OZSC 10-K & 10-Q changes, risk factors and insider trading

On June 11, 2024, the Company formed Automated Room Controls, Inc. (“ARC”) a Nevada corporation, as a wholly owned subsidiary of the Company. ARC was created to address a significant need in the lighting controls industry. ARC’s personnel has extensive experience in lighting controls since 2012, bringing together IT specialists and lighting control experts. We believe that easy deployment and creative applications can transform lighting controls into essential tools for enhancing the utility and ambiance of any space. The Company’s mission mission is to deliver cutting-edge technology that simplifies complex control needs, ensuring seamless integration and exceptional performance.

Equipment Distributor: 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. On February 22, 2023, with an effective date of March 1, 2023, the Company entered into a Sublease for a Single Subleasee Agreement (the “Sublease”) with the landlord and a third party for the office and warehouse in Carlsbad California. Pursuant to the Sublease agreement, the third party will be responsible for all of the Company’s lease obligations through May 31, 2026, the lease termination date. The Company and the subleasee have agreed to work together regarding any existing Company inventory in the facility.

ARC has devlopeddeveloped products to be an advanced lighting controls system, intricately engineered to integrate sophisticated wired and wireless technologies. At its core, it employs a hybrid network topology that facilitates both resilient wired connections and flexible wireless communications, making it suitable for complex infrastructural environments. The system is equipped with an array of sensors and control nodes, enabling precise light management and energy usage monitoring. With support for protocols such as DALI and Zigbee, alongside the capability for seamless integration with IoT platforms, ARC offers a comprehensive solution for intricate lighting networks. This system is designed not just for control and efficiency, but also for adaptability to diverse architectural and electrical layouts, embodying a technical solution for advanced, energy-conscious lighting management.

For the year ended December 31, 2024,2025, the Company generated revenue of $1,342,653$307,421 compared to $4,760,705$1,342,653 for the year ended December 31, 2023. 2024. Revenues from Ozop Energy Systems, Inc. (“OES”) and Automated Room Controls, Inc. (“ARC”) are classified as sourced and distributed products. Ozop Engineering and Design (“OED”) revenues are classified as design and installation. Sales are summarized as follows:

Sales of sourced and distributed products for the year ended December 31, 2024, included $728,640, pursuant to the YHS Settlement. Excluding this, sales of sourced and distributed products (solar product) were significantly lower for the year ended December 31, 2024,2025, compared to December 31, 2023.2024. The Company believes the lower revenues were due to higher interest rates affecting homeowners’ ability and desire for residential rooftop solar installations as well as competitors lowering their selling prices to try to capture a part of the lower demand. These factors also resulted in our customers having excess inventory on hand. and our decision to not currently place additional orders for solar products. Sales of sourced and distributed products for the year ending December 31, 2025, also includes $93,613 of revenues from ARC, which started to generate revenue during 2025. Design and installation revenues increaseddecreased for the year ended December 31, 2024,2025, compared to December 31, 2023,2024, as the Company receivedprior additionalyear andincluded larger$162,000 for a one-time large installation jobs.job.

Cost of sales and gross margin

During the yearsyear ended December 31, 2024, and 2023, the Company reviewed its inventory valuation to determine if the historical cost of its solar panels was less than their net realizable value. Management also considers, if applicable, other factors, including known trends, market conditions, and other such issues. Based on current market conditions related to solar panels including but not limited to reduced selling prices in the industry and the abundance of inventory supply in the market, management determined that the net realizable value of certain of the Company’s inventory required a lower of cost or market adjustment of $134,025 and $1,495,978, respectively, (the “Inventory Adjustment”) to the historical historical cost of inventory purchased. Design and installation cost of sales is comprised of OED’s labor costs for each job.

Travel expenses decreased for the year ended December 31, 2024,2025, compared to the year ended December 31, 2023,2024, as the Company had lower travel expenses related to Systems.Systems and OED as a result of decreased sales.

