,000 | 135,000 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (1,193,761 | ) | (187,708 | ) | (1,381,469 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2022 | 637,755 | 638 | 2,500 | 3 | 1,334 | 1 | 4,622,362,977 | 4,622,363 | (11,249,934 | ) | 196,594,222 | (218,520,372 | ) | (442,813 | ) | (28,995,892 | ) | |||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | 6,704,305 | (172,399 | ) | 6,531,906 | ||||||||||||||||||||||||||||||||||||||||||||
| Balances June 30, 2022 | 637,755 | 638 | 2,500 | 3 | 1,334 | 1 | 4,622,362,977 | 4,622,363 | (11,249,934 | ) | 196,594,222 | (211,816,067 | ) | (615,212 | ) | (22,463,986 | ) | |||||||||||||||||||||||||||||||||||
| Issuance of shares of common stock sold, net of issuance costs of $24,967 | - | - | - | 83,655,061 | 83,655 | 730,970 | 814,625 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (534,988 | ) | (169,565 | ) | (704,553 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balances September 30, 2022 | 637,755 | $ | 638 | 2,500 | $ | 3 | 1,334 | $ | 1 | 4,706,018,038 | $ | 4,706,018 | $ | (11,249,934 | ) | $ | 197,325,192 | $ | (212,351,055 | ) | $ | (784,777 | ) | $ | (22,353,913 | ) | ||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
| F-3 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)
| Common stock to be issued | Series C Preferred Stock | Series D Preferred Stock | Series E Preferred Stock | Common Stock | Treasury | Accumulated Comprehensive | Additional Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Stock | Loss | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances January 1, 2021 | 50,000 | $ | 50 | 20,000 | $ | 20 | 1,000 | $ | 1 | 3,397,958,292 | $ | 3,397,958 | $ | $ | (7 | ) | $ | 12,530,933 | $ | (22,278,665 | ) | $ | (6,349,710 | ) | ||||||||||||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | - | - | - | - | 428,747,654 | 428,748 | 97,110,282 | 97,539,030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon cashless exercise of warrants | - | - | - | - | 330,797,987 | 330,798 | 38,714,266 | 39,045,064 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series E Preferred Stock | - | - | - | 2,000 | 2 | - | 1,999,998 | 2,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series E Preferred Stock | - | - | - | (3,000 | ) | (3 | ) | - | (2,999,997 | ) | (3,000,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued and to be issued for fees and services | 5,000,000 | 5,000 | - | - | - | 20,000,000 | 20,000 | 2,877,000 | 2,902,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for lease agreement | - | - | - | - | 100,000,000 | 100,000 | 530,000 | 630,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for debt restructure | - | - | - | - | 175,000,000 | 175,000 | 16,275,000 | 16,450,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | 7 | (209,492,368 | ) | (209,492,361 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2021 | 5,000,000 | 5,000 | 50,000 | 50 | 20,000 | 20 | 4,452,503,933 | 4,452,504 | 167,037,482 | (231,771,033 | ) | (60,275,977 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued and to be issued for fees and services | (5,000,000 | ) | (5,000 | ) | - | - | - | 25,000,000 | 25,000 | 1,752,000 | 1,772,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon cashless exercise of warrants | - | - | - | - | 75,000,000 | 75,000 | 8,990,237 | 9,065,237 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | - | - | - | - | 54,406,964 | 54,407 | 4,945,593 | 5,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series E Preferred Stock | - | - | - | 2,000 | 2 | - | 1,999,998 | 2,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series E Preferred Stock | - | - | - | (2,000 | ) | (2 | ) | - | (1,999,998 | ) | (2,000,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (211,952 | ) | (211,952 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances June 30, 2021 | 50,000 | 50 | 20,000 | 20 | 4,606,910,897 | 4,606,911 | 182,725,312 | (231,982,985 | ) | (44,650,692 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for fees and services | - | - | - | 5,452,080 | 5,452 | 392,048 | 397,500 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of Series C and Series D stock for Treasury | - | (47,500 | ) | (48 | ) | (18,667 | ) | (19 | ) | - | - | (11,249,934 | ) | (11,250,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Sale of Series D Preferred Stock and warrants | - | - | 1 | - | - | 13,100,000 | 13,100,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 11,714,722 | 11,714,722 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances September 30, 2021 | $ | 2,500 | $ | 3 | 1,334 | $ | 1 | $ | 4,612,362,977 | $ | 4,612,363 | $ | (11,249,934 | ) | $ | $ | 196,217,360 | $ | (220,268,263 | ) | $ | (30,688,470 | ) | |||||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
| F-4 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) from continuing operations | $ | 4,832,675 | $ | (197,756,118 | ) | |||
| Net loss from discontinued operations | (386,792 | ) | (233,481 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in continuing operations | ||||||||
| Non-cash interest expense | 5,020,528 | 47,838,062 | ||||||
| Amortization and depreciation | 132,924 | 62,438 | ||||||
| Debt restructure expense | 16,450,000 | |||||||
| Loss on fair value change of derivatives | (15,314,483 | ) | 25,892,783 | |||||
| Loss (gain) on extinguishment of debt | 95,437,587 | |||||||
| Stock compensation expense | 136,249 | 8,634,656 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 964,393 | (1,265,134 | ) | |||||
| Inventory | (409,773 | ) | (1,323,952 | ) | ||||
| Prepaid expenses | 11,499 | (65,477 | ) | |||||
| Vendor deposits | (2,049,281 | ) | (1,236,042 | ) | ||||
| Accounts payable and accrued expenses | 1,714,058 | 1,447,353 | ||||||
| Accounts payable and accrued expenses, related | 10,000 | |||||||
| Operating lease liabilities | (88,885 | ) | (36,693 | ) | ||||
| Customer deposits | 104,932 | 228,231 | ||||||
| Net cash used in continued operations | (5,331,955 | ) | (5,915,786 | ) | ||||
| Net cash provided by (used in) discontinued operations | 146,733 | (434,456 | ) | |||||
| Net cash used in operating activities | (5,185,222 | ) | (6,350,242 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of office and computer equipment | (198,362 | ) | (101,816 | ) | ||||
| Net cash used in investing activities of continued operations | (198,362 | ) | (101,816 | ) | ||||
| Net cash used in investing activities of discontinued operations | (7,953 | ) | ||||||
| Net cash used in investing activities | (198,362 | ) | (109,769 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock, net of costs | 814,625 | |||||||
| Proceeds from issuances of notes payable | 12,000,000 | |||||||
| Proceeds from sale of Series D preferred stock and warrants | 13,100,000 | |||||||
| Payments of principal of convertible note payable and notes payable | (375,000 | ) | ||||||
| Redemption of Series E Preferred Stock | (5,000,000 | ) | ||||||
| Redemption of Series C and Series D Preferred Stock | (11,250,000 | ) | ||||||
| Net cash provided by financing activities | 814,625 | 8,475,000 | ||||||
| Net increase (decrease) in cash | (4,568,959 | ) | 2,014,989 | |||||
| Cash, Beginning of period | 6,632,194 | 1,628,747 | ||||||
| Cash, End of period | $ | 2,063,235 | $ | 3,643,736 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 29,025 | $ | 1,003,747 | ||||
| Cash paid for income taxes | $ | $ | ||||||
| Schedule of non-cash Investing or Financing Activity: | ||||||||
| Original issue discount included in notes payable | $ | $ | 1,310,000 | |||||
| Issuance of common stock upon convertible note and accrued interest conversion | $ | $ | 743,555 | |||||
| Operating lease right-of-use assets and liabilities | $ | $ | 702,888 | |||||
| Issuance of common stock and preferred stock for consulting fees and compensation | $ | 136,249 | $ | 7,965,945 | ||||
| Issuance of common stock for lease agreement | $ | $ | 630,000 | |||||
| Issuance of common stock for debt restructuring | $ | $ | 16,450,000 | |||||
See notes to condensed consolidated financial statements.
| F-5 |
OZOP ENERGY SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2022
(Unaudited)
NOTE 1 - ORGANIZATION
Business
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 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 () shares of PCTI, which represents all of the outstanding shares of PCTI, from Chis in exchange for the issuance of shares of the Company’s Series C Preferred Stock, shares of the Company’s Series D Preferred Stock, and shares of the Company’s Series E Preferred Stock to Chis.
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.
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.
NOTE 2 – GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying condensed 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, 2022, the Company had an accumulated deficit of $212,351,054 and a working capital deficit of $23,000,162 (including derivative liabilities of $5,652,218). As of September 30, 2022, the Company was in default of $15,369,247 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.
| F-6 |
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.
Management’s Plans
As a public company, Management believes it will be able to access the public equities market for fund raising for product development, sales and marketing and inventory requirements as we expand our distribution in the U.S. market.
The Company is in negotiations with its’ lenders related to the debt instruments that are currently in default, to extend the maturity dates.
On October 14, 2021, the Company received a Notice of effectiveness related to the Company’s Form S-3 Registration Statement (the “Registration Statement”). Pursuant to the Registration Statement the Company may offer and sell from time to time in one or more offerings of up to thirty million dollars ($) in aggregate offering price. We may offer these securities in amounts, at prices and on terms determined at the time of offering.
On April 4, 2022, the Company and GHS Investments LLC (“GHS”). signed a Securities Purchase Agreement (the “GHS Purchase Agreement”) for the sale of up to Two Hundred Million () shares of the Company’s common stock to GHS. We may sell shares of our common stock from time to time over a six (6)- month period ending October 4, 2022, at our sole discretion, to GHS under the GHS Purchase Agreement. The purchase price shall be 85% of lowest VWAP for the ten (10) days preceding the Company’s notice to GHS for the sale of the Company’s common stock. On April 8, 2022, the Company filed a Prospectus Supplement to the Registration Statement dated October 14, 2021, regarding the GHS Purchase Agreement. As of the date of this Report the Company has sold the following securities pursuant to this Registration Statement:
On July 15, 2022, the Company sold shares to GHS at $ and received net proceeds of $152,732, after deducting transaction and broker fees of $5,183.
On August 1, 2022, the Company sold shares to GHS at $ and received net proceeds of $81,451, after deducting transaction and broker fees of $2,708.
On August 4, 2022, the Company sold shares to GHS at $ and received net proceeds of $86,405, after deducting transaction and broker fees of $2,809.
