Note 1: Nature of Business and Business Presentation
Ocean
Thermal Energy Corporation is currently in the businesses
of:
●
OTEC and
SWAC/LWAC—designing ocean thermal energy conversion
(“OTEC”) power plants and seawater air conditioning and
lake water air conditioning (“SWAC/LWAC”) plants for
large commercial properties, utilities, and municipalities. These
technologies provide practical solutions to humanity’s three
oldest and most fundamental needs: clean drinking water, plentiful
food, and sustainable, affordable energy without the use of fossil
fuels. OTEC is a clean technology that continuously extracts energy
from the temperature difference between warm surface ocean water
and cold deep seawater. In addition to producing electricity, some
of the seawater running through an OTEC plant can be efficiently
desalinated using the power generated by the OTEC technology,
producing thousands of cubic meters of fresh water every day for
use in agriculture and human consumption in the communities served
by its plants. This cold, deep, nutrient-rich water can also be
used to cool buildings (SWAC/LWAC) and for fish
farming/aquaculture. In short, it is a technology with many
benefits, and its versatility makes OTEC unique.
● EcoVillages—developing
and commercializing our EcoVillages, as well as working to develop
or acquire new complementary assets. EcoVillages are communities
whose goal is to become more socially, economically, and
ecologically sustainable and whose inhabitants seek to live
according to ecological principles, causing as little impact on the
environment as possible. We expect that our EcoVillage communities
will range from a population of 50 to 150 individuals, although
some may be smaller. We may also form larger EcoVillages, of up to
2,000 individuals, as networks of smaller subcommunities. We expect
that our EcoVillages will grow by the addition of individuals,
families, or other small groups.
We expect to use our technology in the development
of our EcoVillages, which should add significant value to that line
of business.
The
condensed consolidated financial statements include the accounts of
the company and our wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. In
the opinion of management, our financial statements reflect all
adjustments that are of a normal recurring nature necessary for
presentation of financial statements in accordance with U.S.
generally accepted accounting principles (GAAP).
We
condensed or omitted certain information and footnote disclosures
normally included in our annual audited financial statements, which
we prepared in accordance with GAAP. The operating results for the
nine months ended September 30, 2020, are not necessarily
indicative of the results to be expected for the year. Our interim
financial statements should be read in conjunction with our annual
report on Form 10-K for the year ended December 31, 2019, including
the financial statements and notes.
Note 2: Summary of Significant Accounting Policies
Principal Subsidiary Undertakings
Our condensed consolidated financial statements include the following
subsidiaries:
|
Name
|
Place of Incorporation / Establishment
|
Principal Activities
|
Date Formed
|
|
Ocean
Thermal Energy Bahamas Ltd.
|
Bahamas
|
Intermediate
holding company of OTE BM Ltd. and OTE Bahamas O&M
Ltd.
|
07/04/2011
|
|
|
|
|
|
|
OTE BM
Ltd.
|
Bahamas
|
OTEC/SDC
development in the Bahamas
|
09/07/2011
|
|
|
|
|
|
|
OCEES
International Inc.
|
Hawaii,
USA
|
Research and
development for the Pacific Rim
|
01/21/1998
|
We have
an effective interest of 100% in each of our
subsidiaries.
Use of Estimates
In
preparing financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reported period.
Actual results could differ from those estimates. Significant
estimates include the assumptions used in the valuation of
equity-based transactions, valuation of derivative liabilities,
valuation of deferred tax assets, and depreciable lives of property
and equipment.
Cash and Cash Equivalents
We
consider all highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents.
At September 30, 2020, and December 31, 2019, we had no cash
equivalents.
Income Taxes
We use
the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are
determined based on temporary differences between financial
reporting and tax bases of assets and liabilities and on the amount
of operating loss carryforwards and are measured using the enacted
tax rates and laws that will be in effect when the temporary
differences and carryforwards are expected to reverse. An allowance
against deferred tax assets is recorded when it is more likely than
not that such tax benefits will not be realized.
Our
ability to use our net operating loss carryforwards may be
substantially limited due to ownership change limitations that may
have occurred or that could occur in the future, as required by
Section 382 of the Internal Revenue Code of 1986, as amended (the
“Code”), as well as similar state provisions. These
ownership changes may limit the amount of net operating loss that
can be utilized annually to offset future taxable income and tax,
respectively. In general, an “ownership change” as
defined by Section 382 of the Code results from a transaction or
series of transactions over a three-year period resulting in an
ownership change of more than 50.0% of the outstanding stock of a
company by certain stockholders or public groups.
We have
not completed a study to assess whether an ownership change has
occurred or whether there have been multiple ownership changes
since we became a “loss corporation” under the
definition of Section 382. If we have experienced an ownership
change, utilization of the net operating loss carryforwards would
be subject to an annual limitation under Section 382 of the Code,
which is determined by first multiplying the value of our stock at
the time of the ownership change by the applicable long-term,
tax-exempt rate, and then could be subject to additional
adjustments, as required. Any limitation may result in expiration
of a portion of the net operating loss carryforwards before
utilization. Further, until a study is completed and any limitation
known, no positions related to limitations are being considered as
an uncertain tax position or disclosed as an unrecognized tax
benefit. Any carryforwards that expire prior to utilization as a
result of such limitations will be removed from deferred tax assets
with a corresponding reduction of the valuation allowance. Due to
the existence of the valuation allowance, it is not expected that
any possible limitation will have an impact on our results of
operations or financial position.
Business
Segments
We
operate in one segment and therefore segment information is not
presented.
Fair Value
Financial
Accounting Standards Board (“FASB”) Accounting Standard
Codification (“ASC”) Topic 820, Fair Value Measurements and
Disclosures, defines fair value, establishes a framework for
measuring fair value under GAAP, and enhances disclosures about
fair value measurements. ASC 820 describes a fair value hierarchy
based on three levels of inputs, of which the first two are
considered observable and the last unobservable, that may be used
to measure fair value, which are the following:
●
Level 1–Pricing inputs are quoted prices available in active
markets for identical assets or liabilities as of the reporting
date.
●
Level 2–Pricing inputs are quoted for similar assets or
inputs that are observable, either directly or indirectly, for
substantially the full term through corroboration with observable
market data. Level 2 includes assets or liabilities valued at
quoted prices adjusted for legal or contractual restrictions
specific to these investments.
●
Level 3–Pricing inputs are unobservable for the assets or
liabilities; that is, the inputs reflect the reporting
entity’s own assumptions about the assumptions market
participants would use in pricing the asset or
liability.
Management believes
the carrying amounts of the short-term financial instruments,
including cash and cash equivalents, prepaid expense, accounts
payable, accrued liabilities, notes payable, deferred compensation,
and other liabilities reflected in the accompanying balance sheets
approximate fair value at September 30, 2020, and December 31,
2019, due to the relatively short-term nature of these
instruments.
We
account for derivative liability at fair value on a recurring basis
under level 3 at September 30, 2020, and December 31, 2019 (see
Note 5).
Concentrations
Cash,
cash equivalents, and restricted cash are deposited with major
financial institutions, and at times, such balances with any one
financial institution may be in excess of FDIC-insured limits.
Management believes the risk in these situations to be minimal. As
of September 30, 2020, and December 31, 2019, $0 and $0,
respectively, were deposited in excess of FDIC-insured
limits.
Loss per Share
The
basic loss per share is calculated by dividing our net loss
available to common shareholders by the weighted average number of
common shares during the period. The diluted loss per share is
calculated by dividing our net loss by the diluted weighted average
number of shares outstanding during the period. The diluted
weighted average number of shares outstanding is the basic weighted
number of shares adjusted for any potentially dilutive debt or
equity. We have 350,073 and 350,073 shares issuable upon the
exercise of warrants and 150,541,644 and 65,591,841 shares issuable
upon the conversion of convertible notes that were not included in
the computation of dilutive loss per share because their inclusion
is antidilutive for the nine months ended September 30, 2020 and
2019, respectively.
