# Ozop Energy Solutions, Inc.: Form 10-Q for the period ended Mar 31, 2022

- Company: [Ozop Energy Solutions, Inc.](/companies/ozsc.md) (CIK 1679817)
- Form: 10-Q
- Filed: 2022-05-16
- Accepted by EDGAR: May 16, 2022, 09:00 ET
- Period: 2022-03-31
- Accession: 0001493152-22-013538
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1679817/000149315222013538/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1679817/000149315222013538/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $3.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $2.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $206.4k | us-gaap:GrossProfit |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | −$1.8m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | −$1.2m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.00 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | −$3.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $40.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-03-31 | $3.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $8.9m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $10.3m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $38.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $39.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-03-31 | −$28.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,325 characters.

*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.

*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.

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 |

5

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.

6

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.

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:

### 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.

## Market risk

As filed, 1,142 characters.

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.

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.

## Controls and procedures

As filed, 3,927 characters.

### 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.

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.

Filed May 16, 2022.
Source: SEC EDGAR, the filing index for accession 0001493152-22-013538. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.