On August 10, 2022, the Company sold shares to GHS at $ and received net proceeds of $191,577, after deducting transaction and broker fees of $4,956.
On August 30, 2022, the Company sold shares to GHS at $ and received net proceeds of $156,331, after deducting transaction and broker fees of $4,236.
| F-7 |
On September 15, 2022, the Company sold shares to GHS at $ and received net proceeds of $79,736, after deducting transaction and broker fees of $2,673.
On September 30, 2022, the Company sold shares to GHS at $ and received net proceeds of $66,393, after deducting transaction and broker fees of $2,401.
On October 17, 2022, the Company sold shares to GHS at $ and received net proceeds of $70,971, after deducting transaction and broker fees of $2,494.
OES is actively engaged 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. Our solar and energy storage projects involve large-scale battery and solar photovoltaics (PV) installations. Our utility-scale storage business model is based on an arbitrage business model in which we install multiple 1+ megawatt batteries, charge them with off-peak grid electricity under contract with the utility, then sell the power back during peak load hours at a premium, as dictated by prevailing electricity tariffs.
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.
| ● | In May 2022, the Company entered into an agreement with GS Administrators, Inc., a member of Houston-based GSFSGroup. Under the agreement, the Company will market GSFSGroup’s EV VSC’s in all states (except, California, Florida, Massachusetts and Washington) to Ozop’s network of new and used franchised dealerships and other eligible entities. In addition to acting as an agent for the marketing, Ozop also has the right to white label the product under its’ Ozop Plus brand. Ozop’s role won’t be limited to marketing the product. GSFSGroup plans to tap into Ozop’s experience relative to battery collection and disposal and has agreed to insurance risk sharing in connection with the insurance policies that back the VSC’s. GSFSGroup is working on getting the approvals needed for the above four (4) states. | |
| ● | On June 22, 2022, the Company entered into an Agent Agreement with Royal Administration Services, Inc. (“Royal”). Under the agreement, the Company will market Royal’s EV VSC’s and has the right to white label it under Ozop Plus. Royal has agreed to allow Ozop Plus on all VSC’s, marketed by Royal and the Company, to assume all of the risk related to the electric battery at an agreed upon premium. The battery premium is dependent on the consumer’s selection of the duration of the VSC, the miles selected for coverage and the type of vehicle that the consumer has purchased, with a key component being the kWh size of the battery. These VSC’s have a maximum of 10 years and 150,000 miles and cover new and used cars from model year 2017 and newer. Royal’s VSCs are now effective in 35 states and the others have various waiting times or approvals needed. |
| ● | On October 13, 2022, EVCO entered into a Reinsurance Contract (the “Contract”) with American Bankers Insurance Company of Florida (“ABIC” or the “Ceding Company”). Royal is the Administrator of the Contract. Pursuant to the terms of the Contract, ABIC will cede 100% of the battery coverage portion of all electric vehicle service contracts to EVCO. On the same date ABIC and EVCO also entered into a Trust Agreement, whereas EVCO as the reinsurer agrees to deposit an amount equal to unearned premium reserves, plus losses reported but unpaid, plus the estimated amount of losses incurred but not reported to the trust account. Permissible investments (with a maturity of no more than five (5) years) of the assets of the Trust account include: |
| ○ | U.S. Treasury Securities | |
| ○ | Cash or cash instruments | |
| ○ | U.S agency issues | |
| ○ | Other investments as Ceding Company approves |
| F-8 |
In April, 2022, OED began operations and has generated $38,100 of revenues and currently has six employees in sales, marketing installation and services. OED offers product and design support for lighting and solar projects with a focus on fast lead times and technical support.
On September 1, 2022, the Board of Directors of the Company authorized PCTI to file and prosecute to completion a Chapter 7 proceeding; that the best interest of creditors and other interested parties will be served thereby. The President of PCTI was authorized, empowered and directed, in the name of and on behalf of PCTI to execute and verify the Petition for Relief under the Bankruptcy Code as well as all other ancillary documents, and to cause the same to be filed in the United States Bankruptcy Court for the Western District of Pennsylvania. The Petition was filed on October 3, 2022; Case No. 22-21958-CMB.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
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 September 30, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2022, 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 Current Report on Form 10-K/A filed on April 26, 2022.
The unaudited condensed consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries; Ozop Energy Systems, Inc. Ozop Engineering and Design, Inc., PCTI, Ozop Capital Partners, Inc., EV Insurance Company, Inc., Ozop HK and Spinus, LLC (“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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. Cash and cash equivalent balances may, at certain times, exceed federally insured limits. The Company has no cash equivalents at September 30, 2022, and December 31, 2021.
Sales Concentration and credit risk
Following is a summary of customer(s) who accounted for more than ten percent (10%) of the Company’s revenues for the three and nine months ended September 30, 2022, and 2021, and their accounts receivable balance as of September 30, 2022:
| Sales
% Three Months Ended September 30, 2022 | Sales
% Nine Months Ended September 30, 2022 | Sales
% Three Months Ended September 30, 2021 | Sales
% Nine Months Ended September 30, 2021 | Accounts receivable balance September 30, 2022 | ||||||||||||||||
| Customer A | 77.5 | % | 44.5 | % | N/A | N/A | $ | 172,224 | ||||||||||||
| F-9 |
Accounts Receivable
The Company records accounts receivable at the time products and services are delivered. An allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectability is unlikely. The allowance (if any) is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the collectability of the accounts and prior loss experience.
Inventory
Inventories are valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Inventory costs include finished goods, material, labor and manufacturing overhead. In evaluating the net realizable value of inventory, management also considers, if applicable, other factors, including known trends, market conditions, currency exchange rates and other such issues. Finished goods inventories at September 30, 2022, and December 31, 2021, were $1,197,883 and $788,110, respectively. As of September 30, 2022, the Company has on deposit with vendor(s) approximately $2,870,000 and has a balance due of approximately $8,351,000. The remaining balance is partially due when the vendor ships the product, with the final balance due prior to delivery.
Purchase concentration
OES purchases finished renewable energy products from its’ suppliers. For the three months ended September 30, 2022, there was one supplier that accounted for 91.7%, and for the nine months ended September 30, 2022, there were four suppliers that accounted for 34.9%, 27.2%, 11.3% and 11.2%, respectively. For the three and nine months ended September 30, 2021, there were two suppliers that accounted for 46.8% and 20.1% and 38 and 23.4%%, respectively. There are only a handful of major suppliers, and we currently have supply arrangements with some of those vendors. One of these vendors requires a 20% down payment with the 30% balances due on shipment and 50% due prior to delivery, while other vendors terms are due in full immediately prior to delivery. We also buy product from other distributors, if we are not able to purchase direct from the manufacturer. While management believes all of its relationships with its vendors are good, if we are unable to continue to use and/or find alternative suppliers, when we cannot buy direct, it may have a material negative effect on our business
Property, plant and equipment
Property and equipment are stated at cost, and depreciation is provided by use of a straight-line method over the estimated useful lives of the assets.
The Company reviews property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. The estimated useful lives of property and equipment is as follows:
| Building and building improvements | 10-25 years | |
| Office furniture and equipment | 3-5 years | |
| Warehouse equipment | 7 years |
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, from the commercial sales of products by: (1) identify the contract (if any) with a customer; (2) identify the performance obligations in the contract (if any); (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract (if any); and (5) recognize revenue when each performance obligation is satisfied. The Company has no outstanding contracts with any of its’ customers. The Company recognizes revenue when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product and is based on the applicable shipping terms.
| F-10 |
For contracts with customers, ownership of the goods and associated revenue are transferred to customers at a point in time, generally upon shipment of a product to the customer or receipt of the product by the customer and without significant judgments. Advance payments are typically required for commercial customers and are recorded as current liability until revenue is recognized. Advance payments are not required for government customers. The majority of contracts typically require payment within 30 to 60 days after transfer of ownership to the customer.
For the periods covered herein, we did not have post shipment obligations such as training or installation, customer acceptance provisions, credits and discounts, rebates and price protection, or other similar privileges.
The following table disaggregates our revenue by major source for the three and nine months ended September 30, 2022 and 2021:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sourced and distributed products | $ | 3,907,318 | $ | 4,716,607 | $ | 11,576,017 | $ | 5,971,589 | ||||||||
| OED Installations | 21,600 | 38,100 | ||||||||||||||
| Total | $ | 3,928,918 | $ | 4,716,607 | $ | 11,614,117 | $ | 5,971,589 | ||||||||
Revenues from sourced and distributed products are purchased from suppliers as finished goods and the Company brings the finished goods into our California warehouse to fill orders as well as to build inventory for future sales orders. From time to time for some of our larger orders we may have our suppliers ship directly to our customers to avoid extra shipping charges.
Advertising and Marketing Expenses
The Company expenses advertising and marketing costs as incurred. For the three and nine months ended September 30, 2022, the Company recorded advertising and marketing expenses of $8,045 and $13,233, respectively, and for the three and nine months ended September 30, 2021, the Company recorded advertising and marketing expenses of $9,487 and $20,263, respectively.
Research and Development
Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the three and nine months ended September 30, 2022, and 2021, the Company did not record any research and development expenses.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of this note transaction and the effective conversion price embedded in this note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
| F-11 |
The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.
Discontinued Operations
In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations.
On September 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceeding (see Note 2) which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as a loss from discontinued operations in the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2022, and 2021. For additional information, see Note 14- Discontinued Operations.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Our CEO and Chairman holds sufficient shares of the Company’s voting preferred stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company such that the CEO and Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company, without the need to call a general meeting of common shareholders of the Company.
Initial Measurement
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement – Financial Instruments Classified as Liabilities
The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).
| F-12 |
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
| ● | Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities. | |
| ● | Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| ● | Level 3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
From time to time, certain of the Company’s embedded conversion features on debt and outstanding warrants have been treated as derivative liabilities for accounting purposes under ASC 815 due to the conversion features within the instrument and that the company has insufficient authorized shares to fully settle conversion features of the instruments if exercised. In this case, the Company utilized the latest inception date sequencing method to reclassify outstanding instruments as derivative instruments. These contracts were recognized at fair value with changes in fair value recognized in earnings until such time as the conditions giving rise to such derivative liability classification were settled.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments.