Revenue Recognition
We
account for our revenue in accordance with Accounting Standard
Update 2014-09, Revenue from
Contracts with Customers (Topic 606), which requires a
company to recognize revenue to depict the transfer of goods or
services to a customer at an amount that reflects the consideration
it expects to receive in exchange for those goods or
services.
Recent Accounting Pronouncements
We have
reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our
consolidated results of operations, financial position, and cash
flows. Based on that review, we believe that none of these
pronouncements will have a significant effect on current or future
earnings or operations.
Note 3: Going Concern
The
accompanying unaudited condensed consolidated financial statements
have been prepared on the assumption that we will continue as a
going concern. As reflected in the accompanying condensed
consolidated financial statements, we had a net loss of $4,944,152
and used $549,337 of cash in operating activities for the nine
months ended September 30, 2020. We had a working capital
deficiency of $26,668,455 and a stockholders’ deficiency of
$27,010,809 as of September 30, 2020. These factors raise
substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent on our
ability to generate revenue and obtain external funding for our
projects under development. The financial statements do not include
any adjustments that may result from the outcome of this
uncertainty.
In
recent months, the continued spread of COVID-19 has led to
disruption and volatility in the global capital markets, which
increases the cost of capital and adversely impacts access to
capital. The members of our executive team and contract outside
accountant live in different cities in Pennsylvania. On March 23,
2020, the Governor of Pennsylvania issued statewide stay-at-home
orders to mitigate the spread of COVID-19. Non-life-sustaining
physical businesses, like our company, were closed. Individuals
were permitted to leave their residences only for tasks essential
to maintaining health and safety. On June 26, 2020, Lancaster
County, where we are located, finally moved into the least
restrictive phase for reopening our business; however, we must
still follow specific guidelines established by the Governor. These
include continuing to telework as much as possible, updating our
buildings to meet business and safety requirements, decreasing our
office usage to 75% occupancy, and following CDC and Pennsylvania
Department of Health guidelines for social distancing and cleaning.
The pandemic continues to have a negative impact on our ability to
access the capital markets for additional working capital. We
cannot assure that we will not experience further adverse impacts
on our ability to raise capital through debt and/or equity markets
to fund working capital requirements or our ability to continue as
a going concern as a result the COVID-19.
Note 4: Convertible Notes and Notes Payable
On
December 12, 2006, we borrowed funds from the Southeast Idaho
Council of Governments (SICOG), the EDA-#180 loan. The interest
rate is 6.25%, and the maturity date was January 5, 2013. During
the nine months ended September 30, 2020, we made a repayment of
$3,491. The loan principal was $1,063 with accrued interest of $0
as of September 30, 2020. This note is in default.
On
December 23, 2009, we borrowed funds from SICOG, the EDA-#273 loan.
The interest rate is 7%, and the maturity date was December 23,
2014. The loan principal was $94,480 with accrued interest of
$21,961 as of September 30, 2020. This note is in
default.
On
December 23, 2009, we borrowed funds from SICOG, the MICRO I-#274
loan and MICRO II-#275 loan. The interest rate is 7%, and the
maturity date was December 23, 2014. The combined loan principal
was $47,239 with accrued interest of $9,614 as of September 30,
2020. These notes are in default.
On
December 1, 2007, we borrowed funds from the Eastern Idaho
Development Corporation and the Economic Development Corporation.
The interest rate is 7%, and the maturity date was September 1,
2015. The loan principal was $85,821 with accrued interest of
$50,078 as of September 30, 2020. This note is in
default.
On
September 25, 2009, we borrowed funds from the Pocatello
Development Authority. The interest rate is 5%, and the maturity
date was October 25, 2011. The loan principal was $50,000 with
accrued interest of $25,178 as of September 30, 2020. This note is
in default.
On
March 12, 2015, we combined convertible notes issued in 2010, 2011,
and 2012, payable to our officers and directors in the aggregate
principal amount of $320,246, plus accrued but unpaid interest of
$74,134, into a single, $394,380 consolidated convertible note (the
“Consolidated Note”). The Consolidated Note was
assigned to JPF Venture Group, Inc., an investment entity that is
majority-owned by Jeremy Feakins, our director, chief executive
officer, and chief financial officer. The Consolidated Note was
convertible to common stock at $0.025 per share, the approximate
market price of our common stock as of the date of the issuance. On
February 24, 2017, the Consolidated Note was amended to eliminate
the conversion feature. The Consolidated Note bears interest at 6%
per annum and is due and payable within 90 days after demand. As of
September 30, 2020, the outstanding loan balance was $394,380 and
the accrued but unpaid interest was $137,207 on the Consolidated
Note.
During
2016 and 2015, we borrowed $75,000 from JPF Venture Group, Inc.
pursuant to promissory notes. The terms of the notes are as
follows: (i) interest is payable at 6% per annum;
(ii) the notes are payable 90 days after demand; and
(iii) payee is authorized to convert part or all of the note
balance and accrued interest, if any, into shares of our common
stock at the rate of one share each for $0.03 of principal amount
of the note. This conversion share price was adjusted to $0.01384
for the reverse stock splits. As of December 31, 2018, we have
recorded a debt discount of $75,000 for the fair value derivative
liability and fully amortized the debt discount. As of September
30, 2020, the outstanding balance of these notes was $75,000, plus
accrued interest of $20,161.
During
2016, we borrowed $112,500 from JPF Venture Group, Inc. pursuant to
promissory notes. The terms of each note are as follows:
(i) interest is payable at 6% per annum; (ii) the notes
are payable 90 days after demand; and (iii) payee is
authorized to convert part or all of the note balance and accrued
interest, if any, into shares of our common stock at the rate of
one share for each $0.03 of principal amount of the note. On
February 24, 2017, the notes were amended to eliminate the
conversion features. As of September 30, 2020, the outstanding
balance of these notes was $112,500, plus accrued interest of
$30,178.
On
October 20, 2016, we borrowed $12,500 from our independent director
pursuant to a promissory note. The terms of the note are as
follows: (i) interest is payable at 6% per annum;
(ii) the note is payable 90 days after demand; and
(iii) the payee is authorized to convert part or all of the
note balance and accrued interest, if any, into shares of our
common stock at the rate of one share for each $0.03 of principal
amount of the note. This conversion share price was adjusted to
$0.01384 for the reverse stock splits. As of December 31, 2018, we
have recorded a debt discount of $12,500 for the fair value of
derivative liability and fully amortized the debt discount. As of
September 30, 2020, the outstanding note balance was $12,500, plus
accrued interest of $3,085.
During
2012, we issued a note payable for $1,000,000. The note had an
interest rate of 10% per annum, was secured by a first lien in all
of our assets, and was due on February 3, 2015. On March 6, 2018,
the note was amended to extend the due date to December 31, 2018.
On March 29, 2019, the maturity date of the note was extended to
December 31, 2019. As of September 30, 2020, the outstanding note
balance was $1,000,000, plus accrued interest of $814,488. This
note is in default.
During
2013, we issued Series B units. Each unit is comprised of a note
agreement, a $50,000 promissory note that matures on September 30,
2023, and bears interest at 10% per annum payable annually in
arrears, and a security agreement. During 2013, we issued $525,000
of 10% promissory notes. As of September 30, 2020, the loan
balances were $158,334 and the accrued interest was
$113,051.
During
2013, we issued a note payable for $290,000 in connection with the
reverse merger transaction with Broadband Network Affiliates, Inc.
We have determined that no further payment of principal or interest
on this note should be made because the note holder failed to
perform his underlying obligations giving rise to this note. As
described in Note 7, the note holder filed suit on May 21, 2019,
and we remain confident that the court will decide in our favor by
either voiding the note or awarding damages sufficient to offset
the note value. As of September 30, 2020, the balance outstanding
was $130,000, and the accrued interest as of that date was $69,317.
