Ozop Energy Solutions, Inc.: Form 10-K for the period ended Dec 31, 2022

ORGANIZATION

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.

Our corporate website is located at http://ozopenergy.com/, and the contents of our website are expressly not incorporated herein.

On July 10, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Under the terms of the SPA, the Company acquired one thousand (1,000) shares of PCTI, which represents all of the outstanding shares of PCTI, from Chis in exchange for the issuance of 47,500 shares of the Company’s Series C Preferred Stock, 18,667 shares of the Company’s Series D Preferred Stock, and 500 shares of the Company’s Series E Preferred Stock to Chis.

On October 29, 2020, the Company formed a new wholly owned subsidiary, Ozop Surgical Name Change Subsidiary, Inc., a Nevada corporation (“Merger Sub”). The Merger Sub was formed under the Nevada Revised Statutes for the sole purpose and effect of changing the Company’s name to “Ozop Energy Solutions, Inc.” That same day the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with the Merger Sub and filed Articles of Merger (the “Articles of Merger”) with the Nevada Secretary of State, merging the Merger Sub into the Company, which were stamped effective as of November 3, 2020. As permitted by the Section 92.A.180 of the Nevada Revised Statutes, the sole purpose and effect of the filing of Articles of Merger was to change the name of the Company from Ozop Surgical Corp to “Ozop Energy Solutions, Inc.”

On December 11, 2020, the Company formed Ozop Energy Systems, Inc. (“OES”), a Nevada corporation and a wholly owned subsidiary of the Company. OES was formed to be a manufacturer and distributor of renewable energy products.

On August 19, 2021, the Company formed Ozop Capital Partners, Inc. (“Ozop Capital”), a Delaware corporation and a wholly owned subsidiary of the Company. Brian Conway was appointed as the sole officer and director of Ozop Capital and has voting control of Ozop Capital.

On October 29, 2021, EV Insurance Company, Inc. (“EVCO”) was formed as a captive insurance company in the State of Delaware. EVCO is a wholly owned subsidiary of Ozop Capital. On January 7, 2022, EVCO filed with New Castle County, Delaware DBA OZOP Plus.

On February 25, 2022, the Company formed Ozop Engineering and Design, Inc. (“OED”) a Nevada corporation, as a wholly owned subsidiary of the Company. OED was formed to become a premier engineering and lighting control design firm. OED offers product and design support for lighting and solar projects with a focus on fast lead times and technical support. OED and our partners are able to offer the resources needed for lighting, solar and electrical design projects. OED will provide customers systems to coordinate the understanding of electrical usage with the relationship between lighting design and lighting controls, by developing more efficient ecofriendly designs. We work with architects, engineers, facility managers, electrical contractors and engineers.

Corporate Matters

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, 50,000 shares of the Company’s preferred remain designated as Series C Preferred Stock. The holders of Series C Preferred Stock have no conversion rights and no dividend rights. For so long as any shares of the Series C Preferred Stock remain issued and outstanding, the Holder thereof, voting separately as a class, shall have the right to vote on all shareholder matters equal to sixty-seven (67%) percent of the total vote. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued 47,500 shares of Series C preferred Stock to Chis. On July 13, 2021, the Company purchased 47,500 shares of the Company’s Series C Preferred Stock held by Chis (see below). As of December 31, 2022, and 2021, there were 2,500 shares, respectively, of Series C Preferred Stock issued and outstanding, all owned by Mr. Conway.

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, 20,000 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 18,667 shares of Series D preferred Stock to Chis, and on August 28, 2020. Pursuant to Mr. Conway’s employment agreement, the Company issued 1,333 shares of Series D Preferred Stock to Mr. Conway. On July 13, 2021, the Company purchased 18,667 shares of the Company’s Series D Preferred Stock held by Chis (see below).

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. In conjunction with the Agreement, Chis resigned from any and all positions held in the Company’s wholly owned subsidiary, PCTI. Further, Chis agreed that upon her resignation and for a period of five years thereafter (the “Restriction Period”), she shall not, directly or indirectly, solicit the employment of, assist in the soliciting of the employment of, or hire any employee or officer of the Company, including those of any of its present or future subsidiaries, or induce any person who is an employee, officer, agent, consultant or contractor of the Company to terminate such relationship with the Company. Additionally, Chis agrees that during the Restriction Period, she shall not compete with the Company or PCTI anywhere worldwide or be employed by any competitor of the Company.