The following table represents the Company’s derivative instruments that are measured at fair value on a recurring basis as of September 30, 2022, and December 31, 2021, for each fair value hierarchy level:
| September 30, 2022 | Derivative
Liabilities | Total | ||||||
| Level I | $ | $ | ||||||
| Level II | $ | $ | ||||||
| Level III | $ | 5,652,218 | $ | 5,652,218 | ||||
| December 31, 2021 | Derivative
Liabilities | Total | ||||||
| Level I | $ | $ | ||||||
| Level II | $ | $ | ||||||
| Level III | $ | 20,966,701 | $ | 20,966,701 | ||||
Leases
The Company accounts for leases under ASU 2016-02 (see Note 14), applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. We allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.
| F-13 |
Operating lease ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company used an incremental borrowing rate of 7.5%, for the existing lease, based on the information available at the adoption date in determining the present value of future payments. Operating lease expense is recognized pursuant to on a straight-line basis over the lease term and is included in rent in the condensed consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented.
Segment Policy
The Company has no reportable segments as it operates in one segment; renewable energy.
The Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of September 30, 2022, and 2021, the Company’s dilutive securities are convertible into approximately and , respectively, shares of common stock. The following table represents the classes of dilutive securities as of September 30, 2022, and 2021:
| September 30, 2022 | September 30, 2021 | |||||||
| Convertible preferred stock (1) | 7,059,027,462 | 6,918,544,466 | ||||||
| Unexercised common stock purchase warrants (1) | 672,024,518 | 597,024,518 | ||||||
| Convertible notes payable | 6,529,409 | 1,288,506 | ||||||
| Promissory note payable (1) | 88,791,096 | |||||||
| 7,826,372,485 | 7,516,857,490 | |||||||
| (1) | The potentially dilutive shares included in the above table are limited whereby the conversion or exercise cannot result in the beneficial owner holding more than % of the then outstanding shares of common stock subsequent to any conversion or exercise. |
| F-14 |
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts in Entity’ Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’ Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. The Company does not believe the adoption of the ASU will have a material impact on the Company’s financial position, results of operations or cash flows.
Other than the above, there have no recent accounting pronouncements or changes in accounting pronouncements during the period ended September 30, 2022, that are of significance or potential significance to the Company.
NOTE 4 – PROPERTY AND EQUIPMENT
The following table summarizes the Company’s property and equipment:
| September 30, 2022 | December 31, 2021 | |||||||
| Office equipment | $ | 214,454 | $ | 157,370 | ||||
| Building and building improvements | 771,278 | |||||||
| Less: Accumulated Depreciation | (84,361 | ) | (44,929 | ) | ||||
| Property and Equipment, Net | $ | 901,371 | $ | 112,441 | ||||
On September 6, 2022, the Company was assigned the title to a property located at 55 Ronald Reagan Blvd, Warwick, NY 10990, in exchange for shares of common stock that were issued to the building owner in January 2021 (see Note 10). The Company valued the shares at $, (the market value of the common stock on the date of the agreement) and initially recorded $630,000 as a prepaid expense. The Deed was recorded in the name of the Company on October 4, 2022. The Company recorded the $630,000 as fixed asset and credited the prepaid expense. During the nine months ended September 30, 2022, the company expended $141,278 in capital improvements.
Depreciation expense was $39,432 and $23,133 for the nine months ended September 30, 2022, and 2021, respectively.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
On July 10, 2020, PCTI (the accounting acquirer) assumed the balance of a past-due 15% convertible note issued by the Company on September 13, 2017. As of September 30, 2022, and December 31, 2021, the outstanding principal balance of this note was $25,000.
NOTE 6 – DERIVATIVE LIABILITIES
The Company determined the conversion feature of the convertible notes, which all contain variable conversion rates, represented an embedded derivative since the notes were convertible into a variable number of shares upon conversion. Accordingly, the notes are not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.
At any given time, certain of the Company’s embedded conversion features on debt and outstanding warrants may be treated as derivative liabilities for accounting purposes under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant to SEC staff guidance that permits a sequencing approach based on the use of ASC 815-15-25 which provides guidance for contracts that permit partial net share settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1) earliest issuance date or (2) latest maturity date. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the latest maturity date.
| F-15 |
The Company valued the derivative liabilities at September 30, 2022, and December 31, 2021, at $5,652,218 and $20,966,701, respectively. For the derivative liability associated with convertible notes, the Company used the Monte Carlo simulation valuation model with the following assumptions as of September 30, 2022, and December 31, 2021, risk free interest rates at 3.92% and 0.19%, respectively, and volatility of 70% and 92%, respectively. The following assumptions were utilized in the Black-Scholes valuation of outstanding warrants at September 30, 2022, and December 31, 2021, risk free interest rate of 4.11% to 4.24%, and .48% to .99%, respectively, volatility of 109% to 310%, and 344% to 366%, respectively, and exercise prices of $0.006 to $0.15.
A summary of the activity related to derivative liabilities for the nine months ended September 30, 2022, is as follows:
| Derivative liabilities associated with warrants | Derivative liabilities associated with convertible notes | Total derivative liabilities | ||||||||||
| Balance December 31, 2021 | $ | 20,938,755 | $ | 27,946 | $ | 20,966,701 | ||||||
| Change in fair value | (15,315,297 | ) | 814 | (15,314,483 | ) | |||||||
| Balance September 30, 2022 | $ | 5,623,458 | $ | 28,760 | $ | 5,652,218 | ||||||
NOTE 7 – NOTES PAYABLE
The Company has the following note payables outstanding:
| September 30, 2022 | December 31, 2021 | |||||||
| Notes payable, interest at 8%, matured January 5, 2020, in default | $ | 45,000 | $ | 45,000 | ||||
| Other, due on demand, interest at 6%, currently in default | 50,000 | 50,000 | ||||||
| Note payable $750,000 face value, interest at 12%, matured August 24, 2021, in default | 375,000 | 375,000 | ||||||
| Note payable $389,423 face value, interest at 18%, matures November 6, 2023 | 389,423 | 389,423 | ||||||
| Note payable $1,000,000 face value, interest at 12%, matured November 13, 2021, in default | 1,000,000 | 1,000,000 | ||||||
| Note payable $2,200,000 face value, interest at 12%, matures October 31, 2024, net of discount of $243,833 (2021) | 2,200,000 | 1,956,167 | ||||||
| Note payable $11,110,000 face value, interest at 12%, matures October 31, 2024 (as amended), net of discount of $2,314,583 (2021) | 11,110,000 | 8,795,417 | ||||||
| Note payable $3,300,000 face value, interest at 12%, matures October 31, 2024, net of discount of $637,412 (2022) and $3,099,524 (2021) | 2,662,588 | 200,476 | ||||||
| Sub- total notes payable | 17,832,011 | 12,811,483 | ||||||
| Less long-term portion | 389,423 | 389,423 | ||||||
| Current portion of notes payable, net of discount | $ | 17,442,588 | $ | 12,422,060 | ||||
On December 7, 2021, the Company entered into a 12%, $3,300,000 face value promissory note with a third- party lender with an initial maturity date of December 7, 2022. On October 31, 2022, the lender agreed to extend the maturity date to October 31, 2024. The Company agreed to increase the interest rate to 15% and to issue a warrant to purchase 75,000,000 shares of common stock at $0.0067 per share with an expiry date of October 31, 2025. In exchange for the issuance of the $3,300,000 note, inclusive of an original issue discount of $300,000, the Company received proceeds of $3,000,000 on December 13, 2021, from the lender. In conjunction with the note, the Company issued a warrant to purchase 75,000,000 shares of common stock at $0.039 per share (subject to adjustments) with an expiry date on the three- year anniversary of the note. For the nine months ended September 30, 2022, amortization of the costs of $225,000 was charged to interest expense. The fair value of the warrant calculated by the Black- Scholes option pricing method of $2,982,815 has been recorded as an initial debt and an initial derivative liability of $2,982,815. For the nine months ended September 30, 2022, amortization of the warrant discount of $2,337,111 was charged to interest expense. As of September 30, 2022, and December 31, 2021, the outstanding principal balance of this note was $3,300,000 with a carrying value of $2,662,588 and $200,476, respectively, net of unamortized discounts of $637,412 and $3,099,524, respectively.
| F-16 |
On March 17, 2021, the Company entered into a 12%, $11,110,000 face value promissory note with a third- party lender with an initial maturity date of March 17, 2022. On October 31, 2022, the lender agreed to extend the maturity date to October 31, 2024. The Company agreed to increase the interest rate to 15% and to issue a warrant to purchase 250,000,000 shares of common stock at $0.0067 per share with an expiry date of October 31, 2025. This note is now in default. In exchange for the issuance of the $11,110,000 note, inclusive of an original issue discount of $1,000,000 and lender costs of $110,000 the Company received proceeds of $10,000,000 on March 23, 2021, from the lender. In conjunction with the note, the Company issued a warrant to purchase 250,000,000 shares of common stock at $0.13 per share (subject to adjustments) with an expiry date on the three- year anniversary of the note. For the nine months ended September 30, 2022, amortization of the costs of $231,250 was charged to interest expense. The fair value of the warrant calculated by the Black- Scholes option pricing method of $33,248,433 has been recorded as an initial debt discount of $10,000,000, interest expense of $23,248,433 and initial derivative liability of $32,248,433. For the nine months ended September 30, 2022, amortization of the warrant discount of $2,083,333 was charged to interest expense. As of September 30, 2022, and December 31, 2021, the outstanding principal balance of this note was $11,110,000 with a carrying value of $11,100,000 and $8,795,417, respectively, net of unamortized discounts of $2,314,583 as of December 31, 2021. As of September 30, 2022, and December 31, 2021, the accrued interest is $2,019,889 and $1,033,687, respectively.
On February 9, 2021, the Company entered into a 12%, $2,200,000 face value promissory note with a third- party lender with an initial maturity date of February 9, 2022. On October 31, 2022, the lender agreed to extend the maturity date to October 31, 2024. The Company agreed to increase the interest rate to 15% and to issue a warrant to purchase 50,000,000 shares of common stock at $0.0067 per share with an expiry date of October 31, 2025. This note is now in default. In exchange for the issuance of the $2,200,000 note, inclusive of an original issue discount of $200,000 the Company received proceeds of $2,000,000 on February 16, 2021, from the lender. In conjunction with the note, the Company issued a warrant to purchase 50,000,000 shares of common stock at $ per share (subject to adjustments) with an expiry date on the three- year anniversary of the note. For the nine months ended September 30, 2022, amortization of the costs of $22,167 was charged to interest expense. The fair value of the warrant calculated by the Black- Scholes option pricing method of $17,659,506 has been recorded as an initial debt discount of $2,000,000, interest expense of $15,659,506 and initial derivative liability of $17,659,506. For the nine months ended September 30, 2022, amortization of the warrant discount of $221,667 was charged to interest expense. As of September 30, 2022, and December 31, 2021, the outstanding principal balance of this note was $2,200,000 with a carrying value as of December 31, 2021, of $1,956,167, net of unamortized discounts of $243,833. As of September 30, 2022, and December 31, 2021, the accrued interest is $426,016 and $230,729, respectively.
