{"url_path":"/sec/ozsc/10-k/2026/item-7","section_key":"item-7","section_title":"Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-05-14","source_url":"https://www.sec.gov/Archives/edgar/data/1679817/0001493152-26-023179-index.html","accession_number":"0001493152-26-023179","cik":"0001679817","ticker":"OZSC","issuer_name":"OZOP ENERGY SOLUTIONS, INC.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1679817/0001493152-26-023179-index.html","primary_entity_key":"0001679817","primary_entity_name":"OZOP ENERGY SOLUTIONS, INC."},"word_count":4447,"has_tables":true,"body_markdown":"**ITEM\n7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**\n\n \n\n*The\nfollowing is management’s discussion and analysis of certain significant factors that have affected our financial position and\noperating results during the periods included in the accompanying consolidated financial statements, as well as information relating\nto the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,”\n“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”\n“continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking\nstatements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports\nor documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ\nmaterially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date\nhereof. We undertake no obligation to update these forward-looking statements.*\n\n \n\nWhile\nour financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the\nsatisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial\ndoubt about our ability to continue as a going concern.\n\n \n\n**THE\nCOMPANY**\n\n \n\nOzop\nEnergy Solutions, Inc. (the “Company,” “we,” “us” or “our”) was originally incorporated\nas Newmarkt Corp. on July 17, 2015, under the laws of the State of Nevada.\n\n \n\nOn\nOctober 29, 2020, the Company formed a new wholly owned subsidiary, Ozop Surgical Name Change Subsidiary, Inc., a Nevada corporation\n(“Merger Sub”). The Merger Sub was formed under the Nevada Revised Statutes for the sole purpose and effect of changing the\nCompany’s name to “Ozop Energy Solutions, Inc.” That same day the Company entered into an Agreement and Plan of Merger\n(the “Merger Agreement”) with the Merger Sub and filed Articles of Merger (the “Articles of Merger”) with the\nNevada Secretary of State, merging the Merger Sub into the Company, which were stamped effective as of November 3, 2020. As permitted\nby 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\nthe name of the Company from Ozop Surgical Corp to “Ozop Energy Solutions, Inc.”\n\n \n\nOn\nDecember 11, 2020, the Company formed Ozop Energy Systems, Inc. (“OES”), a Nevada corporation and a wholly owned subsidiary\nof the Company. OES was formed to be a manufacturer and distributor of renewable energy products.\n\n \n\n12\n\n \n\n \n\nOn\nAugust 19, 2021, the Company formed Ozop Capital Partners, Inc. (“Ozop Capital”), a Delaware corporation and a wholly owned\nsubsidiary of the Company. Brian Conway was appointed as the sole officer and director of Ozop Capital and has voting control of Ozop\nCapital.\n\n \n\nOn\nOctober 29, 2021, EV Insurance Company, Inc. (“EVCO”) was formed as a captive insurance company in the State of Delaware.\nEVCO is a wholly owned subsidiary of Ozop Capital. On January 7, 2022, EVCO filed with New Castle County, Delaware DBA OZOP Plus.\n\n \n\nOn\nFebruary 25, 2022, the Company formed Ozop Engineering and Design, Inc. (“OED”) a Nevada corporation, as a wholly owned subsidiary\nof the Company. OED was formed to become a premier engineering and lighting control design firm. OED offers product and design support\nfor lighting and solar projects with a focus on fast lead times and technical support. OED and our partners are able to offer the resources\nneeded for lighting, solar and electrical design projects. OED will provide customers systems to coordinate the understanding of electrical\nusage with the relationship between lighting design and lighting controls, by developing more efficient ecofriendly designs. We work\nwith architects, engineers, facility managers, electrical contractors and engineers.\n\n \n\nOn\nJune 11, 2024, the Company formed Automated Room Controls, Inc. (“ARC”) a Nevada corporation, as a wholly owned subsidiary\nof the Company. ARC was created to address a significant need in the lighting controls industry. We believe that easy deployment and\ncreative applications can transform lighting controls into essential tools for enhancing the utility and ambiance of any space. The Company’s\nmission is to deliver cutting-edge technology that simplifies complex control needs, ensuring seamless integration and exceptional performance.\n\n \n\nOES\noperates in the renewable, electric vehicle (“EV”), energy storage and energy resiliency sectors. We are engaged in multiple\nbusiness lines that include project development as well as equipment distribution.