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, 4,570 shares of the Company’s preferred stock will be designated as Series D Convertible Preferred Stock. The holders of the Series D Convertible Preferred Stock shall not be entitled to receive dividends. Any holder may, at any time convert any number of shares of Series D Convertible Preferred Stock held by such holder into a number of fully paid and nonassessable shares of common stock determined by multiplying the number of issued and outstanding shares of common stock of the Company on the date of conversion, by 1.5 and dividing that number by the number of shares of Series D Convertible Preferred Stock being converted. Except as provided in the Series D Amendment or as otherwise required by law, no holder of the Series D Convertible Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Company for their vote, waiver, release or other action. The Series D Convertible Preferred Stock shall not bear any liquidation rights. On July 28, 2021, the Company closed on a Stock and Warrant Purchase Agreement (the “Series D SPA”). Pursuant to the terms of Series D SPA, an investor in exchange for $13,200,000 purchased one share of Series D Preferred Stock, and a warrant to acquire 3,236 shares of Series D Preferred Stock. As of December 31, 2022, and 2021, there were 1,334 shares, respectively, of Series D Preferred Stock issued and outstanding and warrants to purchase 3,236 shares of Series D Preferred Stock are outstanding as of December 31, 2022. Mr. Conway owns 1,333 shares of Series D Preferred Stock as of December 31, 2022, and 2021.

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, 3,000 shares of the Company’s preferred stock have been designated as Series E Preferred Stock. The holders of the Series E Convertible Preferred Stock shall not be entitled to receive dividends. No holder of the Series E Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Corporation for their vote, waiver, release or other action, except as may be otherwise expressly required by law. At any time, the Corporation may redeem for cash out of funds legally available therefor, any or all of the outstanding Preferred Stock (“Optional Redemption”) at $1,000 (one thousand dollars) per share. The shares of Series E Preferred Stock have not been registered under the Securities Act of 1933 or the laws of any state of the United States and may not be transferred without such registration or an exemption from registration. On July 10, 2020, pursuant to the SPA with PCTI, the Company issued 500 shares of Series E preferred Stock to Chis, and on August 28, 2020, pursuant to Mr. Conway’s employment agreement, the Company issued 500 shares of Series E Preferred Stock to Mr. Conway. As of December 31, 2021, and 2020, there were -0- and 1,000 shares, respectively, of Series E Preferred Stock issued and outstanding.

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 (200,000,0000) shares of the Company’s common stock to GHS. We may sell shares of our common stock from time to time over a twelve (12)- month period ending April 4, 2023, at our sole discretion, to GHS under the GHS Purchase Agreement. The purchase price shall be 85% of lowest VWAP for the ten (10) days preceding the Company’s notice to GHS for the sale of the Company’s common stock. On April 8, 2022, the Company filed a Prospectus Supplement to the Registration Statement dated October 14, 2021, regarding the GHS Purchase Agreement.

Discontinued Operations

In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meet the criteria in paragraph 205-20-45-10. In the period in which the component meets held-for-sale or discontinued operations criteria the major current assets, other assets, current liabilities, and noncurrent liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations.

On September 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceeding which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as a loss from discontinued operations in the accompanying consolidated financial statements for the years ended December 31, 2022, and 2021.

Recent Events

On January 18, 2023, the Company and GHS signed a Securities Purchase Agreement (the “2nd GHS Purchase Agreement”) for the sale of up to One Hundred Fifty Million (150,000,0000) 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 July 18, 2023, at our sole discretion, to GHS under the GHS Purchase Agreement. The purchase price shall be 85% of lowest VWAP for the ten (10) days preceding the Company’s notice to GHS for the sale of the Company’s common stock. On January 31, 2023, the Company filed a Prospectus Supplement to the Registration Statement dated October 14, 2021, regarding the 2nd GHS Purchase Agreement.

Business Overview

Ozop Energy Systems

OES was formed to be a distributor of renewable energy products and is actively engaged in the renewable, electric vehicle (“EV”), energy storage and energy resiliency sectors. 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.

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. The utility-scale storage business 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, patents pending, was developed for the off-grid distribution of electricity to remove or reduce the dependency on utilities that currently burdens the EV Charging sectors. It will also reduce or eliminate the lengthy permitting processes and streamline the installations of those EV chargers.

Modular Energy Distribution System: The Neo-GridTM System patent pending, consists of the design, engineering, installation, and operational methodologies as well as the financial arbitrage of how we produce, capture and distribute electrical energy for the EV markets. OES has acquired through a license the rights to a proprietary system, the Neo-GridsTM System (patent pending), for the capture and distribution of electrical energy for the EV market. The Neo-GridsTM System will serve both the private auto and the commercial sectors. The exponential growth of the EV industry has been accelerated by the recent major commitments of most of the major car manufacturers. Our Neo-GridsTM System leverages this accelerated growth by offering (1) charging locations that can be rapidly installed in restricted areas or load limits and (2) EV charger electricity that is produced from renewable sources having little to no carbon footprint.