On November 13, 2020, the Company entered into a 12%, $1,000,000 face value promissory note with a third-party due November 13, 2021. Principal payments shall be made in six instalments of $166,667 commencing 180 days from the issue date and continuing each 30 days thereafter for 5 months and the final payment of principal and interest due on the maturity date. The Company received proceeds of $890,000 on November 20, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $110,000. In conjunction with this note, the Company issued 2 common stock purchase warrants; each warrant entitles the Holder to purchase 125,000,000 shares of common stock at an exercise price of $0.008, subject to adjustments and expires on the -year anniversary of the issue date. As of September 30, 2022 and December 31, 2021, the outstanding principal balance of this note was $1,000,000. This note is in default and the interest rate from the date of default is the lesser of 24% or the highest amount permitted by law. As of September 30, 2022, and December 31, 2021, the accrued interest is $312,986 and $135,452, respectively. The Company is in discussions with the lender regarding the extension of the maturity date of this note.
| F-17 |
On November 6, 2020, the Company entered into a Settlement Agreement with the holder of $120,000 of convertible notes with accrued and unpaid interest of $8,716 and a $210,000 Promissory Noted dated June 23, 2020 with accrued and unpaid interest of $15,707. The Company issued a new 12% Promissory Note with a face value of $389,423 and a maturity date of November 6, 2023. In conjunction with this settlement, the Company issued a warrant to purchase 60,000,000 shares of common stock at an exercise price of $0.0075, subject to adjustments and expires on the -year anniversary of the issue date. The Company analyzed the transaction and concluded that this was a modification to the existing debt. The investor exercised the warrant on January 14, 2021.
On August 24, 2020 (the “Issue Date”), the Company entered into a 12%, $750,000 face value promissory note with a third-party (the “Holder”) due August 24, 2021 (the “Maturity Date”). Principal payments shall be made in six instalments of $125,000 commencing 180 days from the Issue Date and continuing each 30 days thereafter for 5 months and the final payment of principal and interest due on the Maturity Date. The Holder shall have the right from time to time, and at any time following an event of default, as defined on the agreement, to convert all or any part of the outstanding and unpaid principal, interest and any other amounts due into fully paid and non-assessable shares of common stock of the Company, at the lower of i) the Trading Price (as defined in the agreement) during the previous five trading days prior to the Issuance Date or ii) the volume weighted average price during the five trading days ending on the day preceding the conversion date. The Company received proceeds of $663,000 on August 25, 2020, and the Company reimbursed the investor for expenses for legal fees and due diligence of $87,000. For the year ended December 31, 2021, amortization of the costs of $56,188 was charged to interest expense. In conjunction with this Note, the Company issued 2 common stock purchase warrants; each warrant entitles the Holder to purchase 122,950,819 shares of common stock at an exercise price of $0.0061, subject to adjustments and expires on the five-year anniversary of the Issue Date. The warrants issued resulted in a debt discount of $750,000. During the year ended December 31, 2021, the Company paid $375,000 to the Holder. On May 3, 2021, the Company issued shares of common stock to the Holder, upon the cashless exercise of a portion of the warrants. As of September 30, 2022, and December 31, 2021, the outstanding principal balance of this note was $375,000. This note is in default and the interest rate from the date of default is the lesser of 24% or the highest amount permitted by law. As of September 30, 2022, and December 31, 2021, the accrued interest is $157,747 and $90,247, respectively. The Company is in discussions with the lender regarding the extension of the maturity date of this note.
NOTE 8 – DEFERRED LIABILITY
On September 2, 2020, PCTI entered into an agreement with a third- party. Pursuant to the terms of the agreement, in exchange for $750,000, PCTI agreed to pay the third-party a perpetual three percent (3%) payment of revenues, as defined in the agreement. Payments are due ninety (90) days after each calendar quarter, with the first payment due on or before March 31, 2021, for revenues for the quarter ending December 31, 2020. For the nine months ended September 30, 2022, the Company reduced this deferred liability by $158,536 and that amount is included in accounts payable and accrued expenses. The deferred liability as of September 30, 2022, and December 31, 2021, on the condensed consolidated balance sheet is $591,464 and $750,000, respectively. No payments have been made and the Company is in default of the agreement with the total amount of $399,779 included in accounts payable and accrued expenses as of September 30, 2022. On February 26, 2021, the agreement was assigned to Ozop and on March 4, 2021, the note was amended, whereby in exchange for shares of common stock, the royalty percentage was amended to 1.8%. The Company valued the shares at $ per share (the market value of the common stock on the date of the agreement) and recorded $16,450,000 as debt restructure expense on the condensed consolidated statement of operations for the nine months ended September 30, 2021.
NOTE 9 – RELATED PARTY TRANSACTIONS
Employment Agreement
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, and effective September 1, 2021, Mr. Conway receives $10,000 per month from Ozop Capital.
| F-18 |
Effective January 1, 2022, the Company entered into a new employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway received a $ contract renewal bonus and will receive an annual compensation of $ 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. Ozop Capital increased Mr. Conway’s compensation to $20,000 per month in January 2022, OES began compensating Mr. Conway $20,000 in March 2022, and OED began compensation Mr. Conway $20,000 per month beginning in April 2022.
Series E Preferred Stock
On March 21, 2021, the Company issued shares of Series E Preferred Stock (see Note 11), of the shares were issued to Mr. Conway. On April 16, 2021, the Board of Directors of the Company authorized the issuance shares of Series E Preferred stock, of which were issued to Mr. Conway. During the nine months ended September 30, 2021, the Company redeemed shares issued to Mr. Conway, and pursuant to the terms and conditions of the Certificate of Designation of the Series E Preferred Stock, including the redemption value of $ per share, recorded stock compensation expense to Mr. Conway of $ for the nine months ended September 30, 2021.
Management Fees and related party payables
For the three and nine months ended September 30, 2022, and 2021, the Company recorded expenses to the CEO in the following amounts:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| CEO | $ | 220,000 | $ | 70,000 | $ | 850,000 | $ | 709,999 | ||||||||
| CEO - Series E Preferred Stock | 2,850,000 | |||||||||||||||
| Total | $ | 220,000 | $ | 70,000 | $ | 850,000 | $ | 3,559,999 | ||||||||
Redemption of Series C and Series D Preferred Stock
On July 13, 2021, the Company entered into a Definitive Agreement (the “Agreement”) with Chis to purchase the shares of the Company’s Series C Preferred Stock held by Chis and the shares of the Company’s Series D Preferred Stock held by Chis for the total purchase price of $11,250,000. In conjunction with the Agreement, Chis resigned from any and all positions held in the Company’s wholly owned subsidiary, PCTI. Further, Chis agreed that upon her resignation and for a period of five years thereafter (the “Restriction Period”), she shall not, directly or indirectly, solicit the employment of, assist in the soliciting of the employment of, or hire any employee or officer of the Company, including those of any of its present or future subsidiaries, or induce any person who is an employee, officer, agent, consultant or contractor of the Company to terminate such relationship with the Company. Additionally, Chis agreed that during the Restriction Period, she shall not compete with the Company or PCTI anywhere worldwide or be employed by any competitor of the Company.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Leases
On January 2, 2021, the Company entered into a ten (10) year lease for a 6-bay garage storage facility of approximately 2,500 square feet from the property owner. Pursuant to the lease the Company agreed to issue shares of restricted common stock. The shares were certificated on March 8, 2021, with an effective date of January 2, 2021. The Company valued the shares at $, (the market value of the common stock on the date of the agreement) and recorded $630,000 as a prepaid expense. The Company never took occupancy of the space. On July 19, 2022, the property owner purchased a different property and on September 6, 2022, assigned the title of such property to the Company in consideration of the shares received in January 2021. The Deed was recorded in the name of Ozop Energy Solutions, Inc. on October 4, 2022. The Company recorded the $630,000 as fixed asset and credited the prepaid expense.
| F-19 |
Agreements
On September 1, 2021, Ozop Capital entered into an advisory agreement (the “RMA Agreement”) with Risk Management Advisors, Inc. (“RMA”). Pursuant to the terms of the RMA Agreement, RMA will assist Ozop Capital in analyzing, structuring, and coordinating Ozop Capital’s participation in a captive insurance company. RMA will coordinate legal, accounting, tax, actuarial and other services necessary to implement the Company’s participation in a captive insurance company, including, but not limited to, the preparation of an actuarial feasibility study, filing of all required regulatory applications, domicile selection, structural selection, and coordination of the preparation of legal documentation. In connection with the services listed above, Ozop Capital agreed to pay $50,000 and to issue $50,000 of shares of restricted common stock. One-half of the cash and stock were due upon the signing of the RMA Agreement. Accordingly, RMA received $25,000 and shares of restricted common stock of the Company in September 2021. The balance of the cash and stock became due on October 29, 2021, upon the issuance of the captive insurance company’s certificate of authority from the state of Delaware. The Company has paid the $25,000 balance and recorded shares of common stock to be issued.
On April 13, 2021, the Company agreed to engage PJN Strategies, LLC (“PJN”) as a consultant. Pursuant to the agreement, the Company agreed to compensate PJN $20,000 per month. Effective September 1, 2021, a new agreement was entered into between PJN and Ozop Capital. Pursuant to the terms of the new one- year agreement Ozop Capital agreed to compensate PJN $84,000 per month. For the three and nine months ended September 30, 2022, the Company recorded $252,000 and $756,000, respectively, of consulting expenses.
On April 16, 2021, the Company signed a letter of agreement with Rubenstein Public Relations, Inc. (“RPR”). Pursuant to the letter of agreement, the Company agreed to engage RPR, effective May 1, 2021, on a month-to-month basis for $17,000 per month.. The Company terminated the agreement in October 2021.