Salaries, taxes, and benefits decreased for the year ended December 31, 2024,2025, compared to December 31, 2023.2024. Ozop Energy Systems (“OES”) currently has 21 employeesemployee with an aggregate annual salary of $204,000$72,000 and focused on 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. OEDEffective currentlyJuly has1, four employees with an aggregate annual compensation of $454,000.2025, OED has two part-time employees 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, the hourly compensation of $40,323 was expensed to cost of sales. Prior to October 1, 2025, OED had full time employees and allocated $99,988 and $85,878 of salaries to cost of sales for the yearyears ended December 31, 2024,2025, and employees2024, withrespectively.ARC an annual salary of $210,000 areis being expensedmanaged effectiveby our Julyfinancial 1,consultant, our OES employee, and the Company’s CEO. During 2024, to Automated Room Controls, Inc. (“ARC”). Ozop Capital Partners had one employee with annual compensation of $125,000 (terminated in July 2024), and hired a new employee on September 3, 2024, with an annual salary of $144,000. The Company allocates salaries and related expenses to the appropriate subsidiary for where their services are being performed. The expenses per subsidiarysubsidiary, included in operating expenses for the years ended December 31, 2024,2025, and 2023,2024, are as follows:

Professional and consulting fees decreasedincreased for the year ended December 31, 2024,2025, compared to the year ended December 31, 2023.2024. The decreaseincrease is due to the expirationCompany ofreceived certain$125,000 consulting contracts and legal fees relatedpursuant to the YHS litigation.settlement, Thesethat decreaseswas werecredited partially offset by increases in generalto legal expensesfees and auditingfor fees.the year ended December 31, 2024.

Advertising and marketing expenses decreased for the year ended December 31, 2024,2025, compared to December 31, 2023.2024, Duringas theresult yearof ended December 31, 2024, the Company reducedattending less trade shows in the amountcurrent ofyear leadcompared lists it was acquiring as well as reducedto the amountprior spent on promotional items.year.

Research and development costs increaseddecreased for the year ended December 3,31, 2024,2025, compared to the year ended December 31, 2023,2024, due to the development and testing of the ARC products.products substantially occurred during the year ending December 31, 2024.

General and administrative expense other, increased decreased for the year ended December 31, 2024,2025, compared to the year ended December 31, 2023.2024. There were increasesdecreases in Dues and Subscriptionsdepreciation ($10,996), filing fees ($10,730$28,182), trade showsmeals and entertainment ($74,371$16,891), andinvestor websiterelation developmentexpenses ($15,800$4,861), and other net increasedecreases ($2,720$1,218), which were substantially offset by decreasesincreases in badmerchant, debtcredit expense ($34,277), depreciation ($26,265), repairscard and maintenancebank ($12,467),fees $11,519, transfer agent and filing building fees $15,562, freight expenses ($36,426).$3,017.

Other (Income) Income (Expenses)

The decrease increase in interest expense for the year ended December 31, 2024,2025, is primarily a result of new amortization related to the initial debt discounts for new convertible notes and new promissory notes issued, including the Exchange Agreement, partially offset by the amortization period of certain note discounts that were completed during the year ended December 31, 2024. For the year ended December 31, 2025, the Company recognized a loss on the change in the fair value of derivatives. For the year ended December 31, 2024, the Company recognized gains on the change in the fair value of derivativesderivatives. less thanFor the gains for the yearyears ended December 31, 2023.2025, Additionally for the year ended December 31,and 2024, the Company recognized a gain of $86,250 for the sale of a building to a related party and a gain of $271,360 on the settlement with YHS.YHS, respectively.

For the year ended December 31, 2024,2025, we primarily funded our business operations with the existing cash on hand as of January 1, 2024,2025, cash received from collection of accounts receivable, $573,000 from the issuances of convertible notes payable, $392,168 received from sales of common stock, $100,000 received in the sale of inventorybuilding to a related party, and collection$350,000 from the issuances of accounts receivable,promissory andnotes $1,212,370 received from sales of common stock.payable.

As of December 31, 2024,2025, we had cash of $797,139$266,431 as compared to $1,446,029$797,139 as of December 31, 2023.2024. As of December 31, 2024,2025, we had current liabilities of $33,185,481,$40,178,567, compared to current assets of $952,666,$437,748, which resulted in a working capital deficit of $32,232,815.$39,740,819. The current liabilities are comprised of accounts payable and accrued expenses, related party liabilities, convertible debt, derivative liabilities, lease obligations, deferred liability, notes payable payable, and liabilities of discontinued operations.