This note is in default.
On
January 18, 2018, Jeremy P. Feakins & Associates, LLC, an
investment entity owned by our chief executive, chief financial
officer, and a director, agreed to extend the due date for
repayment of a $2,265,000 note issued in 2014 to the earlier of
December 31, 2018, or the date of the financial closings of our
Baha Mar project (or any other project of $25 million or more),
whichever occurs first. As of September 30, 2020, the note balance
was $1,102,500 and the accrued interest was $712,959. This note is
in default.
We have
$300,000 in principal amount of outstanding notes due to unrelated
parties, issued in 2014, in default since 2015, accruing interest
at a default rate of 22%. We intend to repay the notes and accrued
interest upon the Baha Mar SWAC/LWAC project’s financial
closing. Accrued interest totaled $364,195 as of September 30,
2020. These notes are in default.
The due
date of April 7, 2017, on a $50,000 promissory note with an
unaffiliated investor, was extended to April 7, 2019. The note and
accrued interest can be converted into our common stock at a
conversion rate of $0.75 per share at any time prior to the
repayment. This conversion price is not required to adjust for the
reverse stock split as per the note agreement. Accrued interest
totaled $27,792 as of September 30, 2020. The note is in
default.
On
March 9, 2017, an entity owned and controlled by our chief
executive officer agreed to provide up to $200,000 in working
capital. The note bears interest of 10% and is due and payable
within 90 days of demand. During the year ended December 31, 2017,
we received an additional $2,000 and repaid $25,000. As of
September 30, 2020, the balance outstanding was $177,000, plus
accrued interest of $64,269.
During
the third quarter of 2017, we completed a $2,000,000 convertible
promissory note private placement offering. The terms of the notes
are as follows: (i) interest is payable at 6% per annum;
(ii) the notes are payable two years after purchase; and (iii)
all principal and interest on each note automatically converts on
the conversion maturity date into shares of our common stock at a
conversion price of $4.00 per share, as long as the closing share
price of our common stock on the trading day immediately preceding
the conversion maturity date is at least $4.00, as adjusted for
stock splits, stock dividends, reclassification, and the like. If
the price of our shares on such date is less than $4.00 per share,
the notes (principal and interest) will be repaid in full. During
third quarter of 2019, $15,000 in notes was repaid. As of September
30, 2020, the outstanding balance for the remaining three notes was
$65,000, plus accrued interest of $12,527. These notes are in
default.
On
November 6, 2017, we entered into an agreement and promissory note
with JPF Venture Group, Inc. to loan up to $2,000,000 to us. The
terms of the note are as follows: (i) interest is payable at
10% per annum; (ii) all unpaid principal and all accrued and
unpaid interest is due and payable at the earliest of a resolution
of the Memphis litigation (as defined therein), December 31, 2018,
or when we are otherwise able to pay. During the nine months ended
September 30, 2020, we repaid $29,000. As of September 30, 2020,
the outstanding note balance was $549,093 and the accrued interest
was $184,791. This note is in default.
In
December 2017, we entered into a series of unsecured promissory
notes and warrant purchase agreements with accredited investors.
These notes accrue interest at a rate of 10% per annum payable on a
quarterly basis and are not convertible into shares of our capital
stock. The notes are payable within five business days after
receipt of gross proceeds of at least $1,500,000 from L2 Capital,
LLC, an unaffiliated Kansas limited liability company (“L2
Capital”). We may prepay the notes in whole or in part,
without penalty or premium, on or before the maturity date of July
30, 2019. In connection with the issuance of the notes, for each
note purchased, the note holder received a warrant as
follows:
●
$10,000 note with a
warrant to purchase 2,000 shares
●
$20,000 note with a
warrant to purchase 5,000 shares
●
$25,000 note with a
warrant to purchase 6,500 shares
●
$30,000 note with a
warrant to purchase 8,000 shares
●
$40,000 note with a
warrant to purchase 10,000 shares
●
$50,000 note with a
warrant to purchase 14,000 shares
The
exercise price per share of the warrants is equal to 85% of the
closing price of our common stock on the day immediately preceding
the exercise of the relevant warrant, subject to adjustment as
provided in the warrant. The warrant includes a cashless net
exercise provision whereby the holder can elect to receive shares
equal to the value of the warrant minus the fair market value of
shares being surrendered to pay the exercise price. As of September
30, 2020, the balance of the outstanding loans was $979,156 and the
accrued interest was $234,395. During 2019, 98,000 warrants were
transferred from a warrant holder to JPF Venture Group Inc. These
warrants were issued in exchange for shares issued by JPF Venture
Group to the warrant holders. The warrant terms remain the same. As
of September 30, 2020, we have outstanding warrants to purchase
223,000 shares of common stock. These notes are in
default.
On
February 15, 2018, we entered into an agreement with L2 Capital for
a loan of up to $565,555, together with interest at the rate of 8%
per annum, which consists of up to $500,000, a prorated original
issuance discount of $55,555, and $10,000 for transactional
expenses to L2 Capital. L2 Capital has the right at any time to
convert all or any part of the note into fully paid and
nonassessable shares of our common stock at the fixed conversion
price, which is equal to $0.50 per share; however, at any time on
or after the occurrence of any event of default under the note, the
conversion price will adjust to the lesser of $0.50 or 65%
multiplied by the lowest volume weighted average price of the
common stock during the 20-trading-day period ending, in L2
Capital’s sole discretion on each conversion, on either the
last complete trading day prior to the conversion date or the
conversion date. During the year ended December 31, 2018, we
received five tranches totaling $482,222. As of December 31, 2018,
we have issued warrants to purchase 56,073 shares of common stock
in accordance with a nonexclusive finder’s fee arrangement.
These warrants have a fair value of $2,668 based on the
Black-Scholes option-pricing model. The fair value was recorded as
a discount on the notes payable and is being amortized over the
life of the notes payable. As of December 31, 2018, we have fully
amortized $91,222 of the debt issuance cost and have recorded a
debt discount of $749,026 for the fair value of derivative
liability and fully amortized the debt discount. As of September
30, 2020, we have outstanding warrants to purchase 56,073 shares of
common stock. As of September 30, 2020, the outstanding balance of
the original loan was $323,412, plus a default penalty and fees of
$837,724, for a total of $1,161,136, and accrued interest was
$450,936. On August 1, 2019, L2 Capital, LLC sold the outstanding
loan balance and accrued interest on our note to Oasis Capital,
LLC. The terms and conditions of the original note remain in place.
This note is in default.
On
September 19, 2018, we executed a note payable for $10,000 with an
unrelated party that bears interest at 6% per annum, which is due
quarterly beginning as of September 30, 2018. The maturity date for
the note is three years after date of issuance. In addition, the
lender received warrants to purchase 2,000 shares of common stock
upon signing the promissory note. The warrant can be exercised at a
price per share equal to a 15% discount from the price of common
stock on the last trading day before such purchase. As of September
30, 2020, we have outstanding warrants to purchase 2,000 shares of
common stock. As of September 30, 2020, the balance outstanding was
$10,000 and the accrued interest was $1,237.
On
December 14, 2018, L2 Capital LLC purchased our note payable from
Collier Investments, LLC. The total consideration was $371,250,
including the outstanding note balance of $281,250, the accrued
interest of $33,750, and liquidated damages of $56,250. There was
also a default penalty of $153,123. In addition, we issued 400,000
shares of common stock to L2 Capital as commitment shares with a
fair value of $21,200 in connection with the purchase of the note.
We executed a replacement convertible note with L2 Capital in the
amount of $371,250 with an interest rate of 12% per annum. The
maturity date of the note is December 22, 2018. The holder of the
note can convert the note, or any portion of it, into shares of
common stock at any time after the issuance date. The conversion
price is 65% of the market price, which is defined as the lowest
trading price for our common stock during the 20-trading-day period
prior to the conversion date. As of December 31, 2018, we have
recorded a debt discount of $665,690 for the fair value of
derivative liability and fully amortized the debt discount. As of
September 30, 2020, the outstanding note balance was $987,986,
which includes a default penalty and fees of $665,550, and the
accrued interest was $417,619. This note is in
default.