On March 30, 2021, OES hired 2 individuals as Co-Directors of Sales. Pursuant to their respective offers of employment, the Company agreed to an annual salary of $130,000 with a signing bonus of $20,000 for each and to issue each shares of restricted common stock upon the execution of the agreements and every 90 days thereafter for the first year as long as the employee is still employed. The Company valued the initial shares at $ per share (the market price of the common stock on the date of the agreement), and $ is included in stock-based compensation expense for the six months ended June 30, 2021. On January 14, 2022, the Company issued each of the Co-Directors their final shares due. The shares were valued at $ per share (the market price of the common stock on the date of the issuance), and $ is included in stock-based compensation expense for the nine months ended September 30, 2022. One of the individuals resigned on January 24, 2022.
On March 15, 2021, the Company entered into a consulting agreement with Aurora Enterprises (“Aurora”). Mr. Steven Martello is a principal of Aurora. Pursuant to the agreement Mr. Martello will provide strategic analysis regarding existing markets and revenue streams as well as the development of new lines of revenue. The Company agreed to a monthly retainer fee of $10,000 and to issue to Aurora or their designee shares of restricted common stock. The shares were issued in April 2021. Aurora designated the shares to be issued to Pegasus Partners, Inc. The Company valued the shares at $ per share (the market price of the common stock on the date of the agreement), and $696,000 is included in stock-based compensation expense for the nine months ended September 30, 2021. For the three and nine months ended September 30, 2022, the Company has recorded $30,000 and $90,000, respectively, of consulting expenses, and for the three and nine months ended September 30, 2021, the Company recorded consulting expenses of $30,000 and $60,000, respectively.
On February 24, 2021, the Company entered into a consulting agreement with Christopher Ruppel. Pursuant to the agreement Mr. Ruppel was to join the Ozop Advisory Board. During the year ended December 31, 2021, the Company issued shares of restricted common stock to Mr. Ruppel and agreed to a monthly fee of $2,500. The Company valued the shares at $ per share (the market price of the common stock on the date of the agreement), and $ is included in stock-based compensation expense for the nine months ended September 30, 2021. Effective April 1, 2021, the agreement was amended to $10,000 per month. Effective May 1, 2021, the Company was no longer using the services of Mr. Ruppel. For the nine months ended September 30, 2021, the Company recorded $12,500 of consulting expenses.
| F-20 |
On January 22, 2021, the Company issued shares of restricted common stock for legal services performed in 2020 and approved by the BOD of the Company on December 1, 2020. The Company valued the shares at $ per share (the market price of the common stock on the date of the agreement), and $ is included in stock-based compensation expense for the nine months ended September 30, 2021.
On January 14, 2021, the Company entered into a Consulting Agreement with Mr. Allen Sosis. Pursuant to the agreement, Mr. Sosis will provide services as the Director of Business Development for the Company’s wholly owned subsidiary. Pursuant to the agreement, as amended, the Company will pay Mr. Sosis a monthly fee of $15,000 and an additional $1,000 in benefits. The Company also agreed to issue Mr. Sosis shares of restricted common stock. The shares were issued in April 2021. The Company valued the shares at $ per share (the market price of the common stock on the date of the agreement), and $1,000,000 was recorded as deferred stock compensation, to be amortized over the one-year term of the agreement. The Company terminated Mr. Sosis’s employment in October 2021. For the nine months ended September 30, 2021, the Company recorded $75,500 of consulting expenses and effective June 1, 2021, Mr. Sosis became an employee of the Company through his termination with a $15,000 per month salary.
On January 6, 2021, the Company entered into a consulting agreement with Ezra Green to begin on February 8, 2021. The Company agreed to issue shares of restricted common stock to Mr. Green and to a monthly fee of $2,500. The Company valued the shares at $ per share (the market price of the common stock on the date of the agreement), and $76,000 was recorded as deferred stock-based compensation, to be amortized over the one-year term of the agreement. For the nine months ended September 30, 2022, and 2021, the Company recorded $ and $ as stock-based compensation expense, respectively. Effective April 1, 2021, the agreement was amended to $10,000 per month. For the nine months ended September 30, 2022, the Company recorded $60,000 of consulting expenses and for the three and nine months ended September 30, 2021, the Company recorded $30,000 and $64,500 of consulting expenses, respectively. Effective June 30, 2022, Mr. Green was no longer providing consulting services to the Company.
On March 4, 2019, the Company entered into a Separation Agreement (the “Separation Agreement”) with Salman J. Chaudhry, pursuant to which the Company agreed to pay Mr. Chaudry $227,200 (the “Outstanding Fees”) in certain increments as set forth in the Separation Agreement. As of September 30, 2022 and December 31, 2021, the balance owed Mr. Chaudhry is $162,085.
On September 2, 2020, PCTI entered into an Agreement with a third- party. Pursuant to the terms of the agreement, in exchange for $750,000, PCTI agreed to pay the third-party a perpetual three percent (3%) payment of revenues, as defined in the agreement. On February 26, 2021, the agreement was assigned to Ozop and on March 4, 2021, the agreement was amended, whereby in exchange for shares of common stock, the royalty percentage was amended to 1.8% (see Note 8). The Company valued the shares at $ per share (the market value of the common stock on the date of the agreement) and recorded $16,450,000 as debt restructure expense on the condensed consolidated statement of operations for the nine months ended September 30, 2021.
Legal matters
We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
| F-21 |
NOTE 11– STOCKHOLDERS’ EQUITY
Common stock
During the nine months ended September 30, 2022, the Company issued shares of common stock and received net proceeds of $814,625 after issuance costs of $24,966. The Company also issued shares of restricted common stock in the aggregate for services.
During the period from January 1, 2021, to September 30, 2021, holders of an aggregate of $760,550 in principal and $201,905 of accrued interest and fees of convertible and promissory notes, converted their debt into shares of our common stock at an average conversion price of $0.002 per share.
During the nine months ended September 30 2021, the Company also issued the following shares of restricted common stock:
| ● | shares of restricted common stock pursuant to a lease agreement (see Note 10). | |
| ● | shares of restricted common stock pursuant to restructuring agreement related to a deferred liability (see Note 9). | |
| ● | shares of restricted common stock in the aggregate for services and consulting agreements. |
During the nine months ended September 30, 2021, the Company also issued 405,797,987 shares of common stock upon the cashless exercise of common stock purchase warrants.
As of September 30, 2022, the Company has shares of $ par value common stock authorized and there are shares of common stock issued and outstanding.
On April 4th, 2022, the Company and GHS Investments LLC (“GHS”). signed a Securities Purchase Agreement (the “GHS Purchase Agreement”) for the sale of up to Two Hundred Million () shares of the Company’s common stock to GHS. We may sell shares of our common stock from time to time over a six (6)- month period ending October 4, 2022 (the “Maturity Date”), at our sole discretion, to GHS under the GHS Purchase Agreement. The purchase price shall be 85% of lowest VWAP for the ten (10) days preceding the Company’s notice to GHS for the sale of the Company’s common stock. On April 8, 2022, the Company filed a Prospectus Supplement to the Registration Statement dated October 14, 2021, regarding the GHS Purchase Agreement. On October 17, 2022, the Company and GHS extended the Maturity Date to April 4, 2023.
Preferred stock
As of September 30, 2022, and December 31, 2021, shares have been authorized as preferred stock, par value $ (the “Preferred Stock”), which such Preferred Stock shall be issuable in such series, and with such designations, rights and preferences as the Board of Directors may determine from time to time.
Series C Preferred Stock
On July 7, 2020, the Company filed an Amended and Restated Certificate of Designation with the State of Nevada of the Company’s Series C Preferred Stock. Under the terms of the Amendment to Certificate of Designation of Series C Preferred Stock, shares of the Company’s preferred remain designated as Series C Preferred Stock. The holders of Series C Preferred Stock have no conversion rights and no dividend rights. For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the Holder thereof, voting separately as a class, shall have the right to vote on all shareholder matters equal to sixty-seven (67%) percent of the total vote. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued shares of Series C preferred Stock to Chis. On July 13, 2021, the Company purchased shares of the Company’s Series C Preferred Stock held by Chis (see Note 11). As of September 30, 2022, and December 31, 2021, there were shares of Series C Preferred Stock issued and outstanding and the shares are held by Mr. Conway.
| F-22 |
Series D Preferred Stock
On July 7, 2020, the Company filed a Certificate of Designation with the State of Nevada of the Company’s Series D Preferred Stock. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued shares of Series D preferred Stock to Chis, and on August 28, 2020, pursuant to Mr. Conway’s employment agreement, the Company issued shares of Series D Preferred Stock to Mr. Conway. On July 13, 2021, the Company purchased shares of the Company’s Series D Preferred Stock held by Chis (see Note 10).
On July 27, 2021, the Company filed with the Secretary of State of the State of Nevada an Amended and Restated Certificate of Designation of Series D Preferred Stock (the “Series D Amendment”). Under the terms of the Series D Amendment, shares of the Company’s preferred stock will be designated as Series D Convertible Preferred Stock. The holders of the Series D Convertible Preferred Stock shall not be entitled to receive dividends. Any holder may, at any time convert any number of shares of Series D Convertible Preferred Stock held by such holder into a number of fully paid and nonassessable shares of common stock determined by multiplying the number of issued and outstanding shares of common stock of the Company on the date of conversion, by 1.5 and dividing that number by the number of authorized shares of Series D Convertible Preferred Stock and multiply that result by the number of shares of Series D Convertible Preferred Stock being converted. Except as provided in the Series D Amendment or as otherwise required by law, no holder of the Series D Convertible Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Company for their vote, waiver, release or other action. The Series D Convertible Preferred Stock shall not bear any liquidation rights. On July 28, 2021, the Company closed on a Stock and Warrant Purchase Agreement (the “Series D SPA”). Pursuant to the terms of Series D SPA, an investor in exchange for $13,200,000 purchased one share of Series D Preferred Stock, and a warrant to acquire 3,236 shares of Series D Preferred Stock. As of September 30, 2022, and December 31, 2021, there were shares, respectively, of Series D Preferred Stock issued and outstanding and a warrant to purchase 3,236 shares of Series D Preferred Stock are outstanding as of September 30, 2022, and December 31, 2021.