\n\n \n\n*Equipment\nDistributor:* In April 2021, the Company signed a five-year lease (beginning June 1, 2021) of approximately 8,100 SF in California,\nfor office and warehouse space to support the sales and distribution of our west coast operations. On February 22, 2023, with an effective\ndate of March 1, 2023, the Company entered into a Sublease for a Single Subleasee Agreement (the “Sublease”) with the landlord\nand a third party for the office and warehouse in Carlsbad California. Pursuant to the Sublease agreement, the third party will be responsible\nfor all of the Company’s lease obligations through May 31, 2026, the lease termination date.\n\n \n\n*Modular\nEnergy Distribution System:* The **NeoVolt™** System comprises the design engineering, installation, and operational\nmethodologies as well as the financial arbitrage of how we produce, capture and distribute electrical energy for the EV markets. Our\n**NeoVoltTM System**offers (1) charging locations that can be installed with reduced delays, restricted areas or load\nlimits and (2) EV charger electricity that is produced from renewable sources claiming little to no carbon footprint.\n\n \n\nThe\nCompany has developed a business plan for NeoVolt™, a scalable battery storage solution that aims to relieve the stress on existing\ngrid infrastructure by providing distributed energy storage. With the first stage of engineered technical drawings completed, we are\nadvancing to stage two and preparing to construct the initial prototype or proof of concept (PoC). NeoVolt™ is designed with advanced\nfeatures, including automatic adoption of connected devices and dynamic load balancing through a master-slave configuration. These capabilities\nenable NeoVolt™ to seamlessly integrate with and manage energy flows across multiple devices. Furthermore, the PoC is contingent\nupon recent advancements in EV charging and discharging standardizations, including on-board inverters and bi-directional capabilities,\nto ensure compatibility and efficiency in both residential and commercial applications.\n\n \n\nOED\nspecializes in lighting commissioning services. On September 27, 2024, OED signed an agreement with Leviton Manufacturing Co, Inc., to\nserve as a field service technician for their advanced lighting control systems.\n\n \n\nOzop\nPlus markets vehicle service contracts (VSC’s”) for electric vehicles (EV’s) that offer consumers to be able to purchase\nadditional months and miles above the manufacturer’s warranty and to also bring added value to EV owners by utilizing our partnerships\nand strengths in the energy market to offer unique and innovative services. Among EV owners’ concerns are the EV battery repair\nand replacement costs, range anxiety, environmental responsibilities, roadside assistance, and the accelerated wear on additional components\nthat EV vehicles experience. Management believes that the Ozop Plus marketed VSC’s will give “peace of mind” to the\nEV buyer. On October 23, 2024, Ozop Capital Partners, Inc. entered into an agreement with Empire Auto Protect (“Empire”).\nUnder the agreement, Empire will white label Royal Administration’s Fully Charged VSC, to be marketed as Empire Plus. OZOP Plus\nwill be ceded the battery premium portion of all of the Empire Plus VSC’s contracted.\n\n \n\n13\n\n \n\n \n\nARC\nhas developed products to be an advanced lighting controls system, intricately engineered to integrate sophisticated wired and wireless\ntechnologies. At its core, it employs a hybrid network topology that facilitates both resilient wired connections and flexible wireless\ncommunications, making it suitable for complex infrastructural environments. The system is equipped with an array of sensors and control\nnodes, enabling precise light management and energy usage monitoring. With support for protocols such as DALI and Zigbee, alongside the\ncapability for seamless integration with IoT platforms, ARC offers a comprehensive solution for intricate lighting networks. This system\nis designed not just for control and efficiency, but also for adaptability to diverse architectural and electrical layouts, embodying\na technical solution for advanced, energy-conscious lighting management.\n\n \n\n**Discontinued\nOperations**\n\n \n\nOn\nSeptember 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceedings which meets the definition of a discontinued\noperation. Accordingly, the operating results of PCTI are reported as income from discontinued operations in the accompanying consolidated\nfinancial statements for the years ended December 31, 2025, and 2024.\n\n \n\n**Results\nof Operations for the years ended December 31, 2025, and 2024:**\n\n \n\n*Revenue*\n\n \n\nFor\nthe year ended December 31, 2025, the Company generated revenue of $307,421 compared to $1,342,653 for the year ended December 31, 2024.