OES has developed a business plan for the Neo GridTM distribution system, a solution to alleviate the stress on the existing grid-tied infrastructure. The Company has completed its’ Neo GridTM research and development as well as the first stage that includes the specifications and engineered technical drawings. This completion of the first stage of allows us to move forward with stage two, as well as to begin to construct the first prototype or proof of concept, (“PoC”). Our PoC design is partially reliant on auto manufacturers establishing standardizations of the actual charging/discharging protocols of the batteries such as on-board inverters as well as bi-directional capabilities in electric vehicles, which have only recently been established. As the market growth rate of EV’s continues to rise, the stress on the existing grid-tied infrastructure shows the need for the continued development of our Neo-GridTM System as a viable solution.

Ozop Plus

On August 19, 2021, the Company formed Ozop Capital Partners, Inc. (“Ozop Capital”), a Delaware corporation and a wholly owned subsidiary of the Company. On October 29, 2021, EV Insurance Company, Inc. (“EVCO”) was formed as a captive insurer that reinsures in the State of Delaware. EVCO (DBA “OZOP Plus”) is a wholly owned subsidiary of Ozop Capital. EVCO has agreements with others whereby the battery premium associated with any EV VSC will be ceded to EVCO. Ozop Plus markets vehicle service contracts (“VSC’s”) for electric vehicles (EV’s) that offer consumers to be able to purchase additional months and miles above the manufacturer’s warranty and to also bring added value to EV owners by utilizing our partnerships and strengths in the energy market to offer unique and innovative services. Among EV owners’ concerns are the EV battery repair and replacement costs, range anxiety, environmental responsibilities, roadside assistance, and the accelerated wear on additional components that EV vehicles experience. Management believes that the Ozop Plus marketed VSC’s will give “peace of mind” to the EV buyer.

Ozop Engineering and Design

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 provides 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.

Sales and marketing

The Company markets its products through its websites as well as attending industry specific trade shows. Additionally, Ozop Plus markets the EV VSC in conjunction with Royal Administration Services, Inc. (“Royal”) through Royal’s agents and the Company also will begin marketing the product through various third-party websites and portals for additional direct to consumer marketing to EV owners. In April 2023, OED began marketing its’ maintenance and support contract program, named Ozop Secure to existing customers as well as through other distributors.

Competition

We compete with many companies in the various application segments including larger, more established companies with substantial capabilities, personnel and financial resources. Many of our competitors have a larger presence in global markets.

Employees

As of the date of this filing, the Company employs 9 full time employees. Ozop also has contracts with various independent contractors and consultants to fulfill additional needs, including accounting, investor relations, business development, permitting, and other corporate functions, and may increase staff further as we expand activities and bring new projects online.

On January 2, 2021, the Company entered into a ten (10) year lease for a 6-bay garage storage facility of approximately 2,500 square feet. Pursuant to the lease the Company agreed to issue 100,000,000 shares of restricted common stock. The shares were certificated on March 8, 2021, with an effective date of January 2, 2021. The Company valued the shares at $0.0063 per share, (the market value of the common stock on the date of the agreement) and had initially recorded $630,000 as a prepaid expense. On September 6, 2022, the Company was assigned the title to a property located at 55 Ronald Reagan Blvd, Warwick, NY 10990, in exchange for the 100,000,000 shares of common stock that were issued to the building owner in January 2021. The Company also entered into a free one-year Maintenance Agreement. The Company allocated $30,000 of the prepaid expense to the Maintenance Agreement and is amortizing the $30,000 over the one-year term. The Deed was recorded in the name of the Company on October 4, 2022. The Company reclassed the remaining $600,000 as a fixed asset and credited prepaid expense.

On April 14, 2021, the Company entered into a five-year lease which began on June 1, 2021, for approximately 8,100 square feet of office and warehouse space in Carlsbad, California, expiring May 31, 2026. Initial lease payments of $13,148 began on June 1, 2021, and increase by approximately 2.4% annually thereafter.