The warrant has a 15- year term and Partial Warrant Lock Up and Leak-Out Period. The Holder may only exercise the Warrant and purchase Warrant Shares as follows:
| i. | Up to (one hundred and sixty-two) Warrant Shares, at any time or times on or after five (5) business days from the closing of the Series D SPA (“the Initial Exercise Date”) subject to up to a maximum number of Warrant Shares that, if converted, would be equal to no more than a maximum of 4.99% of the total number of outstanding shares of Common Stock of the Company and no later than on or before the 15th year anniversary of the Initial Exercise Date (“the Termination Date”); and | |
| ii. | The Remainder of the Warrant representing up to (three thousand and seventy-four) Warrant Shares (“Remaining Warrant Shares”) shall be locked up for a period of 36 (thirty-six) months from the Initial Exercise Date (“Lock Up Period”) and shall become exercisable at any time or times from the date that is the 36 (thirty-six) month anniversary of the Initial Exercise Date (“Lock Up Period Termination Date”) and no later than on or before the Termination Date, as follows: |
| a. | During every 1 (one) year period, starting on the day that is the Lock Up Period Termination Date, the Holder shall have the right to exercise the Remainder of the Warrant up to a maximum number of Remaining Warrant Shares that, if converted, would be equal to no more than a maximum of 4.99% of the total number of outstanding shares of Common Stock of the Company during such given year (“Leak-Out Period”). The Leak-Out Period shall come into effect on the day that is the Lock Up Period Termination Date and remain effective on a yearly basis, for a period of 10 (ten) years thereafter, after which the Leak-Out Period will automatically terminate and become null and void. For clarity purposes the Remainder of the Warrant shall become freely exercisable at any time or times beginning on June 29, 2034 and until the Termination Date. |
| F-23 |
Series E Preferred Stock
On July 7, 2020, the Company filed a Certificate of Designation with the State of Nevada of the Company’s Series E Preferred Stock. Under the terms of the Certificate of Designation of Series E Preferred Stock, shares of the Company’s preferred stock have been designated as Series E Preferred Stock. The holders of the Series E Convertible Preferred Stock shall not be entitled to receive dividends. No holder of the Series E Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Corporation for their vote, waiver, release or other action, except as may be otherwise expressly required by law. At any time, the Corporation may redeem for cash out of funds legally available therefor, any or all of the outstanding Preferred Stock (“Optional Redemption”) at $1,000 (one thousand dollars) per share. The shares of Series E Preferred Stock have not been registered under the Securities Act of 1933 or the laws of any state of the United States and may not be transferred without such registration or an exemption from registration. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued shares of Series E preferred Stock to Chis, and on August 28, 2020. Pursuant to Mr. Conway’s employment agreement, the Company issued shares of Series E Preferred Stock to Mr. Conway. On March 2, 2021, the BOD authorized the issuance of shares of Series E Preferred Stock to Mr. Conway and shares of Series E Preferred Stock to a third-party service provider. The issuances were for services performed. Pursuant to the terms and conditions of the Certificate of Designation of the Series E Preferred Stock, including the redemption value of $ per share, the Company recorded $ as stock-based compensation expense for expense for the nine months ended September 30, 2021. On March 24, 2021, the Company redeemed the shares of Series E Preferred Stock outstanding on that date. On April 16, 2021, the BOD authorized the issuance of shares of Series E Preferred stock, of which were granted to Mr. Conway. The issuances were for services performed. Pursuant to the terms and conditions of the Certificate of Designation of the Series E Preferred Stock, including the redemption value of $ per share, the Company recorded $ as stock-based compensation expense for the nine months ended September 30, 2021. As of September 30, 2022, and December 31, 2021, there were -- shares of Series E Preferred Stock issued and outstanding, respectively.
NOTE 12 – NONCONTROLLING INTEREST
On August 19, 2021, the Company formed Ozop Capital. The Company initially owned 51% with PJN owning 49%. Brian Conway was appointed as the sole officer and director of Ozop Capital and has voting control of Ozop Capital. The Company presents interest held by noncontrolling interest holders within noncontrolling interest in the condensed consolidated financial statements. On September 13, 2022, there was a change in the ownership percentages, as PJN returned shares, representing their 49% ownership. As of that date; Ozop Capital is a wholly owned subsidiary of the Company. For the three and nine months ended September 30, 2022, Ozop Capital incurred losses of $346,051 and $1,080,963, respectively, of which $169,565 and $529,672, respectively, is the loss attributed to the noncontrolling interest for the three- and nine- months ending September 30, 2022. As of September 30, 2022, the accumulative noncontrolling interest is $784,777.
NOTE 13 - OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
On April 14, 2021, the Company entered into a -year lease which began on June 1, 2021, for approximately 8,100 square feet of office and warehouse space in Carlsbad, California, expiring May 31, 2026. Initial lease payments of $13,148 began on June 1, 2021, and increase by approximately 2.4% annually thereafter. The interest rate used to determine the present value is our incremental borrowing rate, estimated to be 7.5%, as the interest rate implicit in most of our leases is not readily determinable. During the year ended December 31, 2021, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $702,888 for this lease.
In adopting Topic 842, the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less.
Right-of- use assets are summarized below:
| September 30, 2022 | ||||
| Office and warehouse lease | $ | 702,888 | ||
| Less: Accumulated Amortization | (162,883 | ) | ||
| Right-of-use asset, net | $ | 540,005 | ||
| F-24 |
| September 30, 2022 | ||||
| Lease liability | $ | 549,182 | ||
| Less current portion | (130,070 | ) | ||
| Long term portion | $ | 419,112 | ||
Maturity of lease liabilities are as follows:
| Amount | ||||
| For the year ended December 31, 2022 | $ | 41,394 | ||
| For the year ended December 31, 2023 | 167,858 | |||
| For the year ended December 31, 2024 | 171,840 | |||
| For the year ended December 31, 2025 | 175,942 | |||
| For the year ended December 31, 2026 | 74,030 | |||
| Total | $ | 631,064 | ||
| Less present value discount | (81,882 | ) | ||
| Lease liability | $ | 549,182 | ||
NOTE 14 – DISCONTINUED OPERATIONS
On September 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceeding (see Note 2) which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as a loss from discontinued operations in the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2022, and 2021.
The results of operations of this component, for all periods, are separately reported as “discontinued operations”. A reconciliation of the major classes of line items constituting the loss from discontinued operations, net of income taxes as is presented in the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022, and 2021 are summarized below:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | 5,363 | $ | 66,734 | $ | 281,038 | $ | 881,339 | ||||||||
| Cost of goods sold | 3,572 | 114,636 | 259,828 | 351,136 | ||||||||||||
| Gross profit | 1,791 | (47,902 | ) | 21,210 | 530,203 | |||||||||||
| Operating expenses | 27,244 | 182,517 | 384,991 | 730,138 | ||||||||||||
| Interest expense | 8,517 | 7,450 | 23,011 | 33,546 | ||||||||||||
| Loss from discontinued operations | $ | 33,970 | $ | 237,869 | $ | 386,792 | $ | 233,481 | ||||||||
| F-25 |
The assets and liabilities of discontinued operations are separately reported as “assets and liabilities held for disposal” as of September 30, 2022, and December 31, 2021. All asset and liabilities are classified as current, as the Company expects the liquidation to occur in the short-term. The following tables present the reconciliation of carrying amounts of major classes of assets and liabilities of the Company classified as discontinued operations in the condensed consolidated balance sheet at September 30, 2022, and December 31, 2021:
Current Assets
| September 30, 2022 | December 31, 2021 | |||||||
| Cash | $ | 50 | $ | 134,973 | ||||
| Accounts receivable | 6,534 | |||||||
| Inventory | 237,091 | 277,872 | ||||||
| Vendor deposits | 43,758 | |||||||
| Prepaid expenses and other assets | 7,000 | 12,543 | ||||||
| Right to use asset | 13,870 | 74,189 | ||||||
| Fixed assets, net | 15,477 | 20,448 | ||||||
| Total assets of discontinued operations | $ | 273,488 | $ | 570,317 | ||||
Current liabilities
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts payable and accrued liabilities | $ | 455,217 | $ | 432,508 | ||||
| Current portion of notes payable | 589,246 | 589,246 | ||||||
| Operating lease liability | 13,870 | 74,189 | ||||||
| Deferred revenues | 30,389 | 46,477 | ||||||
| Advances from customers | 96,428 | |||||||
| Total current liabilities of discontinued operations | $ | 1,088,722 | $ | 1,238,848 |
NOTE 15 – SUBSEQUENT EVENTS
On October 17, 2022,the company and GHS extended the maturity date of the Purchase Agreement to April 4, 2023.
On October 17, 2022, the Company sold shares to GHS at $ and received net proceeds of $70,971, after deducting transaction and broker fees of $2,494.
On October 31, 2022, the Company and the lender of certain promissory notes agreed to extend the maturity date of such notes to October 31, 2024. The Company agreed to increase the interest rate to 15% per annum and to issue warrants to purchase in the aggregate 375,000,000 shares of common stock at an exercise price of $0.0067 and an expiry date of October 31, 2025 (see Note 7).
On November 1, 2022, the Company sold shares to GHS at $ and received net proceeds of $69,012, after deducting transaction and broker fees of $2,454.
The Company has evaluated subsequent events through the date the financial statements were issued. The Company has determined that there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.
| F-26 |
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 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.”
On August 19, 2021, the Company formed Ozop Capital Partners, Inc. (“Ozop Capital”), a Delaware corporation is a wholly owned subsidiary of the Company. Ozop Capital was formed as a holding company to seek to develop a captive insurance 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 insurer that reinsures 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.
| 3 |
OES is actively engaged 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. Our solar and energy storage projects involve large-scale battery and solar photovoltaics (PV) installations. Our utility-scale storage business model is based on an arbitrage business model in which we install multiple 1+ megawatt batteries, charge them with off-peak grid electricity under contract with the utility, then sell the power back during peak load hours at a premium, as dictated by prevailing electricity tariffs.
Equipment Distributor: OES has entered the component supply/distribution side of the renewable, resiliency and energy storage industries distributing the core components associated with residential and commercial solar PV systems as well as onsite battery storage and power generation. 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. The components we are distributing include PV panels, solar inverters, solar mounting systems, stationary batteries, onsite generators and other associated electrical equipment and components that are all manufactured by multiple companies, both domestic and international. These core products are sourced from management-developed relationships and are distributed through our existing network and our in-house sales team.
