UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarter ended:
OR
For the Transition Period from ___________ to____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
Not applicable.
(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. ☒
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). ☒
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 | ☐ | |
| ☐ | 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 ☒
As of May 10, 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)
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Vendor deposits | ||||||||
| Total Current Assets | ||||||||
| Operating lease right-of-use asset, net | ||||||||
| Property and equipment, net | ||||||||
| Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Convertible notes payable, net of discounts | ||||||||
| Current portion of notes payable, net of discounts | ||||||||
| Customer deposits | ||||||||
| Deferred liability | ||||||||
| Derivative liabilities | ||||||||
| Operating lease liability, current portion | ||||||||
| Current portion of deferred revenues | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Note payable, net of discount | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Deferred revenue, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| 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 $) | ||||||||
| Series D Preferred Stock ( shares authorized and shares issued and outstanding, par value $) | ||||||||
| Series E Preferred Stock ( shares authorized, -- issued and outstanding, par value $) | ||||||||
| Common stock ( shares authorized par value $; (2022) and (2021) shares issued and outstanding) | ||||||||
| Common stock to be issued; | ||||||||
| Additional paid in capital | ||||||||
| Treasury Stock | ( | ) | ( | ) | ||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Ozop Energy Systems, Inc. stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
See notes to condensed consolidated financial statements.
| F-1 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative, related parties | ||||||||
| General and administrative, other | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other (income) expenses: | ||||||||
| Interest expense | ||||||||
| (Gain) loss on change in fair value of derivatives | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Debt restructure expense | ||||||||
| Total Other (Income) Expenses | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax provision | ||||||||
| Net Loss | ( | ) | ( | ) | ||||
| Less: net loss attributable to noncontrolling interest | ( | ) | ||||||
| Net loss attributable to Ozop Energy Solutions, Inc. | $ | ( | ) | $ | ( | ) | ||
| Loss per share basic and fully diluted | $ | ( | ) | ( | ) | |||
| Weighted average shares outstanding | ||||||||
| Basic and diluted | ||||||||
See notes to condensed consolidated financial statements.
| F-2 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
| Common stock | Series C Preferred | Series D Preferred | Additional | Non | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||
| to be issued | Stock | Stock | Common Stock | Treasury | Paid-in | Accumulated | controlling | Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Stock | Capital | Deficit | Interest | (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Balances January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
| F-3 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 2021
(Unaudited)
| Common stock | Series C Preferred | Series D Preferred | Series E Preferred | Accumulated | Additional | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| to be issued | Stock | Stock | Stock | Common Stock | Comprehensive | Paid-in | Accumulated | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Loss | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Balances January 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversions of note and interest payable | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon cashless exercise of warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series E Preferred Stock | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Series E Preferred Stock | - | - | - | ( | ) | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued and to be issued for fees and services | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for lease agreement | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issue for debt restructure | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balances March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
| F-4 |
OZOP ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | |||||||||
| Cash flows from operating activities: | ||||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operations | ||||||||||
| Non-cash interest expense | ||||||||||
| Amortization and depreciation | ||||||||||
| Debt restructure expense | ||||||||||
| (Gain) loss on fair value change of derivatives | ( | ) | ||||||||
| Loss on extinguishment of debt | ||||||||||
| Stock compensation expense | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Accounts receivable | ( | ) | ||||||||
| Inventory | ( | ) | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||||
| Vendor deposits | ( | ) | ||||||||
| Accounts payable and accrued expenses | ||||||||||
| Deferred revenue | ( | ) | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||||
| Purchase of office and computer equipment | ( | ) | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||||
| Proceeds from issuances of notes payable | ||||||||||
| Payments to shareholders | ( | ) | ||||||||
| Payments of principal of convertible note payable and notes payable | ( | ) | ||||||||
| Redemption of Series E Preferred Stock | ( | ) | ||||||||
| Net cash provided by financing activities | ||||||||||
| Net (decrease) increase in cash | ( | ) | ||||||||
| Cash, Beginning of period | ||||||||||
| Cash, End of period | $ | $ | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||||
| Cash paid for interest | $ | $ | ||||||||
| Cash paid for income taxes | $ | $ | ||||||||
| Schedule of non-cash Investing or Financing Activity: | ||||||||||
| Original issue discount included in notes payable | $ | $ | ||||||||
| Issuance of common stock upon convertible note and accrued interest conversion | $ | $ | ||||||||
| Issuance of common stock and preferred stock for consulting fees and compensation | $ | $ | ||||||||
| Issuance of common stock for lease agreement | $ | $ | ||||||||
| Issuance of common stock for debt restructuring | $ | $ | ||||||||
See notes to condensed consolidated financial statements.