On
January 2, 2019, we issued a series of promissory notes totaling
$310,000 to accredited investors. Proceeds from these notes were
used to support the administrative and legal expenses of our
lawsuit before the United District Court for the Western District
of Tennessee, Ocean Thermal Energy
Corporation v. Robert Coe, et al., Case No.
2:17-cv-02343SHL-cgc, and any subsequent actions brought about as a
result of or in connection with this litigation. These notes are
secured against the proceeds from the litigation. The notes bear an
interest rate of 17%, plus one quarter of one percent of the actual
funds received from the litigation. The repayment of the principal,
accrued interest, and the percentage of the litigation funds
received will be paid immediately following the receipt of
sufficient funds from this litigation. As of September 30, 2020,
the outstanding balance of these loans is $310,000 and the accrued
interest was $90,893.
On
August 14, 2019, we executed a note payable for $26,200 with an
unrelated party that bears interest at 8% per annum and has a
maturity date of October 31, 2021. The note automatically converts
into 1,310,000 shares of our common stock either at the time the
closing sale price for our common stock is equal to or greater than
$1.00 per share, as adjusted for stock splits, stock dividends,
reclassification, and the like, or at the maturity date of October
31, 2021, whichever occurs first. As of September 30, 2020, we have
recorded a debt discount of $26,200 for the fair value of
derivative liability and amortized $13,861 of the debt discount. As
of September 30, 2020, the balance outstanding was $26,200 and the
accrued interest was $2,763.
In the
fourth quarter of 2019, we issued a series of convertible
promissory notes to accredited investors that totaled $105,000. Of
the amount received, $10,000 was from our chief executive officer
and our independent director. The notes bear simple interest on
outstanding principal at the rate of 8% per annum, computed on the
basis of the actual number of days elapsed in a year of 365 days.
Each $5,000 loan automatically converts into 250,000 shares of our
common stock, either at the time the closing sale price for our
common stock is equal to or greater than $1.00 per share, as
adjusted for stock splits, stock dividends, reclassification, and
the like, or at the maturity date of October 31, 2021, whichever
comes first. As of September 30, 2020, we have recorded a debt
discount of $105,000 for the fair value of derivative liability and
amortized $48,517 the debt discount. As of September 30, 2020, the
total outstanding balances of all these loans are $43,837, net of
debt discount of $51,163 to unrelated parties, and $4,680 net of
debt discount of $5,320, to related parties. The accrued interest
was $7,797.
In the
fourth quarter of 2019 and the first three quarters of 2020, we
issued a series of convertible promissory notes to accredited
investors, which totaled $311,750. Of the amount received, $20,000
was from our chief executive officer and an independent director.
The notes bear simple interest on outstanding principal at the rate
of 8% per annum, computed on the basis of the actual number of days
elapsed in a year of 365 days. Each $5,000 loan automatically
converts into 250,000 shares of our common stock, either at the
time the closing sale price for our common stock is equal to or
greater than $1.00 per share, as adjusted for stock splits, stock
dividends, reclassification, and the like, or at the maturity date
of January 2, 2022, whichever comes first. As of September 30,
2020, we have recorded a debt discount of $311,750 for the fair
value of derivative liability and amortized $106,572 of the debt
discount. As of September 30, 2020, the total outstanding value of
these loans was $99,092, net of debt discount of $202,658 to
unrelated parties and $7,480, net of debt discount of $2,520, to
related parties. The outstanding balance of the notes as of
September 30, 2020 was $311,750 and the accrued interest was
$16,576.
During
the quarter ending September 30, 2020, we issued a series of
promissory notes to accredited investors, which totaled $150,000.
The notes bear simple interest on outstanding principal at the rate
of 10% per annum, computed on the basis of the actual number of
days elapsed in a year of 360 days and an additional payment of
0.00125% (one eighth of one-percent) of the actual funds received
(as settlement, collection, or otherwise) from possible future
litigation based on fraud in the inducement claims (such future
litigation hereinafter referred to as the “Phase Two
Litigation”) arising from the current litigation before the
United States District Court for the Western District of Tennessee
and Central District of California, Ocean Thermal Energy Corp. v. Robert Coe, et
al. (Case No. 2:17-cv-02343SHL-cgc and Case No.
2:19-cv-05299-VAP-JPR, respectively) (this current litigation
hereinafter is referred to as the “Phase One
Litigation”). Repayment will be made as follows: (i) the
principal and interest within five business days following our
receipt of $25.5 million from the Phase One Litigation; and
(ii) the additional payment within five business days
following our actual receipt of any funds from the Phase Two
Litigation, less legal fees accrued up to that date. If any such
funds are received on more than one date, payment will be made as
such funds are actually received by us and after deduction of
accrued legal fees up to that date. The outstanding balance of
these notes as of September 30, 2020, was $275,000 and the accrued
interest was $6,829.
On April 28, 2020,
we received the proceeds from an unsecured $17,085 loan (the
“PPP Loan”) through LinkBank under the Paycheck
Protection Program (the “PPP”) pursuant to the
Coronavirus Aid, Relief and Economic Security Act (the “CARES
Act”), which is administered by the United States Small
Business Administration. In accordance with the requirements of the
CARES Act, we will use proceeds from the PPP Loan primarily for
payroll costs. The PPP Loan is scheduled to mature on April 28,
2022 (the “Maturity Date”) and has a 1% interest rate.
Commencing on October 28, 2020, and continuing on the same day of
each following month, we must pay principal and interest payments
until the Maturity Date, at which time the remaining principal and
accrued interest is due in full; however, the monthly payment will
not be calculated until such time as the application for
forgiveness has been processed and the remaining loan amount can be
determined. The PPP Loan may be prepaid by us at any time prior to
maturity with no prepayment penalties. The PPP Loan is unsecured
and is a nonrecourse obligation. All or a portion of the PPP Loan
may be forgiven upon application to the lender during the
eight-week period beginning on the date of first disbursement for
certain expenditure amounts, including payroll costs, in accordance
with the requirements under the PPP. In the event all or any
portion of the PPP Loan is forgiven, the amount forgiven is applied
to outstanding principal. The outstanding loan balance as of
September 30, 2020, was $17,085 and the accrued interest was
$103.