Solar PV: Our PV business model involves the design and construction of electrical generating PV systems that can sell power to the utilities or be used for off grid use as part of our developing Neo-Grids solution. The Neo-GridTM System, patent pending, was developed for the off-grid distribution of electricity to remove or reduce the dependency on utilities that currently burdens the EV Charging sectors. It will also reduce or eliminate the lengthy permitting processes and streamline the installations of those EV chargers.
Modular Energy Distribution System: The Neo-GridTM System patent pending, consists of the design, engineering, installation, and operational methodologies as well as the financial arbitrage of how we produce, capture and distribute electrical energy for the EV markets. OES has acquired through a license the rights to a proprietary system, the Neo-GridsTM System (patent pending), for the capture and distribution of electrical energy for the EV market. The Neo-GridsTM System will serve both the private auto and the commercial sectors. The exponential growth of the EV industry has been accelerated by the recent major commitments of most of the major car manufacturers. Our Neo-GridsTM System leverages this accelerated growth by offering (1) charging locations that can be rapidly installed in restricted areas or load limits and (2) EV charger electricity that is produced from renewable sources having little to no carbon footprint.
OES has developed a business plan for the Neo GridTM distribution system, a solution to alleviate the stress on the existing grid-tied infrastructure. The Company has completed its’ Neo GridTM research and development as well as the first stage that includes the specifications and engineered technical drawings. This completion of the first stage of allows us to move forward with stage two, as well as to begin to construct the first prototype or proof of concept, (“PoC”). Our PoC design is partially reliant on auto manufacturers establishing standardizations of the actual charging/discharging protocols of the batteries such as on-board inverters as well as bi-directional capabilities in electric vehicles, which have only recently been established. As the market growth rate of EV’s continues to rise, the stress on the existing grid-tied infrastructure shows the need for the continued development of our Neo-GridTM System as a viable solution.
OES management has decades of experience in the renewable, storage and resilient energy businesses and associated markets, which include but are not limited to project finance, project development, equipment finance, construction, utility protocol, regulatory policy and technology assessment.
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.
| ● | In May 2022, the Company entered into an agreement with GS Administrators, Inc., a member of Houston-based GSFSGroup. Under the agreement, the Company will market GSFSGroup’s EV VSC’s in all states (except, California, Florida, Massachusetts and Washington) to Ozop’s network of new and used franchised dealerships and other eligible entities. In addition to acting as an agent for the marketing, Ozop also has the right to white label the product under its’ Ozop Plus brand. Ozop’s role won’t be limited to marketing the product. GSFSGroup plans to tap into Ozop’s experience relative to battery collection and disposal and has agreed to insurance risk sharing in connection with the insurance policies that back the VSC’s. GSFSGroup is working on getting the approvals needed for the above four (4) states. |
| 4 |
| ● | On June 22, 2022, the Company entered into an Agent Agreement with Royal Administration Services, Inc. (“Royal”). Under the agreement, the Company will market Royal’s EV VSC’s and has the right to white label it under Ozop Plus. Royal has agreed to allow Ozop Plus on all VSC’s, marketed by Royal and the Company, to assume all of the risk related to the electric battery at an agreed upon premium. The battery premium is dependent on the consumer’s selection of the duration of the VSC, the miles selected for coverage and the type of vehicle that the consumer has purchased, with a key component being the kWh size of the battery. These VSC’s have a maximum of 10 years and 150,000 miles and cover new and used cars from model year 2017 and newer. Royal’s VSCs are now effective in 35 states and the others have various waiting times or approvals needed. |
| ● | On October 13, 2022, EVCO entered into a Reinsurance Contract (the “Contract”) with American Bankers Insurance Company of Florida (“ABIC” or the “Ceding Company”). Royal is the Administrator of the Contract. Pursuant to the terms of the Contract, ABIC will cede 100% of the battery coverage portion of all electric vehicle service contracts to EVCO. On the same date ABIC and EVCO also entered into a Trust Agreement, whereas EVCO as the reinsurer agrees to deposit an amount equal to unearned premium reserves, plus losses reported but unpaid, plus the estimated amount of losses incurred but not reported to the trust account. Permissible investments (with a maturity of no more than five (5) years) of the assets of the Trust account include: |
| ○ | U.S. Treasury Securities | |
| ○ | Cash or cash instruments | |
| ○ | U.S agency issues | |
| ○ | Other investments as Ceding Company approves |
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 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.
Stock Purchase Agreement and Stock Redemption 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.
On July 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.The Agreement was closed on July 27, 2021.
| 5 |
Results of Operations for the three and nine months ended September 30, 2022 and 2021:
Revenue
For the three and nine months ended September 30, 2022, the Company generated revenue of $3,928,918 and $11,614,117, respectively, compared to $4,716,607 and $5,971,589 for the three and nine months ended September 30, 2021, respectively. Revenues from Ozop Energy Systems, Inc. (“OES”) are classified as sourced and distributed products. Ozop Engineering and design (“OED”) operations began in the quarter ended June 30, 2022, and are classified as design and installation. Sales are summarized as follows:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sourced and distributed products | $ | 3,907,318 | $ | 4,716,607 | $ | 11,576,017 | $ | 5,971,589 | ||||||||
| Design and installation | 21,600 | - | 38,100 | - | ||||||||||||
| Total | $ | 3,928,918 | $ | 4,716,607 | $ | 11,614,117 | $ | 5,971,589 | ||||||||
As it did for most of the industry; OES’s importing of solar panels issues that began in the 4th quarter of 2021, continued 2022. Covid issues continued to be disruptive to a continual source of product from foreign manufacturers as well as ocean freight backlogs and covid issues that plagued the port of arrivals related to the unloading of containers and the eventual customs clearance of the imported goods. An announcement by the U.S. Department in March 2022 stated it would investigate allegations that solar panel manufacturers in Southeast Asia are using Chinese-made parts and evading U.S. tariffs has raised alarms concerning both trade and environmental policy The department announced March 28 that it would investigate claims by California-based solar panel manufacturer that solar energy equipment manufacturers in Cambodia, Malaysia, Thailand and Vietnam have close business ties to companies in China that produce the raw materials and some components of solar panel assemblies. On June 6, 2022, President Biden waived tariffs on solar panels from there four Southeast Asian nations for two years and invoked the Defense Production Act to spur domestic solar panel manufacturing at home. The tariff exemption will serve as a “bridge” while U.S. manufacturing ramps up.
Based on the above situation, the Company placed approximately $14,422,000 of purchase orders for solar panels and as of the date of the filing of this report has fully paid and received approximately $7,265,000 of this product. Additionally, the Company has made approximately $1,499,000 of additional deposits to vendors, resulting in a remaining balance of $5,658,000 of open purchase orders to vendors, to assure product delivery of approximately $7.2 million with a forecasted delivery of $3.9 million in Q4 2022 and $3.3 million in Q1 2023. The Company was expecting to receive additional product in Q3 2022, that has been delayed until Q4 2022, which impacted revenues for the three and nine months ended September 30, 2022. Based on the above and the Company’s current on-hand inventory, management anticipates the potential for a significant increase in fourth quarter sales over Q3 2022 sales.
Cost of sales
For the three and nine months ended September 30, 2022, the Company recognized $3,598,918 and $10,634,170, respectively of cost of sales, compared to $4,370,680 and $5,575,557 for the three and nine months ended September 30, 2021, respectively.
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sourced and distributed products | $ | 3,598,918 | $ | 4,370,680 | $ | 10,634,170 | $ | 5,575,558 | ||||||||
| Total | $ | 3,598,918 | $ | 4,370,680 | $ | 10,634,170 | $ | 5,575,558 | ||||||||
Based on the above cost of sales, gross margin was 8.4% for the three and nine months ended September 30, 2022, compared to 7.3% and 6.6% for the three and nine months ended September 30, 2021, respectively. The increase of gross margin for the three and nine months is a result of the mix of customer sales.
| 6 |
Operating expenses
Total operating expenses for the three and nine months ended September 30, 2022, were $1,514,524 and $4,648,920, compared to $1,708,102 and $11,309,256 for the three and none months ended September 30, 2021, respectively. The operating expenses were comprised of:
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine
Months Ended September 30, 2021 | |||||||||||||
| Wages and management fees, related parties, including stock-based compensation | $ | 220,000 | $ | 70,000 | $ | 850,000 | $ | 3,559,999 | ||||||||
| Stock-based compensation, other | - | 668,711 | 136,249 | 5,784,656 | ||||||||||||
| Salaries, taxes and benefits | 411,411 | 275,375 | 996,321 | 397,889 | ||||||||||||
| Professional and consulting fees | 495,820 | 292,278 | 1,674,319 | 830,365 | ||||||||||||
| Advertising and marketing | 8,045 | 9,487 | 13,233 | 20,263 | ||||||||||||
| Rent and office expense | 63,287 | 62,378 | 186,228 | 103,928 | ||||||||||||
| Insurance | 88,256 | 62,961 | 222,547 | 89,609 | ||||||||||||
| General and administrative | 227,705 | 266,912 | 600,023 | 522,547 | ||||||||||||
| Total operating expenses | $ | 1,514,524 | $ | 1,708,102 | $ | 4,648,920 | $ | 11,309,256 | ||||||||
Wages and management fees- related parties, are amounts paid to our CEO. 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, and effective September 1, 2021, Mr. Conway began to receive $10,000 per month from Ozop Capital. Effective January 1, 2022, the Company entered into a new employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway received a $250,000 contract renewal bonus and will receive an 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. Ozop Capital increased Mr. Conway’s compensation to $20,000 per month in January 2022 and OES began compensating Mr. Conway $20,000 in March 2022. Below is a summary of wages and management fees:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| CEO management fees | $ | 220,000 | $ | 70,000 | $ | 850,000 | $ | 709,999 | ||||||||
| Stock-based compensation | - | - | - | 2,850,000 | ||||||||||||
| Total other (income) expense | $ | 220,000 | $ | 70,000 | $ | 850,000 | $ | 3,559,999 | ||||||||
Stock based compensation for the nine months ended September 30, 2022, of $136,429 is comprised of the following:
| ● | 5,000,000 shares of common stock issued in the aggregate to two employees pursuant to their offers of employment dated March 31, 2021. The shares were valued at $0.027 per share. During the nine months ended September 30, 2022, the Company included $135,000 in stock compensation expense. | |
| ● | $1,249 of amortization of stock compensation for shares issued in April 2021. |
Stock based compensation, other for the three and nine months ended September 30, 2021, of $668,711 and $5,784,656 is comprised of the following stock issuances:
| ● | 5,000,000 shares issued in April 2021 pursuant to a one-year consulting agreement. The Company valued the shares at $0.20 per share (the market price of the common stock on the date of the agreement), and $1,000,000 was recorded as deferred stock compensation, to be amortized over the one-year term of the agreement. For the three and nine months ended September 30, 2021, $250,000 and $583,562, respectively, is included in stock-based compensation expense. |
| 7 |
| ● | 10,000,000 shares issued in April 2021 pursuant to a one-year consulting agreement. The Company valued the shares at $0.0076 per share (the market price of the common stock on the date of the agreement), and $76,000 was 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 $21,211 and $55,595, respectively, as stock-based compensation expense. | |
| ● | 5,000,000 shares issued in April 2021 for services. The Company valued the shares at $0.1392 per share (the market price of the common stock on the date of the agreement), and $696,000 is included in stock-based compensation expense for the nine months ended September 30, 2021. | |
| ● | 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. For the nine months ended September 30, 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 12). The shares were valued at $0.2386 per share. For the nine months ended September 30, 2021, the Company included $2,386,000 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. For the nine months ended September 30, 2021, the Company included $460,000 in stock compensation expense for the 5,000,000 shares of common stock. | |
| ● | Issuance of 200 shares and 950 shares of Series E Preferred Stock, with a redemption value of $1,000 per share, resulting in stock compensation expense of $1,150,000 for the nine months ended September 30, 2021. | |
| ● | 5,000,000 shares of common stock to be issued in the aggregate to two employees pursuant to their offers of employment dated March 31, 2021. The shares were valued at $0.0745 per share. For the three and nine months ended September 30, 2021, the Company included $372,500 in stock compensation expense for the 5,000,000 shares of common stock. |
| ● | 452,080 shares of common stock issued for services (see Note 12). The shares were valued at $0.0553 per share (the market price of the common stock on the date of the agreement), and $25,000 is included in stock-based compensation expense for the three and nine months ended September 30, 2021. |
Salaries, taxes and benefits increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021. The increase was a result of the current periods including $268,091 and $767,438, respectively, compared to $275,375 and $397,889 for the three and nine months ended September 30, 2021, respectively, of expenses related to OES and $143,320 and $198,882 for the three and nine months ended September 30, 2022, respectively, for OED. OES now has annual gross payroll of approximately $512,000 and an additional $351,000 on an annual basis of personnel focused on the Company’s battery storage vertical. OED currently has five employees with an aggregate annual compensation of $457,000.