| F-5 |
OZOP ENERGY SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 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 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. The Company is the majority shareholder of Ozop Capital with PJN Holdings LLC (“PJN”), a New York limited liability company, being the minority shareholder. 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 March 31, 2022, the Company had an accumulated
deficit of $
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.
| F-6 |
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. 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. As of the date of this Report the Company has not sold any securities pursuant to this Registration Statement.
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
The Company is in negotiations with its’ lenders related to the debt instruments that are currently in default, to extend the maturity dates.
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.
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 March 31, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 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 Ozop Energy Systems, Inc. and the Company’s other wholly owned subsidiaries PCTI, Ozop LLC, Ozop HK and Spinus, LLC (“Spinus”) and the Company’s majority owned subsidiary Ozop Capital Partners, Inc. 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 March 31, 2022, and December 31, 2021.
| F-7 |
Sales Concentration and credit risk
Following is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three months ended March 31, 2022, and 2021, and their accounts receivable balance as of March 31, 2022:
| Sales % Three Months Ended March 31, 2022 | Sales % Three Months Ended March 31, 2021 | Accounts receivable balance March 31, 2022 | ||||||||||
| Customer A | % | N/A | $ | |||||||||
| Customer B | % | N/A | ||||||||||
| Customer C | % | N/A | ||||||||||
| Customer D | % | N/A | ||||||||||
| Customer E | N/A | % | ||||||||||
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.
The components of inventories at March 31, 2022, and December 31, 2021, are as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Purchase concentration
OES
purchases finished renewable energy products from its’ suppliers. For the three months ended March 31, 2022, there were four suppliers
that accounted for
The principal purchases by PCTI are comprised of parts and raw materials that PCTI assembles and manufactures and sells to its customers. There were no suppliers who accounted for more than ten percent (10%) of the Company’s purchases for the three months ended March 31, 2021.
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:
| Office furniture and equipment | ||
| Warehouse equipment |
| F-8 |
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. Under ASC 606, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. Other than 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.
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 months ended March 31, 2022 and 2021:
| Three months ended March 31, 2022 | Three months ended March 31, 2021 | |||||||
| Sourced and distributed products | $ | $ | ||||||
| Manufactured products | ||||||||
| Total | $ | $ | ||||||
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. For manufactured products, there is usually a bidding process by branches of the military or other large firms that need mostly battery charging and storage systems for large industrial projects. We would then purchase the raw materials and parts needed to build out the project in our Pennsylvania warehouse.
Advertising and Marketing Expenses
The
Company expenses advertising and marketing costs as incurred. For the three months ended March 31, 2022, and 2021, the Company recorded
advertising and marketing expenses of $
Research and Development
Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the three months ended March 31, 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-9 |
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.
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 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 March 31, 2022, and December 31, 2021, for each fair value hierarchy level:
| March 31, 2022 | Derivative Liabilities | Total | ||||||
| Level I | $ | $ | ||||||
| Level II | $ | $ | ||||||
| Level III | $ | $ | ||||||
| December 31, 2021 | Derivative Liabilities | Total | ||||||
| Level I | $ | $ | ||||||
| Level II | $ | $ | ||||||
| Level III | $ | $ | ||||||
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-10 |
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
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 March 31, 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 March 31, 2022, and 2021:
| March 31, 2022 | March 31, 2021 | |||||||
| Convertible preferred stock (1) | ||||||||
| Unexercised common stock purchase warrants (1) | ||||||||
| Convertible notes payable | ||||||||
| Promissory note payable (1) | ||||||||
| Common stock to be issued | ||||||||
| (1) |
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 March 31, 2022, that are of significance or potential significance to the Company.
| F-11 |
NOTE 4 – PROPERTY AND EQUIPMENT
The following table summarizes the Company’s property and equipment:
| March 31, 2022 | December 31, 2021 | |||||||
| Office equipment | $ | $ | ||||||
| Less: Accumulated Depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, Net | $ | $ | ||||||
Depreciation
expense was $
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 March 31, 2022, and December 31, 2021, the outstanding principal balance of this note was $
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.