The
following convertible note and notes payable were outstanding at
September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Date
of Issuance
|
|
|
In
Default
|
|
Principal
at September 30, 2020
|
Discount
at September 30, 2020
|
Carrying
Amount at September 30, 2010
|
|
|
|
|
|
12/12/06
|
|
6.25%
|
Yes
|
58,670
|
1,063
|
-
|
1,063
|
-
|
-
|
1,063
|
-
|
|
12/01/07
|
|
7.00%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
09/25/09
|
|
5.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/09
|
|
7.00%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/09
|
|
7.00%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/09
|
|
7.00%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
|
10.00%
|
Yes
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
|
-
|
1,000,000
|
-
|
|
08/15/13
|
|
10.00%
|
No
|
158,334
|
158,334
|
-
|
158,334
|
-
|
-
|
-
|
158,334
|
|
12/31/13
|
|
8.00%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
-
|
-
|
130,000
|
-
|
|
04/01/14
|
|
10.00%
|
Yes
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
|
12/22/14
|
|
22.00*%
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
|
22.00*%
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
|
03/12/15
|
(1)
|
6.00%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
|
04/07/15
|
|
10.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
11/23/15
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
02/25/16
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
05/20/16
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
12/21/16
|
(1)
|
6.00%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
|
03/09/17
|
(1)
|
10.00%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
|
07/13/17
|
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/18/17
|
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/26/17
|
|
6.00%
|
Yes
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
15,000
|
-
|
|
12/20/17
|
(2)
|
10.00%
|
Yes
|
979,156
|
979,156
|
-
|
979,156
|
-
|
-
|
979,156
|
-
|
|
11/06/17
|
|
10.00%
|
Yes
|
646,568
|
549,093
|
-
|
549,093
|
549,093
|
-
|
-
|
-
|
|
02/19/18
|
(3)
|
18.00%*
|
Yes
|
629,451
|
1,161,136
|
-
|
1,161,136
|
-
|
-
|
1,161,136
|
-
|
|
09/19/18
|
|
6.00%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
-
|
10,000
|
|
12/14/18
|
|
24.00%*
|
Yes
|
474,759
|
987,986
|
-
|
987,986
|
-
|
-
|
987,986
|
-
|
|
01/02/19
|
(4)
|
17.00%
|
No
|
310,000
|
310,000
|
-
|
310,000
|
-
|
-
|
310,000
|
-
|
|
08/14/19
|
|
8.00%
|
No
|
26,200
|
26,200
|
12,339
|
13,861
|
-
|
-
|
-
|
13,861
|
|
(5)
|
|
8.00%
|
No
|
105,000
|
105,000
|
56,483
|
48,517
|
-
|
4,680
|
-
|
43,837
|
|
(6)
|
|
8.00%
|
No
|
311,750
|
311,750
|
205,178
|
106,572
|
-
|
7,480
|
-
|
99,092
|
|
(7)
|
(7)
|
10.00%
|
No
|
275,000
|
275,000
|
-
|
275,000
|
-
|
-
|
275,000
|
-
|
|
04/28/20
|
|
1.00%
|
No
|
17,085
|
17,085
|
-
|
17,085
|
-
|
-
|
12,015
|
5,070
|
|
|
|
|
|
$9,128,853
|
$8,588,223
|
$274,000
|
$8,314,223
|
$2,422,973
|
$12,160
|
$5,548,896
|
$330,194
|
(1)
Maturity date is 90 days after demand.
(2)
Bridge loans were issued at dates between December 2017 and May
2018. Principal is due on the earlier of 18 months from the
anniversary date or the completion of L2 financing with a gross
proceeds of a minimum of $1.5 million.
(3).
L2 - Note was drawn down in five tranches between 02/16/18 and
05/02/18.
(4).
Loans were issued from January 2, 2019 to March 23, 2019. Principal
and interest are due when funds are received from the litigation
between Ocean Thermal Energy Corporation vs., Robert Coe el
al.
(5).
Notes were issued between 10/14/19 1nd 11/5/19. The notes bear an
interest rate of 8% and mature 10/31/21.
They
can be converted into 250,000 shares of common stock. They can be
converted when the stock closing price reaches $1 or on the
maturity, whichever occurs first.
(6).
Notes were issued between 12/9/19 and 2/17/20. The notes bear an
interest rate of 8% and mature 1/2/22.
They
can be converted into 250,000 shares of common stock. They can be
converted when the stock closing price reaches $1 or on the
maturity, whichever occurs first.
(7).
Notes were issued between 5/12/2020 and 6/25/2020. The notes bear
an interest rate of 10%. Repayment will be made as follows: (i) the
principal and interest within five business days
following
our receipt of $25.5 million from the Phase One Litigation; and
(ii) the additional payment within five business days following our
actual receipt of any funds from the Phase Two
Litigation,
less
legal fees accrued up to that date. If any such funds are actually
received on more than one date, payment will be made as such funds
are actually received by us and after deductions of accrued legal
fees
up
to that date.
*
Loans are in default
The
following convertible notes and notes payable were outstanding at
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Date
of Issuance
|
|
|
In
Default
|
|
Principal
at December 31, 2019
|
Discount
at December 31, 2019
|
Carrying
Amount at December 31, 2019
|
|
|
|
|
|
12/12/06
|
|
6.25%
|
Yes
|
58,670
|
4,555
|
-
|
4,555
|
-
|
-
|
4,555
|
-
|
|
12/01/07
|
|
7.00%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
09/25/09
|
|
5.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/09
|
|
7.00%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/09
|
|
7.00%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/09
|
|
7.00%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
|
10.00%
|
Yes
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
|
-
|
1,000,000
|
-
|
|
08/15/13
|
|
10.00%
|
No
|
158,334
|
158,334
|
-
|
158,334
|
-
|
-
|
-
|
158,334
|
|
12/31/13
|
|
8.00%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
-
|
-
|
130,000
|
-
|
|
04/01/14
|
|
10.00%
|
Yes
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
|
12/22/14
|
|
22.00*%
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
|
22.00*%
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
|
03/12/15
|
(1)
|
6.00%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
|
04/07/15
|
|
10.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
11/23/15
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
02/25/16
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
05/20/16
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
12/21/16
|
(1)
|
6.00%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
|
03/09/17
|
(1)
|
10.00%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
|
07/13/17
|
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/18/17
|
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/26/17
|
|
6.00%
|
Yes
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
15,000
|
-
|
|
12/20/17
|
(2)
|
10.00%
|
Yes
|
979,156
|
979,156
|
|
979,156
|
-
|
-
|
979,156
|
-
|
|
11/06/17
|
|
10.00%
|
Yes
|
646,568
|
578,093
|
-
|
578,093
|
578,093
|
-
|
-
|
-
|
|
02/19/18
|
(3)
|
18.00%*
|
Yes
|
629,451
|
1,161,136
|
-
|
1,161,136
|
-
|
-
|
1,161,136
|
-
|
|
09/19/18
|
|
6.00%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
-
|
10,000
|
|
12/14/18
|
|
24.00%*
|
Yes
|
474,759
|
987,986
|
-
|
987,986
|
-
|
-
|
987,986
|
-
|
|
01/02/19
|
(4)
|
17.00%
|
No
|
310,000
|
310,000
|
|
310,000
|
-
|
-
|
310,000
|
-
|
|
08/14/19
|
|
8.00%
|
No
|
26,200
|
26,200
|
21,211
|
4,989
|
-
|
-
|
-
|
4,989
|
|
(5)
|
|
8.00%
|
No
|
105,000
|
105,000
|
95,559
|
9,441
|
-
|
1,000
|
-
|
8,441
|
|
(6)
|
|
8.00%
|
No
|
36,750
|
36,750
|
35,764
|
986
|
-
|
292
|
-
|
694
|
|
|
|
|
|
$8,561,768
|
$8,053,630
|
$152,534
|
$7,901,096
|
$2,451,973
|
$1,292
|
$5,265,373
|
$182,458
|
(1)
Maturity date is 90 days after demand.
(2)
Bridge loans were issued at dates between December 2017 and May
2018. Principal is due on the earlier of 18 months from the
anniversary date or the completion of L2 financing with a gross
proceeds of a minimum of $1.5 million.
(3).
L2 - Note was drawn down in five tranches between 02/16/18 and
05/02/18.
(4).
Loans were issued from January 2, 2019 to March 23, 2019. Principal
and interest are due when funds are received from the litigation
between Ocean Thermal Energy Corporation vs., Robert Coe el
al.
(5).
Notes were issued between 10/14/19 1nd 11/5/19. The notes bear an
interest rate of 8% and mature 10/31/21.
They
can be converted into 250,000 shares of common stock. They can be
converted when the stock closing price reaches $1 or on the
maturity, whichever occurs first.
(6).
Notes were issued between 12/9/19 and 12/31/19. The notes bear an
interest rate of 8% and mature 1/2/22.
They
can be converted into 250,000 shares of common stock. They can be
converted when the stock closing price reaches $1 or on the
maturity, whichever occurs first.
*
Default interest rate
Note 5: Derivative
Liability
We measure the fair value of our assets and
liabilities under the guidance of ASC 820, Fair Value Measurements and
Disclosures, which defines fair
value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value
measurements. ASC 820 does not require any new fair value
measurements, but its provisions apply to all other accounting
pronouncements that require or permit fair value
measurement.