On November 14, 2022, Ozop Energy Systems, Inc. filed a complaint in the Superior Court for County of San Diego, State of California, Ozop Energy Systems, Inc. v. Serna, et al., Case No. 37-2022-00046102-CU-BT-NC, against five former employees, and a corporation owned by two of those defendants, Your Home Solution Corp. (“YHS”), which asserts claims for (1) fraud and deceit; (2) breach of duty of loyalty; (3) intentional interference with prospective economic advantage; (4) violation of Penal Code section 496; (5) violation of Business and Professions Code section 17200, et. seq.; (6) and accounting. The Complaint alleges that the individual defendants, while working for Ozop Energy Systems, Inc., illegally diverted customers and profits that belonged to Ozop Energy Systems, Inc. The Complaint seeks damages in the form of past and future profits, restitution of compensation, and punitive damages.

Other than the above, we know of no legal proceedings to which we are a party or to which any of our property is the subject, which are pending, threatened or contemplated or any unsatisfied judgments against the Company.

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 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.

While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern.

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 and a wholly owned subsidiary of the Company, and was formed as a holding company. On October 29, 2021, EV Insurance Company, Inc. (“EVCO”) was formed as a captive insurer that reinsures in the State of Delaware. EVCO (DBA “OZOP Plus”) is a wholly owned subsidiary of Ozop Capital.

OES is actively engaged in the renewable, electric vehicle (“EV”), energy storage and energy resiliency sectors. We are engaged in multiple business lines that include project development as well as equipment distribution. Our solar and energy storage projects involve large-scale battery and solar photovoltaics (PV) installations. Our utility-scale storage business model is based on an arbitrage business model in which we install multiple 1+ megawatt batteries, charge them with off-peak grid electricity under contract with the utility, then sell the power back during peak load hours at a premium, as dictated by prevailing electricity tariffs.

Equipment Distributor: OES has entered the component supply/distribution side of the renewable, resiliency and energy storage industries distributing the core components associated with residential and commercial solar PV systems as well as onsite battery storage and power generation. In April 2021, the Company signed a five- year lease (beginning June 1, 2021) of approximately 8,100 SF in California, for office and warehouse space to support the sales and distribution of our west coast operations. The components we are distributing include PV panels, solar inverters, solar mounting systems, stationary batteries, onsite generators and other associated electrical equipment and components that are all manufactured by multiple companies, both domestic and international. These core products are sourced from management-developed relationships and are distributed through our existing network and our in-house sales team.

Solar PV: Our PV business model involves the design and construction of electrical generating PV systems that can sell power to the utilities or be used for off grid use as part of our developing Neo-Grids solution. The Neo-GridTM System, patent pending, was developed for the off-grid distribution of electricity to remove or reduce the dependency on utilities that currently burdens the EV Charging sectors. It will also reduce or eliminate the lengthy permitting processes and streamline the installations of those EV chargers.

Modular Energy Distribution System: The Neo-GridTM System patent pending, consists of the design, engineering, installation, and operational methodologies as well as the financial arbitrage of how we produce, capture and distribute electrical energy for the EV markets. OES has acquired through a license the rights to a proprietary system, the Neo-GridsTM System (patent pending), for the capture and distribution of electrical energy for the EV market. The Neo-GridsTM System will serve both the private auto and the commercial sectors. The exponential growth of the EV industry has been accelerated by the recent major commitments of most of the major car manufacturers. Our Neo-GridsTM System leverages this accelerated growth by offering (1) charging locations that can be rapidly installed in restricted areas or load limits and (2) EV charger electricity that is produced from renewable sources having little to no carbon footprint.

OES has developed a business plan for the Neo GridTM distribution system, a solution to alleviate the stress on the existing grid-tied infrastructure. The Company has completed its’ Neo GridTM research and development as well as the first stage that includes the specifications and engineered technical drawings. This completion of the first stage of allows us to move forward with stage two, as well as to begin to construct the first prototype or proof of concept, (“PoC”). Our PoC design is partially reliant on auto manufacturers establishing standardizations of the actual charging/discharging protocols of the batteries such as on-board inverters as well as bi-directional capabilities in electric vehicles, which have only recently been established. As the market growth rate of EV’s continues to rise, the stress on the existing grid-tied infrastructure shows the need for the continued development of our Neo-GridTM System as a viable solution.

OES management has decades of experience in the renewable, storage and resilient energy businesses and associated markets, which include but are not limited to project finance, project development, equipment finance, construction, utility protocol, regulatory policy and technology assessment.

Ozop Plus markets vehicle service contracts (“VSC’s”) for electric vehicles (EV’s) that offer consumers to be able to purchase additional months and miles above the manufacturer’s warranty and to also bring added value to EV owners by utilizing our partnerships and strengths in the energy market to offer unique and innovative services. Among EV owners’ concerns are the EV battery repair and replacement costs, range anxiety, environmental responsibilities, roadside assistance, and the accelerated wear on additional components that EV vehicles experience. Management believes that the Ozop Plus marketed VSC’s will give “peace of mind” to the EV buyer.