The
Company valued the derivative liabilities at March 31, 2022, and December 31, 2021, at $
A summary of the activity related to derivative liabilities for the three months ended March 31, 2022, is as follows:
| Derivative liabilities associated with warrants | Derivative liabilities associated with convertible notes | Total derivative liabilities | ||||||||||
| Balance December 31, 2021 | $ | $ | $ | |||||||||
| Change in fair value | ( | ) | ( | ) | ( | ) | ||||||
| Balance March 31, 2022 | $ | $ | $ | |||||||||
| F-12 |
NOTE 7 – NOTES PAYABLE
The Company has the following note payables outstanding:
| March 31, 2022 | December 31, 2021 | |||||||
| Note payable bank, interest at | $ | $ | ||||||
| Note payable bank, interest at | ||||||||
| Economic Injury Disaster Loan | ||||||||
| Paycheck Protection Program loan | ||||||||
| Notes payable, interest at | ||||||||
| Other, due on demand, interest at | ||||||||
| Note payable $ | ||||||||
| Note payable $ | ||||||||
| Note payable $ | ||||||||
| Note payable $ | ||||||||
| Note payable $ | ||||||||
| Note payable $ | ||||||||
| Sub- total notes payable | ||||||||
| Less long-term portion | ||||||||
| Current portion of notes payable, net of discount | $ | $ | ||||||
On
December 7, 2021, the Company entered into a
On
March 17, 2021, the Company entered into a
On
February 9, 2021, the Company entered into a
| F-13 |
On
November 13, 2020, the Company entered into a
On
November 6, 2020, the Company entered into a Settlement Agreement with the holder of $
On
October 26, 2016, PCTI entered into a $
On
March 15, 2021, PCTI renewed their $
On
August 24, 2020 (the “Issue Date”), the Company entered into a
On
April 20, 2020, PCTI was granted a loan from Huntington Bank in the amount of $
On
July 14, 2020, PCTI received $
| F-14 |
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 $
NOTE 9 – DEFERRED REVENUE
During
the year ended December 31, 2020, the Company received $
NOTE 10 – 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 $
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 $
Series E Preferred Stock
On March 21, 2021, the Company issued shares of Series E Preferred Stock (see Note 12), of the shares were issued to Mr. Conway. 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 compensation expense for the Series E shares issued to Mr. Conway. During the three months ended March 31, 2021, the Company redeemed the shares issued to Mr. Conway and recorded $ of expense related to the shares issued to Mr. Conway. On April 16, 2021, the Board of Directors (the “BOD”) of the Company authorized the issuance shares of Series E Preferred stock, of which were issued to Mr. Conway.
Management Fees and related party payables
For the three months ended March 31, 2022, and 2021, the Company recorded expenses to its officers in the following amounts:
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CEO, parent | $ | $ | ||||||
| CEO, parent- Series E Preferred Stock | ||||||||
| President, subsidiary (resigned July 2021) | ||||||||
| Total | $ | $ | ||||||
| F-15 |
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 $
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Leases
On
January 2, 2021, the Company entered into a ten (
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 $
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 $
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 $
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 $
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 $
| F-16 |
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 $
On February 19, 2021, the Company entered into a Joint Business Alliance agreement with Grid and Energy Master Planning, LLC (“GEMM”). GEMM will provide advisory, financing and implementation solutions for behind-the-meter customers in the areas of energy efficiency, solar, EV charging, and battery storage for OES. The GEMM services allows OES to provide one-stop-shopping in these emerging and maturing sectors. As of March 31, 2022, there has not been any transactions related to this agreement and the Company is continuing to evaluate the accounting treatment of any future transactions.
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 three months ended March 31, 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 $
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 $
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 $
On
September 2, 2020, PCTI entered into an Agreement with a third- party. Pursuant to the terms of the agreement, in exchange for $
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-17 |
NOTE 12– STOCKHOLDERS’ EQUITY
Common stock
During the three months ended March 31, 2022, the Company issued shares of restricted common stock in the aggregate for services.
During
the three months ended March 31, 2021, holders of an aggregate of $
During the three months ended March 31 2021, the Company also issued the following shares of restricted common stock:
| ● | shares of restricted common stock pursuant to a lease agreement (see Note 11). | |
| ● | 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 three months ended March 31, 2021, the Company also issued
As of March 31, 2022, the Company has shares of $par value common stock authorized and there are shares of common stock issued and outstanding.