We
identified conversion features embedded within convertible debt
issued. We have determined that the features associated with the
embedded conversion option should be accounted for at fair value as
a derivative liability. We have elected to account for these
instruments together with fixed conversion price instruments as
derivative liabilities as we cannot determine if a sufficient
number of shares would be available to settle all potential future
conversion transactions.
Following
is a description of the valuation methodologies used to determine
the fair value of our financial liabilities, including the general
classification of such instruments pursuant to the valuation
hierarchy:
|
|
|
Quoted market
prices for identical assets/liabilities
|
Significant
other observable inputs
|
Significant
unobservable inputs
|
|
|
|
|
|
|
|
Derivative
Liability
|
$5,879,051
|
$-
|
$-
|
$5,879,051
|
|
|
|
|
Derivative
liability as of December 31, 2019
|
$3,032,056
|
|
Fair value at the
commitment date for convertible instruments
|
936,850
|
|
Change in fair
value of derivative liability
|
1,910,145
|
|
Reclassification to
additional paid-in capital for financial instruments
|
|
|
that
ceased to be a derivative liability
|
-
|
|
Derivative
liability as of September 30, 2020
|
$5,879,051
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value of derivative liability at the beginning of
period
|
$-
|
|
Day one
gains/(losses) on valuation
|
661,850
|
|
Gains/(losses) from
the change in fair value of derivative liability
|
1,910,145
|
|
Change in fair
value of derivative liability at the end of the period
|
$2,571,995
|
*
Gains/(losses) related to the revaluation of Level 3 financial
liabilities is included in “Change in fair value of
derivative liability” in the accompanying condensed
consolidated unaudited statement of operations.
The
fair value of the derivative liability was estimated using the
income approach and the Black-Scholes option-pricing model. The
fair values at the commitment and remeasurement dates for our
derivative liabilities were based upon the following management
assumptions:
|
|
|
|
|
|
|
Expected
dividends
|
0%
|
|
Expected
volatility
|
|
|
Risk free interest
rate
|
|
|
Expected term (in
years)
|
|
** The fair value at the remeasurement date is equal to the
carrying value on the balance
sheet.
Note 6: Stockholders’ Equity
Preferred Stock
On June
3, 2019, our board of directors designated two classes of Preferred
Stock and approved the following issuances:
Series B Preferred Stock
– We are authorized to issue 1,250,000 shares of Series B
Preferred Stock with a par value of $0.001. These shares will not
have voting rights alongside the common stock, and each share of
Series B Preferred Stock will be convertible into ten shares of our
common stock. As of September 30, 2020, 518,750 shares of Series B
Preferred Stock are issued and outstanding.
Series C Preferred Stock
– We are authorized to issue 2,700,000 shares of Series C
Preferred Stock with a par value of $0.001. These shares are a
one-time grant and will have voting rights alongside the common
stock. Each share of Series C Preferred Stock will be convertible
into five shares of our common stock. As of September 30, 2020,
2,300,000 shares of Series C Preferred Stock are issued and
outstanding.
Warrants
The
following table summarizes all
warrants outstanding and exercisable for the nine months ended
September 30, 2020:
|
|
|
Weighted Average Exercise
Price
|
|
Balance at December
31, 2019
|
350,073
|
$0.18
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Balance at
September 30, 2020
|
350,073
|
$0.18
|
|
Exercisable at
September 30, 2020
|
350,073
|
$0.18
|
During
the nine months ended September 30, 2020, no warrants were
exercised. The aggregate intrinsic value represents the excess
amount over the exercise price that optionees would have received
if all options had been exercised on the last business day of the
period indicated, based on our closing stock price of $0.035 per
share on September 30, 2020. The intrinsic value of warrants to
purchase 350,073 shares on that date was $1,181.
Note 7: Commitments and Contingencies
Commitments
On
December 11, 2017, we entered into an equity purchase agreement
with L2 Capital, LLC, for up to $15,000,000. As provided in the
agreement, we may require L2 Capital to purchase shares of common
stock from time to time by delivering a “put” notice to
L2 Capital specifying the total number of shares to be purchased.
L2 Capital will pay a purchase price equal to 85% of the
“market price,” which is defined as the lowest traded
price on the OTCQB marketplace during the five consecutive trading
days following the “put date” or the date on which the
applicable shares are delivered to L2 Capital. The number of shares
may not exceed 300% of the average daily trading volume for our
common stock during the five trading days preceding the date on
which we deliver the applicable put notice. Additionally, such
amount may not be lower than $10,000 or higher than $1,000,000. L2
Capital has no obligation to purchase shares under this agreement
to the extent that such purchase would cause L2 Capital to own more
than 4.99% of our common stock. Upon the execution of this
agreement, we issued 1,714,285 shares of common stock valued at
$514,286 as a commitment fee in connection with the agreement. The
shares to be issued pursuant to this agreement were covered by a
Registration Statement on Form S-1 effective on January 29, 2018,
with a post-effective amendment effective April 15, 2019. The
commitment period is the period commencing on the execution date
and ending on the earlier of: (i) the date on which L2 Capital
shall have purchased Put Shares pursuant to the agreement equal to
the maximum commitment amount, (ii) December 20, 2020, or (iii)
written notice of termination by us to L2 Capital (which shall not
occur at any time that L2 Capital holds any of the Put Shares).
During the nine months ended September 30, 2020, we did not execute
any put options with L2 Capital to purchase any shares of common
stock.
On June
26, 2017, we entered a nonexclusive finder’s arrangement with
Craft Capital Management LLC (“Craft”) in the event
that proceeds with a debt and/or equity transaction or to finance a
merger/acquisition and/or another transaction are arranged by
Craft. We have no obligation to consummate any transaction, and we
can choose to accept or reject any transaction in our sole and
absolute discretion. Upon the successful completion of a placement,
we will pay to Craft 8% of the gross proceeds from an equity
placement and 3% for a debt placement. In addition, we will issue
to Craft, at the time of closing, warrants with an aggregate
exercise price equal to 3% of the amount raised. As of September
30, 2020, we have issued to Craft warrants to purchase 56,073
shares of common stock for L2 Capital equity transactions and
warrants to purchase 69,000 shares of common stock for L2 Capital
debt transactions, for a total of warrants to purchase 125,073
shares of common stock, none of which has been exercised. These
warrants have a fair value of $3,286 based on the Black-Scholes
option-pricing model. The warrants have exercise prices ranging
from $0.0425 to $0.25 per share and are exercisable for a period of
five years after the closing of the placement. If we, at any time
while these warrants are outstanding, sell or grant any option to
purchase or sell or grant any right to reprice, or otherwise
dispose of or issue any common stock or securities entitling any
person or entity to acquire shares of common stock, at an effective
price per share less than the then-exercise price, then the
exercise price will be reduced to equal the lower share price, at
the option of Craft. Such adjustment will be made whenever such
common stock is issued. We will notify Craft in writing, no later
than the trading day following the issuance of any common stock, of
the applicable issuance price or applicable reset price, exchange
price, conversion price, and other pricing terms.
Litigation
From
time to time, we are involved in legal proceedings and regulatory
proceedings arising from operations. We establish reserves for
specific liabilities in connection with legal actions that
management deems to be probable and estimable.
On May
4, 2018, we reached a settlement of the claims at issue in
Ocean Thermal Energy Corp. v.