\nRevenues from Ozop Energy Systems, Inc. (“OES”) and Automated Room Controls, Inc. (“ARC”) are classified as sourced\nand distributed products. Ozop Engineering and Design (“OED”) revenues are classified as design and installation. Sales are\nsummarized as follows:\n\n \n\n  \n\n**Year\nended**\n\n**December\n31,**\n \n\n  \n**2025**  \n**2024** \n\nSourced\nand distributed products \n$105,709  \n$1,042,022 \n\nDesign\nand installation \n 201,712  \n 300,631 \n\nTotal \n$307,421  \n$1,342,653 \n\n \n\nSales\nof sourced and distributed products for the year ended December 31, 2024, included $728,640, pursuant to the YHS Settlement. Excluding\nthis, sales of sourced and distributed products (solar product) were significantly lower for the year ended December 31, 2025, compared\nto December 31, 2024. The Company believes the lower revenues were due to higher interest rates affecting homeowners’ ability and\ndesire for residential rooftop solar installations as well as competitors lowering their selling prices to try to capture a part of the\nlower demand. These factors also resulted in our customers having excess inventory on hand. and our decision to not currently place additional\norders for solar products. Sales of sourced and distributed products for the year ending December 31, 2025, also includes $93,613 of\nrevenues from ARC, which started to generate revenue during 2025. Design and installation revenues decreased for the year ended December\n31, 2025, compared to December 31, 2024, as the prior year included $162,000 for a one-time large installation job.\n\n \n\n*Cost\nof sales and gross margin*\n\n \n\nFor\nthe years ended December 31, 2025, and 2024, the Company recognized $220,765 and $1,187,180, respectively, of cost of sales.\n\n \n\n  \n\n**Year\nended**\n\n**December\n31,**\n \n\n  \n**2025**  \n**2024** \n\nSourced\nand distributed products \n$80,454  \n$945,931 \n\nDesign\nand installation \n 140,311  \n 107,224 \n\nInventory\nwrite down \n -  \n 134,025 \n\n  \n$220,765  \n$1,187,180 \n\n \n\n14\n\n \n\n \n\nDuring\nthe year ended December 31, 2024, the Company reviewed its inventory valuation to determine if the historical cost of its solar panels\nwas less than their net realizable value. Management also considers, if applicable, other factors, including known trends, market conditions,\nand other such issues. Based on current market conditions related to solar panels including but not limited to reduced selling prices\nin the industry and the abundance of inventory supply in the market, management determined that the net realizable value of certain of\nthe Company’s inventory required a lower of cost or market adjustment of $134,025 (the “Inventory Adjustment”) to the\nhistorical cost of inventory purchased. Design and installation cost of sales is comprised of OED’s labor costs for each job.\n\n \n\n  \n\n**Year\nended**\n\n**December\n31,**\n \n\n  \n**2025**  \n**2024** \n\nGross\nmargin \n 28.2% \n 11.6%\n\n \n\nThe\nincrease in gross margin percentage is primarily related to the Inventory Adjustment of $134,025 during the year ended December 31, 2024,\ncausing a lower gross margin that year. The Company recognized a gross margin on solar products (OES) of 11.8% for the year ended December\n31, 2025, compared to (3.6%) for the year ended December 31, 2024. The gross margin on design and installation of 30.4% for the year\nended December 31, 2025, compared to 64.3% for the year ended December 31, 2024, a result of a customer agreement effective October 1,\n2024, who compensates the Company based on hourly rate for actual hours worked as compared to a higher daily rate the Company received\nfrom other customers during the year ended December 31, 2024. ARC products had a gross margin of 25.5% for the year ended December 31,\n2025.\n\n \n\n*Operating\nexpenses*\n\n \n\nTotal\noperating expenses for the years ended December 31, 2025, and 2024, were $3,058,483 and $3,619,155, respectively. The operating expenses\nwere comprised of:\n\n \n\n  \n\n**Year\nended**\n\n**December\n31,**\n \n\n  \n**2025**  \n**2024** \n\nManagement\nfees, related parties \n$960,000  \n$960,000 \n\nTravel\nexpenses \n 39,806  \n 95,784 \n\nStock\ncompensation expense \n 40,000  \n - \n\nSalaries,\ntaxes, and benefits \n 500,505  \n 839,027 \n\nProfessional\nand consulting fees \n 844,500  \n 770,982 \n\nAdvertising\nand marketing \n 68,194  \n 106,705 \n\nRent\nand office expenses \n 73,135  \n 151,940 \n\nResearch\nand development costs \n 46,832  \n 183,897 \n\nBuilding\nrepairs and maintenance \n 58,207  \n 53,318 \n\nInsurance \n 193,524  \n 202,668 \n\nGeneral\nand administrative, Other \n 233,780  \n 254,834 \n\nTotal \n$3,058,483  \n$3,619,155 \n\n \n\nEffective\nJanuary 1, 2022, the Company entered into an employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway receives annual\ncompensation of $240,000 from the Company and will also be eligible to receive bonuses and equity grants at the discretion of the BOD.