Preferred stock
As of March 31, 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.
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. Under the terms of the Certificate of Designation of Series D Preferred Stock, shares of the Company’s preferred stock have been designated as Series D Convertible Preferred Stock. The holders of the Series D Convertible Preferred Stock shall not be entitled to receive dividends. The holders as a group may, at any time convert all of the shares of Series D Convertible Preferred Stock 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 3. Except as provided in the Certificate of Designation 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 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
| F-18 |
The
warrant has a
| 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. |
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 $
NOTE 13 – NONCONTROLLING INTEREST
On
August 19, 2021, the Company formed Ozop Capital. Upon formation, the Company owned
| F-19 |
NOTE 14 - OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
On
October 25, 2019, PCTI executed a non-cancellable lease for office and industrial space which began December 1, 2019 and expires on
On
April 14, 2021, the Company entered into a -year lease which began on June 1, 2021, for approximately
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:
| March 31, 2022 | ||||
| Office and warehouse lease | $ | |||
| Less: Accumulated Amortization | ( | ) | ||
| Right-of-use asset, net | $ | |||
| March 31, 2022 | ||||
| Lease liability | $ | |||
| Less current portion | ( | ) | ||
| Long term portion | $ |
Maturity of lease liabilities are as follows:
| Amount | ||||
| For the year ended December 31, 2022 | $ | |||
| For the year ended December 31, 2023 | ||||
| For the year ended December 31, 2024 | ||||
| For the year ended December 31, 2025 | ||||
| For the year ended December 31, 2026 | ||||
| Total | $ | |||
| Less present value discount | ( | ) | ||
| Lease liability | $ | |||
NOTE 15 – SUBSEQUENT EVENTS
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
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-20 |
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. The Company is the majority shareholder of Ozop Capital with PJN Holdings LLC, a New York limited liability company, being the minority shareholder. Ozop Capital was formed as a holding company and seeks to develop a captive insurance company. Brian Conway was appointed as the sole officer and director 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.
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.
| 3 |
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-Grids proprietary program, 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-Grids, patent pending, is comprised 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 the license 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 installed with reduced delays, restricted areas or load limits and (2) EV charger electricity that is produced from renewable sources claiming little to no carbon footprint.
OES has developed a business plan for the Neo Grids distribution, a solution to the stress forthcoming to the existing grid infrastructure. The Company has completed its’ Neo Grid research and development as well as the first set of engineered technical drawings. This first stage of engineered technical drawings 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-Grid 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 plans on producing vehicle service contracts (“VSC’s”) for electric vehicles (EV’s) that will offer to consumers to be able to purchase additional months and or 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 VSC will give “peace of mind” to the EV buyer. The Company is currently in negotiations to complete the necessary agreements to launch the product in Q2 2022. Additionally, the Company is also in discussions with entities whereby Ozop Plus can reinsure the battery portion of another entity’s VSC.
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
On July 10, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Under the terms of the SPA, the Company acquired one thousand (1,000) shares of PCTI, which represents all of the outstanding shares of PCTI, from Chis in exchange for the issuance of 47,500 shares of the Company’s Series C Preferred Stock, 18,667 shares of the Company’s Series D Preferred Stock, and 500 shares of the Company’s Series E Preferred Stock to Chis. The Acquisition is being accounted for as a business combination and was treated as a reverse acquisition for accounting purposes with PCTI as the accounting acquirer in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). In accordance with the accounting treatment for a reverse acquisition, the Company’s historical financial statements prior to the reverse merger were and will be replaced with the historical financial statements of PCTI prior to the reverse merger, in all future filings with the U.S. Securities and Exchange Commission (the “SEC”). The consolidated financial statements after completion of the reverse merger have and will include the assets, liabilities and results of operations of the combined company from and after the closing date of the reverse merger.
| 4 |
PCTI designs, develops, manufactures and distributes standard and custom power electronic solutions. All of its products are manufactured in the United States.
The results of operations below include PCTI activity for the three months ended March 31, 2022, and 2021. Due to supply chain issues and other factors, management is currently reviewing the current business model of PCTI, in determining the best course of action going forward.
Stock Redemption Agreement
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 XX, 2022.