• In May 2022, the Company entered into an agreement with GS Administrators, Inc., a member of Houston-based GSFSGroup. Under the agreement, the Company will market GSFSGroup’s EV VSC’s in all states (except, California, Florida, Massachusetts and Washington) to Ozop’s network of new and used franchised dealerships and other eligible entities. In addition to acting as an agent for the marketing, Ozop also has the right to white label the product under its’ Ozop Plus brand. Ozop’s role won’t be limited to marketing the product. GSFSGroup plans to tap into Ozop’s experience relative to battery collection and disposal and has agreed to insurance risk sharing in connection with the insurance policies that back the VSC’s. GSFSGroup is working on getting the approvals needed for the above four (4) states.
• On June 22, 2022, the Company entered into an Agent Agreement with Royal Administration Services, Inc. (“Royal”). Under the agreement, the Company will market Royal’s EV VSC’s and has the right to white label it under Ozop Plus. Royal has agreed to allow Ozop Plus on all VSC’s, marketed by Royal and the Company, to assume all the risk related to the electric battery at an agreed upon premium. The battery premium is dependent on the consumer’s selection of the duration of the VSC, the miles selected for coverage and the type of vehicle that the consumer has purchased, with a key component being the kWh size of the battery. These VSC’s have a maximum of 10 years and 150,000 miles and cover new and used cars from model year 2017 and newer. Royal’s VSCs are now effective in 46 states and the others have various waiting times or approvals needed.
• On October 13, 2022, EVCO entered a Reinsurance Contract (the “Contract”) with American Bankers Insurance Company of Florida (“ABIC” or the “Ceding Company”). Royal is the Administrator of the Contract. Pursuant to the terms of the Contract, ABIC will cede 100% of the battery coverage portion of all electric vehicle service contracts to EVCO. On the same date ABIC and EVCO also entered into a Trust Agreement, whereas EVCO as the reinsurer agrees to deposit an amount equal to unearned premium reserves, plus losses reported but unpaid, plus the estimated amount of losses incurred but not reported to the trust account. Permissible investments (with a maturity of no more than five (5) years) of the assets of the Trust account include:
• U.S. Treasury Securities
• Cash or cash instruments
• U.S agency issues
• Other investments as Ceding Company approves

On February 25, 2022, the Company formed Ozop Engineering and Design, Inc. (“OED”) a Nevada corporation, as a wholly owned subsidiary of the Company. OED was formed to become a premier engineering and lighting control design firm. OED offers product and design support for lighting and solar projects with a focus on fast lead times and technical support. OED and our partners can offer the resources needed for lighting, solar and electrical design projects. OED will provide its’ customers systems to coordinate the understanding of electrical usage with the relationship between lighting design and lighting controls, by developing more efficient ecofriendly designs by working with architects, engineers, facility managers, electrical contractors and engineers.

Stock Purchase Agreement and Stock Redemption Agreement

On July 10, 2020, the Company entered into a Stock Purchase Agreement (the “SPA”) with Power Conversion Technologies, Inc., a Pennsylvania corporation (“PCTI”), and Catherine Chis (“Chis”), PCTI’s Chief Executive Officer (“CEO”) and its sole shareholder. Under the terms of the SPA, the Company acquired one thousand (1,000) shares of PCTI, which represents all of the outstanding shares of PCTI, from Chis in exchange for the issuance of 47,500 shares of the Company’s Series C Preferred Stock, 18,667 shares of the Company’s Series D Preferred Stock, and 500 shares of the Company’s Series E Preferred Stock to Chis.

On July 13, 2021, the Company entered into a Definitive Agreement (the “Agreement”) with Chis to purchase the 47,500 shares of the Company’s Series C Preferred Stock held by Chis and the 18,667 shares of the Company’s Series D Preferred Stock held by Chis for the total purchase price of $11,250,000. The Agreement was closed on July 27, 2021.

Discontinued Operations

On September 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceeding which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as a loss from discontinued operations in the accompanying consolidated financial statements for the years ended December 31, 2022, and 2021.