Robert Coe, et al., Case No. 2:17-cv-02343SHL-cgc, before
the United States District Court for the Western District of
Tennessee. Between May 30 and July 19, 2018, we received three
payments totaling $100,000 from the defendants. On August 8, 2018,
an $8 million judgment was entered against the defendants and in
our favor. On May 28, 2019, we further settled the claims at issue
with two of the defendants, Brett M Regal and his company, Trade
Base Sales, Inc. (“Regal Debtors”), for $17,500,000,
bringing the combined judgment and settlement amount owed to us is
$25,500,000. On July 1, 2019, the United States District Judge for
the Central District of California (case
number: 2:19-cv-05299-VAP-JPR), approved our stipulated
application for an order permitting us to levy on property and
appointing a receiver to carry out the levy on Regal Debtors’
property, such that it may be sold (subject to further order of the
court approving and confirming such sales), to satisfy the
$25,500,000 settlement and judgment amounts in our favor. On August
15, 2019, the court-appointed receiver notified the court that he
had taken custody, possession, and control of certain gemstone and
mineral specimens, known as the “Ophir Collection” and
350,000 pounds of unrefined gold and other precious metal bearing
ore. By order of the court, the receiver was given the authority to
assign, sell, and transfer the debtor property. The proceeds of any
sales will be used to satisfy the judgment and settlement
agreement, receivership’s reasonable costs and fees, as well
as any other claims as determined by the court. Various parties
have come forward asserting ownership and priority lien rights to
the property. In our ongoing efforts to collect the $25,500,000
judgment obtained, a third party has intervened in our case in the
Central District of California (case number:
2:19-cv-05299-VAP-JPR), asserting that it is the rightful owner of
the “Ophir Collection” of gems and mineral specimens
that is now in possession of the court-appointed receiver. The
claims of that third party have not yet been addressed by the
court.
On May
21, 2019, Theodore T. Herman filed a complaint against us in
Theodore T. Herman v. Ocean
Thermal Energy Corporation, Case No. CI-19-04780, in the
Court of Common Pleas of Lancaster County, Pennsylvania, asserting
that he is entitled to payment on the promissory note described in
Note 4: Convertible Notes and Notes Payable. On July 1, 2019, we
filed preliminary objections to the complaint, and subsequently
filed an answer and new matter on August 20, 2019, to which the
plaintiff filed a reply on September 9, 2019. We will continue
to defend our position that no further payment on this note is
owed.
On
August 22, 2018, Fugro USA Maine, Inc. (“Fugro”), filed
suit against us in Fugro USA Marine,
Inc. v. Ocean Thermal Energy Corp., Cause No. 2018-56396, in
the District Court for Harris County, TX, 165th Judicial District,
seeking approximately $500,000 allegedly owed for engineering
services provided. On June 23, 2020, a settlement was reached under
which we will pay Fugro $375,000 by December 31, 2020. We have
recorded the amount of accrued legal settlement as of September 30,
2020. We are in compliance with making the payments per the
agreement.
Consulting Agreements
On June
4, 2018, we entered into a consulting agreement to pay 20,000
shares of common stock when one of the conditions of the contract
was satisfied. Although this condition was satisfied on August 31,
2018, as of September 30, 2020, we have not issued the shares, and
we have accrued the share compensation at fair value totaling
$1,600.
On
August 14, 2018, we entered into a consulting agreement to pay
$40,000 by issuing shares of common stock. As of September 30,
2020, we have not issued the shares and have accrued the
amount.
Employment Agreements
On
January 1, 2011, we entered into a five-year employment agreement
with our chief executive officer, which provides for successive
one-year term renewals unless it is expressly cancelled by either
party100 days prior to the end of the term. Under the agreement,
our chief executive officer will receive an annual salary of
$350,000, a car allowance of $12,000, and company-paid health
insurance. The agreement also provides for bonuses equal to one
times his annual salary plus 500,000 shares of common stock for
each additional project that generates $25 million or more in
revenue to us. Our chief executive officer is entitled to receive
severance pay in the lesser amount of three years’ salary or
100% of the remaining salary if the remaining term is less than
three years. On September 15, 2017, an addendum was added to the
employment agreement stating that effective June 30, 2017, his
salary will be increased to $388,220 per year; that he will receive
interest at a rate of 8% on his accrued unpaid wages; and that the
term of employment agreement is extended for an additional five
years.
Note 8: Related-Party Transactions
For the
nine months ended September 30, 2020, we paid rent of $90,000 to a
company controlled by our chief executive officer.
On
January 18, 2018, the due date of a 2015 related-party note payable
was extended to the earlier of December 31, 2018, or the date of
the financial closings of our Baha Mar Project (or any other
project of $25 million or more), whichever occurs first. The
balance on the note payable was $1,102,500 and accrued interest was
$712,959 as of September 30, 2020. The note is in
default.
On
March 9, 2017, we issued a promissory note payable of $200,000 to a
related party in which our chief executive officer is an officer
and director. The note bears interest of 10% and is due and payable
within 90 days after demand. The outstanding note balance was
$177,000 and accrued interest was $64,269 as of September 30,
2020.
On
November 6, 2017, we entered into an agreement and promissory note
with JPF Venture Group, Inc. to loan up to $2,000,000 to us. The
terms of the note are as follows: (i) interest is payable at
10% per annum; (ii) all unpaid principal and all accrued and
unpaid interest are due and payable at the earliest of resolution
of the Memphis litigation (as defined therein), December 31, 2018,
or when we are otherwise able to pay. As of September 30, 2020, the
outstanding note balance was $549,093 and the accrued interest was
$184,791. For the nine months ended September 30, 2020, we repaid
$29,000. This note is in default.
We
remain liable for the loans made to us by JPF Venture Group before
it was an affiliate. As of September 30, 2020, the outstanding
balance of these loans was $581,880 and the accrued interest was
$187,546.
In the
fourth quarter of 2019, we issued a series of convertible
promissory notes to accredited investors. The notes bear simple
interest on outstanding principal at the rate of 8% per annum,
computed on the basis of the actual number of days elapsed in a
year of 365 days. Each $5,000 loan automatically converts into
250,000 shares of our common stock, either at the time the closing
sale price for our common stock is equal to or greater than $1.00
per share, as adjusted for stock splits, stock dividends,
reclassification and the like, or at the maturity date of January
2, 2022, whichever comes first. On January 21, 2020, we borrowed an
additional $5,000 from Jeremy P. Feakins, our chief executive
officer. As of September 30, 2020, the outstanding balance of his
loans was $10,000 and the accrued interest was $987. On January 21,
2020, we borrowed an additional $5,000 from an independent
director. As of September 30, 2020, the outstanding balance of his
loans was $10,000 and the accrued interest was $981.
Note 9: Subsequent Events
Subsequent to
September 30, 2020, we issued a series of promissory notes to
accredited investors, which totaled $205,000. The notes bear simple
interest on outstanding principal at the rate of 10% per annum,
computed on the basis of the actual number of days elapsed in a
year of 360 days and an additional payment of 0.00125% (one eighth
of one-percent) of the actual funds received (as settlement,
collection, or otherwise) from the Phase Two Litigation arising
from the current litigation before the United States District Court
for the Western District of Tennessee and Central District of
California, Ocean Thermal Energy
Corp. v. Robert Coe, et al. (Case No. 2:17-cv-02343SHL-cgc
and Case No. 2:19-cv-05299-VAP-JPR, respectively. Repayment will be
made as follows: (i) the principal and interest within five
business days following our receipt of $25.5 million from the Phase
One Litigation; and (ii) the additional payment within five
business days following our actual receipt of any funds from the
Phase Two Litigation, less legal fees accrued up to that date. If
any such funds are received on more than one date, payment will be
made as such funds are actually received by us and after deduction
of accrued legal fees up to that date.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes to
our financial statements included elsewhere in this report. This
discussion contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from
those anticipated in these forward-looking statements as a result
of various factors discussed elsewhere in this report.
Certain information included herein contains statements that may be
considered forward-looking statements such as statements relating
to our anticipated revenues, gross margins and operating results,
estimates used in the preparation of our financial statements,
future performance and operations, plans for future expansion,
capital spending, sources of liquidity, and financing sources.
Forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results
in the future, and accordingly, such results may differ from those
expressed in any forward-looking statements made herein. These
risks and uncertainties include those relating to our liquidity
requirements; the continued growth of our industry; the success of
marketing and sales activity; the dependence on existing
management; the availability and cost of substantial amounts of
project capital; leverage and debt service (including sensitivity
to fluctuations in interest rates); domestic and global economic
conditions; the inherent uncertainty and costs of prolonged
arbitration or litigation; and changes in federal or state tax laws
or the administration of such laws.