For the year ended December 31, 2024,2025, net cash used in operating activities was $1,850,146 compared to $799,282 for the year ended December 31, 2023. For the year ended December 31, 2024, our net cash used in operating activities was primarily attributable to the net loss of $6,198,161,$8,712,543, the gain on the sale of building to a related party of $86,250, adjusted by the loss on the change in fair value of derivatives of $1,005,585, adjusted by$1,621,028, non-cash interest expense of $1,119,461,$1,166,614, thestock inventorybased write-downcompensation of $134,025 $40,000, and amortization and depreciation of $214,372.$208,553. Net changes of $3,889,315$3,970,212 in operating assets and liabilities reduced the cash used in operating activities.

For the year ended December 31, 2023, net cash used in operating activities was $799,282. For the year ended December 31, 2023,2024, our net cash used in operating activities was primarily attributable to the net loss of $7,369,681, $6,198,161, the gain on the change in fair value of derivatives of $3,212,113, and $250,000 of income on forfeited customer deposit,$1,005,585, adjusted by non-cash items of the termination expense of $1,755,082, interest expense of $1,465,518,$1,119,461, the inventory write-down write-down of $1,495,978$134,025 and amortization and depreciation of $230,134.$214,372. Net changes of $5,107,251$3,889,315 in operating assets and liabilities reduced the the cash used in operating activities.

For the year ended December 31, 2023,2025, the net cash provided by financing activities was $878,263.$1,315,168 Duringof thewhich year$573,000 ended December 31, 2023, we received $1,828,263,was net ofproceeds received from issuance costs, of convertible notes, $392,168 from the sales of common stock to GHS, and we made paymentsnet of $950,000issuance forcosts, and $350,000 from the issuances of promissory notes payable. For the year ended December 31, 2024, the net cash provided by financing activities was $1,212,370, from the sales of common stock to GHS, net of issuance costs.

The Company’s consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of its consolidated financial statements and related disclosures requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements. The Company bases its estimates on historical experience, known trends and events and various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in more details in Note 3 to our financial statements appearing elsewhere in this Annual Report on Form 10-K. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. The SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our management believes that given current facts and circumstances, there are no material estimates or assumptions with levels of subjectivity and judgement necessary to be considered critical accounting policies.policies and estimates, except for following.

We have no off-balance sheet arrangementsarrangements, including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

On September 1, 2022, the BOD of the Company authorized the filing of a Chapter 7 proceedings which meets the definition of a discontinued operation. Accordingly, the operating results of PCTI are reported as income from discontinued operations in the accompanying unaudited consolidated financial statements for the three and six months ended MarchJune 31,30, 2026, and 2025.

Results of Operations for the three and six months ended MarchJune 31,30, 2026, and 2025:

For the three and six months ended MarchJune 31,30, 2026, the Company generated revenue of $56,053$41,645 and $97,698, respectively, compared to $42,257$63,731 and $105,988 for the three and six months ended March 31,June 30, 2025. Revenues from Ozop Energy Systems, Inc. (“OES”) and Automated Room Controls, Inc. (“ARC”) are classified as sourced and distributed products. Ozop Engineering and Design (“OED”) revenues are classified as design and installation. Sales are summarized as follows:

Design and installation revenues increaseddecreased for the three months ended MarchJune 31,30, 2026, and increased for the six months ended June 30, 2026, compared to the three and six months ended MarchJune 31,30, 2025, respectively, as OED received more jobs in the current year to date period compared to the prior year quarter.to date period. Sales of sourced and distributed products (ARC and OES) were lower for the three and six months ended June March 31,30, 2026, compared to the three and six months ended MarchJune 31,30, 2025.2025, respectively. The Company believes the lower revenues were due to higher interest rates affecting homeowners’ ability and desire for residential rooftop solar installations as well as competitors lowering their selling prices to try to capture a part of the lower demand. These factors also resulted in our customers having excess inventory on hand, and our decision to not currently place additional orders for solar products.

For the three and six months ended MarchJune 31,30, 2026, and 2025, the Company recognized $45,659cost of sales of $31,087 and $32,768,$76,746, respectively, compared to $45,868 and 78,636, respectively, of cost of sales.sales for the three and six months ended June 2025.