Professional and consulting fees increased for the three and nine months ended September 30, 2022, compared to September 30, 2021. The increases are due to increases in accounting expenses of Ozop and its’ subsidiaries in the current three- and nine-month periods and consultants engaged in the second quarter of 2021 by Ozop Capital Partners that have been engaged for the entire nine months ended September 30, 2022, as Ozop Plus initiates its business plan regarding vehicle service contracts on electric vehicles.
Advertising and marketing expenses decreased for the three and nine months ended September 30, 2022, compared to September 30, 2021. The decreases were related to marketing programs during 2021, including brand awareness programs for Ozop.
| 8 |
Rent and office expense (including supplies, utilities and internet costs) remained the same for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, and increased for the nine months ended September 30, 2022, compared to the none months ended September 30, 2021. The increase is the result of including in the current period, rent and office expense of approximately $147.916 for the nine months ended September 30, 2022, compared to $69,221 for the nine months ended September 30, 2021, for OES. The Company estimates that the monthly OES rent and office expense for the California operation to be approximately $18,000 per month.
Insurance expense increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021. The increase was the result of including in the current three- and nine-month periods, insurance expense of approximately $68,465 and $201,413, respectively, for the three and nine months ended September 30, 2022, compared to $62,961 and $89,609 for the three and nine months ended September 30, 2021, for OES. OED’s insurance expense was $19,790 and $21,135 for the three and nine months ended September 30, 2022. The Company estimates that the monthly OES and OED insurance expense to be approximately $30,000 per month.
Other Income (Expenses)
Other income, net was $513,156 and $8,501,649 for the three and nine months ended September 30, 2022, respectively, compared to other income, net of $13,314,765 for the three months ended September 30, 2021, and other expenses of $186,842,894 for the nine months ended September 30, 2021, and were comprised of as follows:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Interest expense | $ | 1,424,554 | $ | 4,123,535 | $ | 6,812,834 | $ | 49,062,523 | ||||||||
| (Gain) loss on change in fair value of derivatives | (1,937,710 | ) | (17,483,300 | ) | (15,314,483 | ) | 25,892,783 | |||||||||
| Loss on extinguishment of debt | - | - | - | 95,437,587 | ||||||||||||
| Debt restructure expense | - | - | - | 16,450,000 | ||||||||||||
| Total other (income) expense | $ | (513,156 | ) | $ | (13,314,765 | ) | $ | (8,501,649 | ) | $ | 186,842,894 | |||||
The decrease in other income, net, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, is primarily a result of the reduced gain on the change in fair value of the derivatives and the reduced interest expense related to the amortization of debt discounts associated with the maturity dates of certain of the company’s promissory notes. Other expenses for the nine months ended September 30, 2021, includes the 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. The shares were valued at $0.094 per share and the Company recognized $16,450,000 of restructuring costs. Also included in interest expense for the nine months ended September 30, 2021, is the initial $38,907,939 of fair value related to the issuance of 300,000,000 warrants. In addition, the amortization of debt discounts of $8,810,332 and losses on changes in fair values of derivatives, related to convertible notes and warrants.
Net income (loss)
Net loss for the three months ended September 30, 2022, was $534,988 compared to net income of $11,714,722 for the three months ended September 30, 2021. The change was primarily a result of the reduced gain on the change in fair value of derivatives in the current period compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, the Company had net income $4,975,556 compares to a net loss of $197,989,599 for the nine months ended September 30, 2021. The loss for the nine months ended September 30, 2021, was primarily a result of the other expenses descried above as well as $7,965,945 of stock- based compensation expenses included in the operating expenses for the nine months ended September 30, 2021.
| 9 |
Liquidity and Capital Resources
The accompanying condensed 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, 2022, the Company had an accumulated deficit of $212,351,054 and a working capital deficit of $23,000,162 (including derivative liabilities of $5,652,218). As of September 30, 2022, the Company was in default of $14,142,588 plus accrued interest on debt instruments due to non-payment upon maturity dates. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for one year from the date of the issuance of these financial statements. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Currently, our current capital and our other existing resources will be sufficient to provide the working capital needed for our current business, however, additional capital will be required to meet our debt obligations, and to further expand our business. We may be unable to obtain the additional capital required. If we are unable to generate capital or raise additional funds when required it will have a negative impact on our business development and financial results. These conditions raise substantial doubt about our ability to continue as a going concern as well as our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. This “going concern” could impair our ability to finance our operations through the sale of debt or equity securities. Management’s plans in regard to these factors are discussed below and also in Note 2 to the condensed consolidated financial statements filed herein.
As of September 30, 2022, we had cash of $2,063,235 as compared to $6,767,167 at December 31, 2021. As of September 30, 2022, we had current liabilities of $29,794,842 (including $5,652,218 of non-cash derivative liabilities), compared to current assets of $6,794,680, which resulted in a working capital deficit of $23,000,162. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, customer deposits, lease obligations, notes payable and liabilities of discontinued operations.
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 nine months ended September 30, 2022, net cash used in operating activities was $5,185,222 compared to $6,350,242 for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, our net cash used in operating activities was primarily attributable to the net income of $4,445,884, adjusted by non- cash interest expense of $5,020,528, stock-based compensation of $136,249 and the non-cash expenses of amortization and depreciation of $132,924. This was offset by the gain on the fair value changes in derivatives related to warrants and convertible notes of $15,314,483. Net changes of $246,943 in operating assets and liabilities decreased the cash used in operating activities.
For the nine months ended September 30, 2021, our net cash used in operating activities was primarily attributable to the net loss of $197,989,599, adjusted by loss on debt extinguishment of $95,437,589, non- cash interest expense of $47,838,062 (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 $8,634,656 and the non-cash expenses of interest and amortization and depreciation of $62,438. Net changes of $2,241,716 in operating assets and liabilities increased the cash used in operating activities, primarily as a result of the start-up of the Company’s California operations in the support of inventory and accounts receivable.
| 10 |
Investing Activities
For the nine months ended September 30, 2022, the net cash used in investing activities was $198,632, compared to $109,769 for the nine months ended September 30, 2021. The amounts for both periods were a result of the Company purchasing office furniture and equipment.
Financing Activities
For the nine months ended September 30, 2022, the Company received shares proceeds of $814,625, net of issuance costs. During the nine months ended September 30, 2021, net cash provided by financing activities was $8,475,000. We received $12,000,000 of proceeds from the issuances of $13,310,000 face value of promissory notes, $13,100,000 (net of costs) from the Series D SPA. During the nine months ended September 30, 2021, the Company acquired 47,500 shares of Series C Preferred Stock and 18,667 shares of Series D Preferred Stock from Chis for $11,250,000, redeemed 5,000 shares of the Series E Preferred Stock for $5,000,000 and repaid $375,000 of notes payable.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the reasons discussed below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of September 30, 2022, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.
| 1. | We do not have an Audit Committee – While not being legally obligated to have an audit committee, it is the management’s view that such a committee, including a financial expert member, is an utmost important entity level control over the Company’s financial statement. Currently the Board of Directors acts in the capacity of the Audit Committee, and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities. | |
| 2. | We did not maintain appropriate cash controls – As of September 30, 2022, the Company has not maintained sufficient internal controls over financial reporting for cash, including failure to segregate cash handling and accounting functions, and did not require dual signatures on the Company’s bank accounts. |
| 11 |
Accordingly, the Company concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting occurred during the three months ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 1A. RISK FACTORS
Not applicable for smaller reporting companies.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the quarter ended September 30, 2022.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
Item 5. OTHER INFORMATION
| (a) | None. | |
| (b) | During the quarter ended September 30, 2022, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors. |
| 12 |
Item 6. EXHIBITS
The following documents are filed as part of this report:
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
| 13 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 14, 2022
| /s/ Brian P Conway | |
| Brian P. Conway | |
| Chief Executive Officer | |
| (principal executive officer) | |
| (principal financial and accounting officer) |
| 14 |