Results of Operations for the three months ended March 31, 2022 and 2021:
Revenue
For the three months ended March 31, 2022, the Company generated revenue of $3,082,238 compared to $795,554 for the three months ended March 31, 2021. The increase in revenues is a result of revenues of $2,912,322 from Ozop Energy Systems, Inc. (“OES”) and are classified as sourced and distributed products. PCTI sales decreased to $162,916 for the three months ended March 31, 2022 compared to $795,554 for the three months ended March 31, 2021. Sales are summarized as follows:
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sourced and distributed products | $ | 2,912,322 | $ | - | ||||
| Manufactured products | 162,916 | 795,554 | ||||||
| Total | $ | 3,082,238 | $ | 795,554 | ||||
As it did for most of the industry; OES’s importing of solar panels issues that began in the 4th quarter of 2021, continued into the first quarter of 2022. Covid issues continued to be distributive 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. Based on the current situation, management has placed approximately $10,900,000 of purchase orders and as of the date of the filing of this report has made approximately $1.7 million of down payments to vendors to assure product delivery of approximately $5.9 million with a forecasted delivery by August 2022 and $5 million with a forecasted delivery in November 2022. Based on the above and the Company’s current on-hand inventory, management anticipates similar to slightly higher quarterly sales results for the second and third quarter of 2022 as experienced in the first quarter, and a significant increase in the fourth quarter of 2022.
Due to supply chain issues and other factors, management is currently reviewing the current business model of PCTI, in determining the best course of action going forward.
Cost of sales
For the three months ended March 31, 2022, and 2021, the Company recognized $2,875,832 and $226,909, respectively, of cost of sales.
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sourced and distributed products | $ | 2,749,349 | $ | - | ||||
| Manufactured products | 126,483 | 226,909 | ||||||
| Total | $ | 2,875,832 | $ | 226,909 | ||||
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Based on the above cost of sales, gross margin was 6.7% and 71.5% for the three months ended March 31, 2022, and 2021, respectively. The decrease of gross margin for the current year is a result of the manufactured orders shipped in 2021 were at a higher margin than the manufactured orders were in 2022. While PCTS’s margin and gross profit decreased in the current year, the Company realized an additional $169,972 of gross profit dollars recognized on OES’s sourced and distributed products. Due to product availability, increased buy prices and delivery issues that the solar industry experienced at the end of the 4th quarter 2021, and into the first quarter of 2022, the Company expects that margins on sourced products may be temporarily reduced at the beginning of 2022. However, the Company anticipates that margins of sourced products will rise during the remainder of 2022. While the overall margin will be reduced, the higher gross profit dollars generated from the higher sourced and distributed products revenues will benefit the Company.
Operating expenses
Total operating expenses for the three months ended March 31, 2022, and 2021, were $1,977,857 and $5,789,470, respectively. The operating expenses were comprised of:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Wages and management fees, related parties | $ | 390,000 | $ | 315,008 | ||||
| Stock-based compensation | 136,249 | 4,902,000 | ||||||
| Salaries, taxes and benefits | 360,281 | 186,575 | ||||||
| Professional and consulting fees | 634,997 | 203,425 | ||||||
| Advertising and marketing | 3,263 | 22,590 | ||||||
| Rent and office expenses | 90,573 | 41,394 | ||||||
| Insurance | 94,155 | 12,075 | ||||||
| General and administrative, other | 268,339 | 106,403 | ||||||
| Total | $ | 1,977,857 | $ | 5,789,470 | ||||
Wages and management fees- related parties, include amounts paid to our CEO and to the President (resigned July 2021) of PCTI. 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. 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 March 31, | ||||||||
| 2022 | 2021 | |||||||
| CEO, parent | $ | 390,000 | $ | 279,999 | ||||
| President, subsidiary (resigned July 2021) | - | 35,008 | ||||||
| Total | $ | 390,000 | $ | 315,008 | ||||
Stock based compensation for the three months ended March 31, 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 three months ended March 31, 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 for the three months ended March 31, 2021, of $4,902,000 is comprised of the following stock issuances:
| ● | 10,000,000 shares issued for services. The shares were valued at $0.0056 per share, the date the Company agreed to issue the shares. During the three months ended March 31, 2021, the Company included $56,000 in stock compensation expense. | |
| ● | 10,000,000 shares issued pursuant to a consulting agreement dated February 24, 2021 (see Note 11). The shares were valued at $0.2386 per share. During the three months ended March 31, 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. During the three months ended March 31, 2021, the Company included $460,000 in stock compensation expense for the 5,000,000 shares of common stock to be issued. The shares were issued in April 2021. | |
| ● | Issuance of 2,000 shares (1,800 were issued to the Company’s CEO) of Series E Preferred Stock, with a redemption value of $1,000 per share, resulting in stock compensation expense of $2,000,000 ($1,800,000 related party) for the three months ended March 31, 2021. |
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Salaries, taxes and benefits increased for the three months ended March 31, 2022, compared to the same period in 2021. The increase was a result of the current period including $246,435 of expenses related to OES. These additional costs were offset by a reduction in PCTI’’s expenses of $73,734. 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. Ozop Engineering and Design (“OED”) has hired three employees effective April 1, 2022, with an aggregate annual compensation of $302,000.