The gross margin on design and installation was 22.4%25.4% and 23.6% for the three and six months ended MarchJune 31,30, 2026, compared to 23.3%33.4% and 28.6% for the three and six months ended March 31,June 30, 2025. The Company recognized a gross margin on solar products (OES) of 11.9%11.7% and 11.8% for the three and six months ended MarchJune 31,30, 2025, and there were no sales and gross margin for the three and six months ended MarchJune 31,30, 2026. For the three and six months ended June 30, 2025, ARC had a gross margin of 19.5%.

Total operating expenses for the three and six months ended MarchJune 31,30, 2026, and 2025, were $671,802$734,841 and $940,318$1,406,643 respectively.respectively, compared to $843,326 and $1,783,644 for the three and six months ended June 30, 2025. The operating expenses were comprised of:

Effective January 1, 2022, the Company entered into an employment agreement with Mr. Conway. Pursuant to the agreement, Mr. Conway receives 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. Currently, the subsidiaries of Ozop Capital, OES and OED, each compensatesrecords an expense for Mr. Conway $20,000 per month.

Salaries, taxes, and benefits decreased for the three and six months ended MarchJune 31,30, 2026, compared to Marchthe 31,three and six months ended June 30, 2025. OES currently has 1 employee with an aggregate annual salary of $72,000,$84,000, compared to 2 employees (through April 30, 2025) with an aggregate annual salary of $204,000 (through April 30, 2025) and $84,000 for theMay threeand months ended March 31,June 2025. The solar distribution of this vertical is being managed by our financial consultant and the Company’s CEO. For the three and six months ended MarchJune 31,30, 2026, OED was paying employees on a per hour basis for time travel to and from a job and time of service at a job and is 100% charged to cost of sales (see above). For the three and six months ended MarchJune 31,30, 2025, OED had two employees with an aggregate annual compensation of $244,000 and allocated $30,260$29,347 and $59,607, respectively, of salaries and payroll taxes to cost of sales for the three and six months ended March 31,June 30, 2025. ARC did not have any employees for the three and six months ended MarchJune 31,30, 2026, and is being managed by our financial consultant, our OES employee, and the Company’s CEO. For the three and six months ended MarchJune 31,30, 2025, ARC had 3 employees (thru April 30,2025), then 2 employees for the remainder of the three months ending June 30, 2025, with an annual salary of $310,000, through April 30, 2025, and $216,000 for $310,000.May and June 2025. Ozop Capital Partners had one employee through January 15, 2026, with annual compensation of $144,000. The Company allocates allocates salaries and related expenses to the appropriate subsidiary for where their services are being performed. The expenses per subsidiary subsidiary included in operating expenses for the three and six months ended MarchJune 31,30, 2026, and 2025, are as follows:

Travel expenses decreased for the three and six months ended MarchJune 31,30, 2026, compared to the three and six months ended MarchJune 31,30, 2025, as the Company had lower travel expenses related to Systems and OED.

Professional and consulting fees decreased slightlyincreased for the three and six months ended MarchJune 31,30, 2026, compared to the three and six months ended MarchJune 31,30, 2025. The increase was a result of additional professional service costs related to the filing of an S-1 registration.

Research and development costs decreased for the three and six months ended MarchJune 31,30, 2026, compared to the three and six months ended MarchJune 31, 30, 2025, due to the development and testing of the ARC products occurred in the 2025 period.periods.

Insurance expenses decreased for the three and six months ended MarchJune 31,30, 2026, compared to the three and six months ended MarchJune 31,30, 2025. The decrease was the result a decrease in health insurance related to the decrease in employees and the Company not renewing certain insurance policies for for OES. The Company estimates that the monthly insurance expense to be approximately $12,000 per month.

Other expense, net, for the three and six months ended MarchJune 31,30, 2026, waswere $1,822,305$7,669,398 and $9,491,703, respectively, compared to $626,342$1,380,535 and $2,006,877, for the three and six months ended MarchJune 31,30, 2025, respectively, and were as follows:

Net loss attributable to the Company for the three and six months ended MarchJune 31,30, 2026, was $2,483,713,$8,393,681 and $10,877,394, respectively, compared to $1,557,171$2,205,998 and $3,763,169 for the three and six months ended June 30, 2025, respectively. The change for the three and six months ended MarchJune 31,30, 2025. The change2026, was primarily a result of the increase in other expenses, partially offset by the decreasedecreases in operating expenses expenses.for the three and six months ended June 30, 2026.