\nThe Company also agreed to compensate Mr. Conway for services provided directly to any of the Company’s subsidiaries. Currently,\nthe subsidiaries of Ozop Capital, OES and OED, each compensates Mr. Conway $20,000 per month.\n\n \n\nTravel\nexpenses decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, as the Company had lower travel\nexpenses related to Systems and OED as a result of decreased sales.\n\n \n\n15\n\n \n\n \n\nStock\nbased compensation of $40,000 during the year ended December 31, 2025, related to the Company issuing an aggregate of 40,000 post reverse\nsplit (200,000,000 prior to the reverse split) shares of common stock pursuant to a Service Agreement (including amendments) with a third\nparty.\n\n \n\nSalaries,\ntaxes, and benefits decreased for the year ended December 31, 2025, compared to December 31, 2024. Ozop Energy Systems (“OES”)\ncurrently has 1 employee with an aggregate annual salary of $72,000 and focused on general and administrative functions. The solar distribution\nof this vertical is being managed by our financial consultant and the Company’s CEO. Effective July 1, 2025, OED has two part-time\nemployees paid on an hourly basis for hours spent on travel to and from a job and hours spent on the job. Effective October 1, 2025,\nthe hourly compensation of $40,323 was expensed to cost of sales. Prior to October 1, 2025, OED had full time employees and allocated\n$99,988 and $85,878 of salaries to cost of sales for the years ended December 31, 2025, and 2024, respectively.ARC is being managed by\nour financial consultant, our OES employee, and the Company’s CEO. During 2024, Ozop Capital Partners had one employee with annual\ncompensation of $125,000 (terminated in July 2024), and hired a new employee on September 3, 2024, with an annual salary of $144,000.\nThe Company allocates salaries and related expenses to the appropriate subsidiary for where their services are being performed. The expenses\nper subsidiary, included in operating expenses for the years ended December 31, 2025, and 2024, are as follows:\n\n \n\n  \n\n**Year\nended**\n\n**December\n31,**\n \n\n  \n**2025**  \n**2024** \n\nOzop\nEnergy Systems \n$134,234  \n$217,226 \n\nOzop\nEngineering and Design \n 70,832  \n 354,100 \n\nOzop\nCapital Partners/EV Insurance Company \n 137,679  \n 125,530 \n\nAutomated\nRoom Controls \n 157,760  \n 142,171 \n\nTotal \n$500,505  \n$839,027 \n\n \n\nProfessional\nand consulting fees increased for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase is due\nto the Company received $125,000 pursuant to the YHS settlement, that was credited to legal fees for the year ended December 31, 2024.\n\n \n\nAdvertising\nand marketing expenses decreased for the year ended December 31, 2025, compared to December 31, 2024, as result of the Company attending\nless trade shows in the current year compared to the prior year.\n\n \n\nResearch\nand development costs decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, due to the development\nand testing of the ARC products substantially occurred during the year ending December 31, 2024.\n\n \n\nInsurance\nexpenses decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024. The decrease was the result of\nthe Company not renewing the credit insurance policy for OES, which terminated April 30, 2024. The Company estimates that the monthly\ninsurance expense to be approximately $15,000 per month.\n\n \n\nRent\nand office expense (including storage, supplies, utilities, and internet costs) decreased for the year ended December 31, 2025, compared\nto the year ended December 31, 2024, because of $71,208 expenses incurred by OES for storage fees in the year ended December 31, 2024,\n(no such storage fees in the year ended December 31, 2025). During the year ended December 31, 2025, the Company sold their building\nand entered into a new lease agreement effective September 1, 2025.\n\n \n\nGeneral\nand administrative expense other, decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024. There\nwere decreases in depreciation ($28,182), meals and entertainment ($16,891), investor relation expenses ($4,861) and other\nnet decreases ($1,218), which were substantially offset by increases in merchant, credit card and bank fees $11,519, transfer agent and\nfiling fees $15,562, freight expenses $3,017.\n\n \n\n16\n\n \n\n \n\n*Other\n(Income) Expenses*\n\n \n\nOther\nexpense, net for the year ended December 31, 2025, was $5,740,716 compared to $2,738,052 for the year ended December 31, 2024, and\nwere as follows.