Professional and consulting fees increased for the three months ended March 31, 2022, compared to March 31, 2021. The increase was due to increases in accounting and auditing expenses of Ozop in the current period, consultants engaged on the second quarter of 2021 by both Ozop Capital Partners and OES as we initiate each of their business plans regarding electric vehicles and distribution of renewable energy products, respectively.
Advertising and marketing expenses decreased for the three months ended March 31, 2022, compared to March 31, 2021. The decrease was related to marketing programs during 2021, including brand awareness programs for both PCTI and Ozop.
Rent and office expense (including supplies, utilities and internet costs) increased for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was the result of including in the current period, rent and office expense of approximately $45,734 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 months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was the result of including in the current period, insurance expense of approximately $80,834 for OES. The Company estimates that the monthly OES insurance expense for the California operation to be approximately $24,000 per month.
Other Income (Expenses)
Other income, net was $389,982 for the three months ended March 31, 2022, compared to other expenses, net, for the three months ended March 31, 2021, of $204,271,543, respectively, and were as follows:
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Interest expense | $ | 3,975,221 | $ | 40,654,750 | ||||
| (Gain) loss on change in fair value of derivatives | (4,365,203 | ) | 52,197,902 | |||||
| Debt restructure expense | - | 16,450,000 | ||||||
| Loss on extinguishment of debt | - | 94,968,892 | ||||||
| Total other (income) expense, net | $ | (389,982 | ) | $ | 204,271,543 | |||
The decrease in other expense for the three months ended March 31, 2022, is primarily a result expenses for the three months ended March 31, 2021, including 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 and 175,000,000 shares of restricted common stock issued related to the restructure of the deferred liability (see Note 9). The shares were valued at $0.094 per share and the Company recognized $16,450,000 of restructuring costs. Included in interest expense for the three months ended March 31, 2021, is the initial expense of $38,907,939 of fair value related to the issuance of 300,000,000 warrants. For the three months ended March 31, 2022, the Company recognized a gain on the change in the fair value of derivatives compared to a loss of $52,197,902 for the three months ended March 31, 2021.
Net loss
The net loss for the three months ended March 31, 2022, was $1,381,469 compared to $209,492,368 for the three months ended March 31, 2021. The decrease in the loss was primarily a result of a decrease in other expenses of $204,661,525, a decrease of $4,765,751 in stock-based compensation expenses as well as the operating results discussed above.
Liquidity and Capital Resources
Currently, our current capital and our other existing resources will be sufficient to provide the working capital needed for our current business, however, additional capital will be required to meet our debt obligations, and to further expand our business. We may be unable to obtain the additional capital required. If we are unable to generate capital or raise additional funds when required it will have a negative impact on our business development and financial results. These conditions raise substantial doubt about our ability to continue as a going concern as well as our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. This “going concern” could impair our ability to finance our operations through the sale of debt or equity securities. Management’s plans in regard to these factors are discussed below and also in Note 2 to the condensed consolidated financial statements filed herein.
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As of March 31, 2022, we had cash of $3,636,662 as compared to $6,767,167 at December 31, 2021. As of March 31, 2022, we had current liabilities of $38,384,123 (including $16,601,498 of non-cash derivative liabilities), compared to current assets of $8,898,282, which resulted in a working capital deficit of $29,485,841. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, customer deposits, lease obligations and notes payable.
In December 2019, a novel strain of coronavirus (COVID-19) emerged. Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it may have a material adverse impact on our business, financial condition and results of operations. Management expects that its business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.