Results of Operations for the years ended December 31, 2022, and 2021:

Revenue

For the year ended December 31, 2022, the Company generated revenue of $16,629,450 compared to $10,595,799 for the year ended December 31, 2021. Revenues from Ozop Energy Systems, Inc. (“OES”) began in May 2021 and are classified as sourced and distributed products. Ozop Engineering and Design (“OED”) operations began in the quarter ended June 30, 2022, and are classified as design and installation. Sales are summarized as follows:

As it did for most of the solar industry; OES’s importing of solar panels issues that began in the 4th quarter of 2021, continued during 2022. Covid issues continued to be disruptive to a continual source of product from foreign manufacturers as well as ocean freight backlogs and covid issues that plagued the port of arrivals related to the unloading of containers and the eventual customs clearance of the imported goods. An announcement by the U.S. Department in March 2022 stated it would investigate allegations that solar panel manufacturers in Southeast Asia are using Chinese-made parts and evading U.S. tariffs has raised alarms concerning both trade and environmental policy The department announced March 28 that it would investigate claims by California-based solar panel manufacturer that solar energy equipment manufacturers in Cambodia, Malaysia, Thailand and Vietnam have close business ties to companies in China that produce the raw materials and some components of solar panel assemblies. On June 6, 2022, President Biden waived tariffs on solar panels from four Southeast Asian nations for two years and invoked the Defense Production Act to spur domestic solar panel manufacturing at home. The tariff exemption will serve as a “bridge” while U.S. manufacturing ramps up.

As of December 31, 2022, the Company had inventory of approximately $3,601,000 of which approximately $3,092,000 are solar panels. As of the date of this report the Company also has outstanding purchase orders with its panel supplier of $14,393,000 and has paid deposits of approximately $3,908,000 towards these open purchase orders. In order to meet our current customers anticipated needs for 2023, the Company would need to purchase approximately an additional $5,000,000 to be received in Q4/2023. Based on the above, management anticipates revenues may approach $20 million for 2023 for solar products.

Cost of sales

For the years ended December 31, 2022, and 2021, the Company recognized $15,281,791 and $9,763,943, respectively, of cost of sales.

Based on the above cost of sales, gross margin was 8.1% and 7.85% for the years ended December 31, 2022, and 2021, respectively. Gross margin for OES was consistent on a year-to-year comparison. While the Company expects margins to remain similar for 2023, the expected increase in revenues should create additional gross profit dollars in 2023 compared to 2022.

Operating expenses

Total operating expenses for the years ended December 31, 2022, and 2021, were $5,959,344 and $13,443,400, respectively. The operating expenses were comprised of:

Management fees- related parties, are amounts paid to our CEO. On July 10, 2020, pursuant to the PCTI transaction, the Company assumed an employment contract entered into on February 28, 2020, between the Company and Mr. Conway (the “Employment Agreement”). Mr. Conway’s compensation as adjusted was $20,000 per month, and effective September 1, 2021, Mr. Conway began to receive $10,000 per month from Ozop Capital. Effective January 1, 2022, the Company entered into a new employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway received a $250,000 contract renewal bonus and receives 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 and OED began compensating Mr. Conway $20,000 in April 2022. Below is a summary of wages and management fees:

The Series E Preferred Stock based compensation for the year ended December 31, 2021, is a result of on March 2, 2021, the BOD authorized the issuance of 1,800 shares of Series E Preferred Stock to Mr. Conway and on April 16, 2021, the BOD authorized the issuance of 1,050 to Mr. Conway. The issuances were for services performed. Pursuant to the terms and conditions of the Certificate of Designation of the Series E Preferred Stock, including the redemption value of $1,000 per share, the Company recorded $2,850,000 as stock-based compensation expense for year ended December 31, 2021.

Stock based compensation, other, for the year ended December 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 year ended December 31, 2022, the Company included $135,000 in stock compensation expense.
• $1,249 of amortization of stock compensation for shares issued in April 2021.

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Stock based compensation, other, for the year ended December 31, 2021, of $6,472,751 is comprised of the following stock issuances:

• 5,000,000 shares issued in April 2021 pursuant to a one-year consulting agreement. The Company valued the shares at $0.20 per share (the market price of the common stock on the date of the agreement), and $1,000,000 was recorded as deferred stock compensation, to be amortized over the one-year term of the agreement. The consultant was terminated in October 2021, and accordingly, for the year ended December 31, 2021, $1,000,000 is included in stock-based compensation expense.
• 10,000,000 shares issued in April 2021 pursuant to a one-year consulting agreement. The Company valued the shares at $0.0076 per share (the market price of the common stock on the date of the agreement), and $76,000 was recorded as deferred stock-based compensation, to be amortized over the one-year term of the agreement. For the year ended December 31, 2021, the Company recorded $74,751 as stock-based compensation expense.
• 5,000,000 shares issued in April 2021 for services. The Company valued the shares at $0.1392 per share (the market price of the common stock on the date of the agreement), and $696,000 is included in stock-based compensation expense for the year ended December 31, 2021.
• 10,000,000 shares issued for services. The shares were valued at $0.0056 per share, the date the Company agreed to issue the shares. For the year ended December 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. The shares were valued at $0.2386 per share. For the year ended December 31, 2021, the Company included $2,386,000 in stock compensation expense.
• 5,000,000 shares of common stock 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 (the market price of the common stock on the date of the issuance). For the year ended December 31, 2021, the Company included $460,000 in stock compensation expense for the 5,000,000 shares of common stock.
• Issuance of 200 shares and 950 shares of Series E Preferred Stock, with a redemption value of $1,000 per share, resulting in stock compensation expense of $1,150,000 for the year ended December 31, 2021.
• 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 $0.0745 per share (the market price of the common stock on the date of the issuance). For the year ended December 31, 2021, the Company included $372,500 in stock compensation expense for the 5,000,000 shares of common stock.
• 452,080 shares of common stock issued for services. The shares were valued at $0.0553 per share (the market price of the common stock on the date of the agreement), and $25,000 is included in stock-based compensation expense for the year ended December 31, 2021.
• 637,755 shares of common stock to be issued for services. The shares were valued at $0.0392 per share (the market price of the common stock on the date of the issuance), and $25,000 is included in stock-based compensation expense for the year ended December 31, 2021.
• 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 $0.0455 per share (the market price of the common stock on the date of the issuance). For the year ended December 31, 2021, the Company included $227,500 in stock compensation expense for the 5,000,000 shares of common stock.

Salaries, taxes, and benefits increased for the year ended December 31, 2022, compared to December 31, 2021. The increase was a result of 2022 having a full year for Ozop Energy Systems and Ozop Engineering and Design and EV Insurance company having employees beginning in April 2022, and October 2022, respectively.

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Ozop Energy Systems currently has 3 employees with an aggregate annual salary of $276,000 and focused on the battery storage system, information technology and general and administrative functions. The solar distribution of this vertical is being managed by our financial consultant and the Company’s CEO. OED currently has six employees with an aggregate annual compensation of $588,000. EV Insurance Company has one employee with annual compensation of $125,000.

Professional and consulting fees increased for the year ended December 31, 2022, compared to December 31, 2021. The increase is due to increases in accounting expenses of Ozop and its’ subsidiaries in 2022 and consultants engaged in the second quarter of 2021 by Ozop Capital Partners that have been engaged for nine months during the year ended December 31, 2022.

Advertising and marketing expenses increased for the year ended December 31, 2022, compared to December 31, 2021. The increases were related to website development, and lead generation costs.

Rent and office expense (including supplies, utilities, and internet costs) increased for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase is the result of including in the current period, rent and office expense for the full year of approximately $222,334 for the year ended December 31, 2022, compared to from June 1, 2021, of $121,343 for the year ended December 31, 2021, for OES. Effective March 1, 2023, OES has subleased the Carlsbad office and warehouse to a third party.

Insurance expense increased for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase was the result of including in the current period insurance expense of approximately $232,664 for the year ended December 31, 2022, compared to $205,970 for the year ended December 31, 2021, for OES. OED’s insurance expense was $44,471 for the year ended December 31, 2022. The Company estimates that the monthly OES and OED insurance expense to be approximately $20,000 per month.

Other Income (Expenses)

Other income, net, for the year ended December 31, 2022, was $10,763,570 compared to other expenses, net, for the year ended December 31, 2021, of $182,457,670 and were as follows.

The decrease in interest expense for the year ended December 31, 2022, is primarily a result of the initial $38,907,939 of interest expense related to the fair value of the issuance of 375,000,000 warrants during the year ended December 31, 2021. Included in other expenses for the year ended December 31, 2021, is 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 $16,450,000 for the issuance of 175,000,000 shares of restricted common stock related to the restructure of the deferred liability. The shares were valued at $0.094 per share and the Company recognized $16,450,000 of restructuring costs.

Net income (loss)

Net income attributable to the Company for the year ended December 31, 2022, was $6,025,812 compared to a net loss of $195,047,946 for the year ended December 31, 2021. The change was primarily a result of the gain on the change in fair value of derivatives of $19,202,431 for the year ended December 31, 2022, compared to the expense of $17,349,075 year ended December 31, 2021. The loss for the year ended December 31, 2021, also included loss on debt settlements of $95,449,996 and $16,450,000 of debt restructure expenses, as well as $9,322,751 of stock- based compensation expenses included in the operating expenses for the year ended December 31, 2021.