\n\n \n\n  \n\n**Year\nended**\n\n**December\n31,**\n \n\n  \n2025  \n2024 \n\nInterest\nexpense \n$4,205,938  \n$4,014,997 \n\nLoss\n(gain) on change in fair value of derivatives \n 1,621,028  \n (1,005,585)\n\nGain\non sale of building to a related party \n (86,250) \n - \n\nGain\non litigation settlement \n -  \n (271,360)\n\nTotal\nother expense, net \n$5,740,716  \n$2,738,052 \n\n \n\nThe\nincrease in interest expense for the year ended December 31, 2025, is primarily a result of new amortization related to the initial debt\ndiscounts for new convertible notes and new promissory notes issued, including the Exchange Agreement, partially offset by the amortization\nperiod of certain note discounts that were completed during the year ended December 31, 2024. For the year ended December 31, 2025, the\nCompany recognized a loss on the change in the fair value of derivatives. For the year ended December 31, 2024, the Company recognized\ngains on the change in the fair value of derivatives. For the years ended December 31, 2025, and 2024, the Company recognized a gain\nof $86,250 for the sale of a building to a related party and a gain of $271,360 on the settlement with YHS, respectively.\n\n \n\n*Net\nloss*\n\n \n\nNet\nloss attributable to the Company for the year ended December 31, 2025, was $8,712,543 compared to $6,198,161, for the year ended\nDecember 31, 2024.\n\n \n\n**Liquidity\nand Capital Resources**\n\n \n\nThe accompanying consolidated financial statements have been prepared on\na going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.\nAs of December 31, 2025, the Company had an accumulated deficit of $233,581,184 and a working capital deficit of $39,740,819. As of December\n31, 2025, the Company was in default of $18,714,423 plus accrued interest on debt instruments due to non-payment upon maturity dates.\nThese factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for one year from\nthe date of the issuance of these financial statements. The accompanying financial statements do not include any adjustments to reflect\nthe possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may\nresult from the possible inability of the Company to continue as a going concern.\n\n \n\nCurrently,\nour current capital and our other existing resources will not be sufficient to provide the working capital needed for our current business,\nand, additional capital will be required to meet our debt obligations, and to further expand our business. We may be unable to obtain\nthe additional capital required. If we are unable to generate capital or raise additional funds when required, it will have a negative\nimpact on our business development and financial results. These conditions raise substantial doubt about our ability to continue as a\ngoing concern as well as our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations.\nThis “going concern” could impair our ability to finance our operations through the sale of debt or equity securities. Management’s\nplans in regard to these factors are discussed in Note 2 to the consolidated financial statements filed herein.\n\n \n\nFor\nthe year ended December 31, 2025, we primarily funded our business operations with the existing cash on hand as of January 1, 2025, cash\nreceived from collection of accounts receivable, $573,000 from the issuances of convertible notes payable, $392,168 received from sales\nof common stock, $100,000 received in the sale of building to a related party, and $350,000 from the issuances of promissory notes payable.\n\n \n\n17\n\n \n\n \n\nAs\nof December 31, 2025, we had cash of $266,431 as compared to $797,139 as of December 31, 2024. As of December 31, 2025, we had current\nliabilities of $40,178,567, compared to current assets of $437,748, which resulted in a working capital deficit of $39,740,819. The current\nliabilities are comprised of accounts payable and accrued expenses, related party liabilities, convertible debt, derivative liabilities,\nlease obligations, deferred liability, notes payable, and liabilities of discontinued operations.\n\n \n\nOperating\nActivities\n\n \n\nFor\nthe year ended December 31, 2025, net cash used in operating activities was $1,792,386 compared to $1,850,146 for the year ended December\n31, 2024.\n\n \n\nFor the year ended December 31, 2025, our net cash used in operating activities\nwas primarily attributable to the net loss of $8,712,543, the gain on the sale of building to a related party of $86,250, adjusted by\nthe loss on the change in fair value of derivatives of $1,621,028, non-cash interest expense of $1,166,614, stock based compensation of\n$40,000, and amortization and depreciation of $208,553. Net changes of $3,970,212 in operating assets and liabilities reduced the cash\nused in operating activities.\n\n \n\nFor\nthe year ended December 31, 2024, our net cash used in operating activities was primarily attributable to the net loss of $6,198,161,\nthe gain on the change in fair value of derivatives of $1,005,585, adjusted by non-cash interest expense of $1,119,461, the inventory\nwrite-down of $134,025 and amortization and depreciation of $214,372. Net changes of $3,889,315 in operating assets and liabilities reduced\nthe cash used in operating activities.