Overview
We
develop projects for renewable power generation, desalinated water
production, and air conditioning using our proprietary technologies
designed to extract energy from the temperature differences between
warm surface water and cold deep water. In addition, our projects
can provide ancillary products such as potable/bottle water and
high-profit aquaculture, mariculture, and agriculture
opportunities.
We
currently have no source of revenue, so as we continue to incur
costs we are dependent on external funding in order to continue. We
cannot assure that such funding will be available or, if available,
can be obtained on acceptable or favorable terms.
Our
operating expenses consist principally of expenses associated with
the development of our projects until we determine that a
particular project is feasible. Salaries and wages consist
primarily of employee salaries and wages, payroll taxes, and health
insurance. Our professional fees are related to consulting,
engineering, legal, investor relations, outside accounting, and
auditing expenses. General and administrative expenses include
travel, insurance, rent, marketing, and miscellaneous office
expenses. The interest expense includes interest and discounts
related to our loans and notes payable.
Results of Operations
Comparison of Three Months Ended September 30, 2020 and
2019
We had
no revenue in the three months ended September 30, 2020 and
2019.
During
the three months ended September 30, 2020, we had salaries and
wages of $206,866, compared to salaries and wages of $331,790
during the same three-month period for 2019, a decrease of 37.7%,
which is partially attributed to management’s efforts to
reduce expenses due to lack of cash flow.
During
the three months ended September 30, 2020 and 2019, we recorded
professional fees of $98,250 and $110,036, respectively, a decrease
of 10.7%. During the third quarter of 2020, our legal fees were
lower due to fewer litigation issues.
We
incurred general and administrative expenses of $53,340 during the
three months ended September 30, 2020, compared to $83,866 for the
same three-month period for 2019, a decrease of 36.4%. Because of
the Covid-19 pandemic, we had less travel and related expenses, and
management made a concerted effort to reduce general and
administrative expenses due to lack of cash flow.
Our
interest expense was $337,771 for the three months ended September
30, 2020, compared to $323,717 for the same period of the previous
year, an increase of 4.3%. This change was due to increased debt
and higher interest rates on defaulted notes.
Our
debt discount amortization was $56,271 for the three months ended
September 30, 2020, compared to $596 for the same period of the
previous year. There was a significant increase due to debt
discount recorded on additional loans that were obtained during the
fourth quarter of 2019 and the first three quarters of 2020. There
was an increase in the fair value of the derivative liability of
$839,952 during the three months ended September 30, 2020, compared
to a $156,031 decrease in the fair value of derivative liability
for the same period in 2019.
Comparison of Nine Months Ended September 30, 2020 and
2019
We had
no revenue in the nine months ended September 30, 2020 and
2019.
During
the nine months ended September 30, 2020, we had salaries and wages
of $632,405, compared to salaries and wages of $647,635 during the
same nine-month period for 2019, a decrease of 2.4%, which is
partially attributed to management’s efforts to reduce
expenses due to lack of cash flow.
During
the nine months ended September 30, 2020 and 2019, we recorded
professional fees of $420,450 and $411,607, respectively, a small
increase of 2.1%. Our legal fees for the nine-month periods were
higher due to the continuing Memphis litigation
issues.
We
incurred general and administrative expenses of $181,136 during the
nine months ended September 30, 2020, compared to $214,031 for the
same nine-month period for 2019, a 15.4% decrease. Management made
a concerted effort to reduce general and administrative expenses
due to lack of cash flow.
Our
interest expense was $984,631 for the nine months ended September
30, 2020, compared to $766,815 for the same period of the previous
year, an increase of 28.4% due to increased debt and higher
interest rates on defaulted notes.
Our
debt discount amortization was $153,535 for the nine months ended
September 30, 2020, compared to $24,435 for the same period of the
previous year. The increase of 529.3% is due to the fact that debt
discount was fully amortized in the previous year. This was due to
the increase in the amount of convertible loans in the fourth
quarter of 2019 and the first three quarters of 2020. There was an
increase in the fair value of the derivative liability of
$2,571,995 during the nine months ended September 30, 2020,
compared to a $608,040 decrease in the fair value of the derivative
liability for the same period in 2019.
Liquidity and Capital Resources
At
September 30, 2020, our principal source of liquidity consisted of
$8,500 of cash, as compared to $23,243 of cash at December 31,
2019. In addition, our stockholders’ deficiency was
$27,010,809 at September 30, 2020, compared to stockholders’
deficiency of $22,066,657 at December 31, 2019, an increase in the
deficiency of $4,944,152, which is attributable to the net loss
during the period.
Our
operations used net cash of $549,337 during the nine months ended
September 30, 2020, as compared to using net cash of $500,784
during the nine months ended September 30, 2019, an increase of
9.7%. The increase in net cash used in operations is due to the
overall increase in net loss of approximately $3.3 million in the
nine months of 2020, which was offset by the change in the
derivative liability of $3.2 million during the same period
2019.
Financing
activities provided cash of $534,594 for our operations during the
nine months ended September 30, 2020, as compared to $508,620 for
the first nine months in 2019, an increase of 5.1%. In the first
nine months of 2020, we received $567,085 from notes payable from
unrelated and related parties and PPP loan. as compared to $336,000
in the same period of 2019. This was offset by the proceeds
received from the sale of preferred stock of $207,500 in 2019
compared to none in 2020.
Our Capital Resources and Anticipated Requirements
As
noted above, at September 30, 2020, we had negative working capital
(current assets minus current liabilities) of $26,668,455. We are
now focusing our efforts on promoting and marketing our technology
by developing and executing contracts. We are exploring external
funding alternatives, as our current cash is insufficient to fund
operations for the next 12 months.
Our
condensed consolidated financial statements have been prepared
assuming we will continue as a going concern. We have experienced
recurring losses from operations and have an accumulated deficit.
Our ability to continue our operations as a going concern is
dependent on the success of management’s plans, which include
the raising of capital through debt and/or equity markets until
such time that revenue provided by operations is sufficient to fund
working capital requirements. We will require additional funding to
finance the growth of our current and expected future operations as
well as to achieve our strategic objectives The accompanying
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. These financial
statements do not include any adjustments relating to the recovery
of the recorded assets or the classification of the liabilities
that might be necessary should we be unable to continue as a going
concern. In recent months, the continued spread of COVID-19 has led
to disruption and volatility in the global capital markets, which
increases the cost of capital and adversely impacts access to
capital. The members of our executive team and contract outside
accountant live in different cities in Pennsylvania. On March 23,
2020, the Governor of Pennsylvania issued statewide stay-at-home
orders to mitigate the spread of COVID-19. Non-life-sustaining
physical businesses, like our company, were closed. Individuals
were permitted to leave their residences only for tasks essential
to maintaining health and safety. On June 26, 2020, Lancaster
County, where we are located, finally moved into the least
restrictive phase for reopening our business; however, we must
still follow specific guidelines established by the Governor. These
include continuing to telework as much as possible, updating our
buildings to meet business and safety requirements, decreasing our
office usage to 75% occupancy, and following CDC and Pennsylvania
Department of Health guidelines for social distancing and cleaning.
The pandemic continues to have a negative impact on our ability to
access the capital markets for additional working capital. We
cannot assure that we will not experience further adverse impacts
on our ability to raise capital through debt and/or equity markets
to fund working capital requirements or our ability to continue as
a going concern as a result the COVID-19.
We have
no significant contractual obligations or commercial commitments
not reflected on our balance sheet as of this date.
Recent Accounting Pronouncements
Information
concerning recently issued accounting pronouncements is set forth
in Note 2 of our notes to unaudited condensed consolidated
financial statements appearing elsewhere in this
report.