Liquidity and Capital Resources

The accompanying 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 December 31, 2022, the Company had an accumulated deficit of $211,300,799 and a working capital deficit of $7,552,616 (including derivative liabilities of $4,314,270). As of December 31, 2022, the Company was in default of $1,470,000 plus accrued interest on debt instruments due to non-payment upon maturity dates. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for one year from the date of the issuance of these financial statements. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

Currently, our current capital and our other existing resources will be sufficient to provide the working capital needed for our current business, however, additional capital will be required to meet our debt obligations, and to further expand our business. We may be unable to obtain the additional capital required. If we are unable to generate capital or raise additional funds when required, it will have a negative impact on our business development and financial results. These conditions raise substantial doubt about our ability to continue as a going concern as well as our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations. This “going concern” could impair our ability to finance our operations through the sale of debt or equity securities. Management’s plans in regard to these factors are discussed below and also in Note 2 to the consolidated financial statements filed herein.

For the year ended December 31, 2022, we primarily funded our business operations with the existing cash on hand as of January 1, 2022, and $2,510,000 of proceeds received pursuant to the issuance of a promissory note and $1,141,514 received from sales of common stock.

As of December 31, 2022, we had cash of $1,369,210 as compared to $6,632,194 as of December 31, 2021. As of December 31, 2022, we had current liabilities of $15,809,229 (including $4,314,270 of non-cash derivative liabilities), compared to current assets of $8,256,613, which resulted in a working capital deficit of $7,552,616. The current liabilities are comprised of accounts payable, accrued expenses, convertible debt, derivative liabilities, customer deposits, lease obligations, notes payable and liabilities of discontinued operations.

In December 2019, a novel strain of coronavirus (COVID-19) emerged. Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but it may have a material adverse impact on our business, financial condition and results of operations. Management expects that its business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.

Operating Activities

For the year ended December 31, 2022, net cash used in operating activities was $8,599,296 compared to $6,354,717 for the year ended December 31, 2021. For the year ended December 31, 2022, our net cash used in operating activities was primarily attributable to the net income of $6,151,885, adjusted by non- cash interest expense of $5,938,622, stock-based compensation of $136,249 and the non-cash expenses of amortization and depreciation of $191,818. This was offset by the gain on the fair value changes in derivatives related to warrants and convertible notes of $19,202,431. Net changes of $1,551,000 in operating assets and liabilities increased the cash used in operating activities.

For the year ended December 31, 2021, our net cash used in operating activities was primarily attributable to the net loss of $195,069,214, adjusted by loss on debt extinguishment of $95,449,996, non- cash interest expense of $51,487,601 (including $38,907,939 for the initial fair value of the 375,000,000 warrants issued), losses on the fair value changes in derivatives related to warrants and convertible notes of $17,349,075, debt restructuring costs of $16,450,000, stock-based compensation of $9,322,751 and the non-cash expenses of interest and amortization and depreciation of $103,000. Net changes of $779,989 in operating assets and liabilities increased the cash used in operating activities, primarily because of the start-up of the Company’s California operations in the support of inventory and accounts receivable.

Investing Activities

For the year ended December 31, 2022, the net cash used in investing activities was $65,202, compared to net cash provided by investing activities of $116,836 for the year ended December 31, 2021.

Financing Activities

For the year ended December 31, 2022, the net cash provided by financing activities was $3,401,514, compared to $11,475,000 for the year ended December 31, 2021. During the year ended December 31, 2022, we received $2,510,000 of proceeds from the issuance of $3,020,000 promissory note and $1,141,514, net of issuance costs, from the sales of common stock to GHS. During the year ended December 31, 2022, we made payments of $250,000 for notes payable.

During the year ended December 31, 2021, we received $15,000,000 of proceeds from the issuances of $16,610,000 face value of promissory notes and $13,100,000 (net of costs) from the Series D SPA. During the year ended December 31, 2021, the Company acquired 47,500 shares of Series C Preferred Stock and 18,667 shares of Series D Preferred Stock from Chis for $11,250,000, redeemed 5,000 shares of the Series E Preferred Stock for $5,000,000, and repaid $375,000 of notes payable.

Critical Accounting Policies

Our significant accounting policies are described in more details in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies to be most critical to the judgement and estimates used in the preparation of our financial statements:

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.

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 consist of finished goods. 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.

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.

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.

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 years ended December 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.

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.

Evaluation of Disclosure Controls and Procedures

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), as of the end of the period covered by this annual report on Form 10-K, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that as of December 31, 2022, disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.

Management’s Report on Internal Controls over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of our assets;
• Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2022, as described below.

We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:

Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.

Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.

We are committed to improving the internal controls and will (1) consider using third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.

We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.