Operating Activities
For the three months ended March 31, 2022, net cash used in operating activities was $3,090,505 compared to $966,126 for the three months ended March 31, 2021. For the three months ended March 31, 2022, our net cash used in operating activities was primarily attributable to the net loss of $1,381.469, adjusted by non- cash interest expense of $3,379,121, stock-based compensation of $136,249 and the non-cash expenses of interest and amortization and depreciation of $62,532. This was offset by the gain on the fair value changes in derivatives related to warrants and convertible notes of $4,365,203. Net changes of $921,735 in operating assets and liabilities increased the cash used in operating activities.
For the three months ended March 31, 2021, our net cash used in operating activities was primarily attributable to the net loss of $209,492,368, adjusted by loss on debt extinguishment of $94,968,892, non- cash interest expense of $40,414,627 (including $38,907,939 for the initial fair value of the 300,000,000 warrants issued), losses on the fair value changes in derivatives related to warrants and convertible notes of $52,197,902, debt restructuring costs of $16,450,000, stock-based compensation of $4,902,000 and the non-cash expenses of interest and amortization and depreciation of $8,327. Net changes of $415,506 in operating assets and liabilities reduced the cash used in operating activities.
Investing Activities
For the three months ended March 31, 2022, the net cash used in investing activities was $40,000, compared to $35,306 for the three months ended March 31, 2021. The amounts for both periods were a result of the Company purchasing office furniture and equipment.
Financing Activities
For the three months ended March 31, 2022, there were no financing activities. For the three months ended March 31, 2021, the net cash provided by financing activities was $8,985,320. During the three months ended March 31, 2021, we received $12,000,000 of proceeds from the issuances of $13,30,000 face value of promissory notes. During the three months ended March 31, 2021, the Company redeemed 3,000 shares of the Series E Preferred Stock for $3,000,000, repaid $3,089 of notes payable and $11,591 to shareholders.
OFF BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
Critical Accounting Policies
Our significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe the following accounting policies to be most critical to the judgement and estimates used in the preparation of our unaudited condensed consolidated financial statements:
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 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 Annual Report on Form 10-K/A filed on April 26, 2022. The unaudited condensed consolidated financial statements of the Company include the consolidated accounts of the Company and its’ wholly owned subsidiaries; PCTI, Ozop LLC, Ozop HK and Spinus. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three months ended March 31, 2022, and 2021.
Earnings (Loss) Per Share
The Company computes net loss per share in accordance with FASB ASC 260, “Earnings per Share.” ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes and stock warrants, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants and conversion of convertible notes. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
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 March 31, 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 March 31, 2022, the Company determined that there were control deficiencies that constituted material weaknesses, as described below.
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| 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 March 31, 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. |
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 March 31, 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
The following represents all shares issued during the quarter ended March 31, 2022:
On January 14, 2022, the Company issued 2,500,000 shares pursuant to an employment agreement.
On January 14, 2022, the Company issued 2,500,000 shares pursuant to an employment agreement.
The Company issued the foregoing securities in reliance on an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Rule 506(b) promulgated thereunder, as there was no general solicitation to the investors and the transactions did not involve a public offering.
Item 3. DEFAULTS UPON SENIOR SECURITIES
On March 17, 2021, the Company entered into a 12%, $11,110,000 face value promissory note with a third- party lender with a maturity date of March 17, 2022. This note is now in default. As of March 31, 2022, the principal of $11,110,000 and the accrued interest of $1,362,421 is due. The Company is in discussions with the lender regarding the extension of the maturity date of this note.
On February 9, 2021, the Company entered into a 12%, $2,200,000 face value promissory note with a third- party lender with a maturity date of February 9, 2022. This note is now in default. As of March 31, 2022, the principal of $2,200,000 and the accrued interest of $295,825 is due. The Company is in discussions with the lender regarding the extension of the maturity date of this note.
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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. This note is now in default. As of March 31, 2022, the principal is $1,000,000 and the accrued interest of $194,630 is due. The Company is in discussions with the lender regarding the extension of the maturity date of this note.
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
Item 5. OTHER INFORMATION
| (a) | None. | |
| (b) | During the quarter ended March 31, 2022, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors. |
Item 6. EXHIBITS
The following documents are filed as part of this report:
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* Filed herewith.
+ Management contract or compensatory plan or arrangement.
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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: May 16, 2022
| /s/ Brian P Conway | |
| Brian P. Conway | |
| Chief Executive Officer | |
| (principal executive officer) | |
| (principal financial and accounting officer) |
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