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization realization of assets and the satisfaction of liabilities in the normal course of business. As of MarchJune 31,30, 2026, the Company had an accumulated deficit of $236,064,897$244,458,578 and a working capital deficit of $40,724,721.$48,795,089. As of MarchJune 31,30, 2026, the Company was in default of $18,714,423$22,129,977 plus accrued interest on debt instruments due to non-payment upon maturity dates or failure to comply with the loan’s contractual payment terms. Current cash balances are not sufficient to satisfy obligations currently due. Management is exploring capital raising options which may or may not become available on a timely basis to meet the obligations that are past due. 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 consolidated 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.

For the threesix months ended MarchJune 31,30, 2026, we primarily funded our business operations with the existing cash on hand as of January 1, 2026, cash received from collection of accounts receivable, $47,069 received from sales of common stock, $215,000$582,000 received from the issuance of convertible promissory notes of $222,000,$643,111, and $190,000$290,000 received from the issuance of $210,000$320,000 promissory notes.

As of MarchJune 31,30, 2026, we had cash of $83,779$60,449 as compared to $266,431 as of December 31, 2025. As of MarchJune 31,30, 2026, we had current liabilities of $40,993,623,$49,148,696, compared to current assets of $268,902,$353,607, which resulted in a working capital deficit of $40,724,721.$48,795,089. The current liabilities are comprised of accounts payable and accrued expenses, related party liabilities, convertible debt, derivative liabilities, lease obligations, deferred liability, notes payable, and liabilities of discontinued operations.

For the threesix months ended MarchJune 31,30, 2026, net cash used in operating activities was $459,721$950,051 compared to $724,822$1,186,537 for the threesix months ended MarchJune 31,30, 2025.

For the threesix months ended MarchJune 31,30, 2026, our net cash used in operating activities was primarily attributable to the net loss of $10,877,394, $2,483,713, adjusted for the non-cash items of the loss on the change in fair value change of derivatives of $30,273, the$6,229,828, non-cash items of interest expense of $1,006,782,$1,666,671, amortization and depreciation of $52,539,$90,702, loss from write off security deposit of $13,408, and stock based compensation expense of $48,000.$79,455, partially offset by non-cash interest income of $7,979. Net changes of $886,398$1,855,258 in operating assets and liabilities reduced the cash used in operating activities.

For the threesix months ended MarchJune 31,30, 2025, our net cash used in operating activities was primarily attributable to the net loss of $3,763,169, $1,557,171, adjusted by the gainloss on the change in fair value of derivatives of $111,759, adjusted by$517,503, non-cash items of interest expense of $14,241,$39,841, stock based compensation of $40,000, and amortization and depreciation of $54,305.$105,843. Net changes of $875,562$1,873,445 in operating assets and liabilities reduced the cash used in operating activities.

For the threesix months ended MarchJune 31,30, 2026, the net cash used in investing activities was $175,000, resulting from loans to related party in in exchange for promissory notes.

For the threesix months ended MarchJune 31,30, 2025, the net cash used in investing activities was $3,490, primarily due to purchase of office and computer equipment.

For the threesix months ended MarchJune 31,30, 2026, the net cash provided by financing activities was $452,069$919,069 of which $215,000$582,000 was net proceeds received received from issuance of convertible notes, $47,069 from the sales of common stock to GHS, net of issuance costs, and $190,000$290,000 from the issuances of promissory notes payable.

For the threesix months ended MarchJune 31,30, 2025, the net cash provided by financing activities was $260,805,$486,965 of which $191,000 was net proceeds received from issuance of convertible note and $295,965 from the sales of common stock to GHS, net of issuance costs.

Our significant accounting policies are described in more details in Note 3 to our financial statements appearing in “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our most recent Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on May14, 2026. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. The SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our management believes that given current facts and circumstances, there are no material estimates or assumptions with levels of subjectivity and judgement necessary to be considered critical accounting policies and estimates. There were no significant changes to our critical accounting policies and estimates during the three and six months ended MarchJune 31,30, 2026.