\n\n \n\nInvesting\nActivities\n\n \n\nFor\nthe year ended December 31, 2025, the net cash used in investing activities was $53,490, resulting from the sale of the building to\na related party of $100,000, less a loan to related party of $150,000, and the purchase of office and computer equipment of $3,490.\nFor the year ended December 31, 2024, the net cash used in investing activities was $11,114 primarily\ndue to purchase of office and computer equipment.\n\n \n\nFinancing\nActivities\n\n \n\nFor\nthe year ended December 31, 2025, the net cash provided by financing activities was $1,315,168 of which $573,000 was net proceeds received\nfrom issuance of convertible notes, $392,168 from the sales of common stock to GHS, net of issuance costs, and $350,000 from the issuances\nof promissory notes payable. For the year ended December 31, 2024, the net cash provided by financing activities was $1,212,370, from\nthe sales of common stock to GHS, net of issuance costs.\n\n \n\n**Critical\nAccounting Policies and Estimates**\n\n \n\nThe\nCompany’s consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of its consolidated\nfinancial statements and related disclosures requires it to make estimates and judgments that affect the reported amounts of assets,\nliabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in the Company’s consolidated\nfinancial statements. The Company bases its estimates on historical experience, known trends and events and various other factors that\nit believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values\nof assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on an\nongoing basis. Actual results may differ from these estimates under different assumptions or conditions.\n\n \n\nOur\nsignificant accounting policies are described in more details in Note 3 to our financial statements appearing elsewhere in this Annual\nReport on Form 10-K. While all these significant accounting policies impact our financial condition and results of operations, we view\ncertain of these policies as critical. The SEC requested that all registrants list their most “critical accounting polices”\nin the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important\nto the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or\ncomplex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our management\nbelieves that given current facts and circumstances, there are no material estimates or assumptions with levels of subjectivity and judgement\nnecessary to be considered critical accounting policies and estimates, except for following.\n\n \n\n18\n\n \n\n \n\n**Convertible\nInstruments and Derivatives**\n\n** **\n\nThe\nCompany evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and\nHedging Activities. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them\nas free-standing derivative financial instruments according to certain criteria. If the instrument contains embedded conversion features\nor other terms that require bifurcation under ASC 815, these features are separated from the host contract and recorded as derivative\nliabilities at fair value. Derivative liabilities are remeasured at fair value at each reporting date, with changes in fair value recognized\nin the consolidated statements of operations.\n\n \n\nThe\nCompany accounts for derivative financial instruments in accordance with Accounting Standards Codification (ASC) 815, Derivatives and\nHedging. Under this guidance, the Company evaluates whether an embedded feature within a financial instrument is required to be accounted\nfor separately as a derivative. Embedded derivatives that are not clearly and closely related to the host contract, that meet the definition\nof a derivative, and that are not eligible for the scope exceptions under ASC 815, are bifurcated from the host instrument and accounted\nfor as separate derivative financial instruments. These derivatives are recognized as either assets or liabilities on the balance sheet\nand are measured at fair value, with changes in fair value recognized in the consolidated statements of operations in the period in which\nthey occur.\n\n \n\nThe\nCompany uses the Monte Carlo simulation valuation method to estimate the fair value of (i) the embedded conversion feature that is required\nto be bifurcated from the debt host contract and (ii) warrants under certain circumstances (collectively, the derivative financial instruments).\nThe Monte Carlo simulation valuation method requires the input or use of highly subjective assumptions, including the expected volatility\nof the Company’s common stock, which management estimates based on implied and/or historical volatility over a comparable period.\nChanges in this subjective input assumption could materially affect the fair value estimate of the derivative financial instruments.\n\n \n\n**OFF\nBALANCE SHEET ARRANGEMENTS**\n\n \n\nWe\nhave no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support\nand credit risk support or other benefits."}