NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31,
2019
NOTE 1 – NATURE OF BUSINESS AND BASIS OF
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 mankind’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
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).
Note 2: Summary of Significant Accounting Policies
Principal Subsidiary Undertakings
Our
consolidated financial statements for the years ended December 31,
2020 and 2019, 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 December 31, 2020 and 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 carry-forwards and are measured using the enacted
tax rates and laws that will be in effect when the temporary
differences and carry-forwards 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:
●
Valued at quoted
prices adjusted for legal or contractual restrictions specific to
these investments.
●
Own assumptions
about the assumptions market participants would use in pricing the
assets or liability.
Management believes
the carrying amounts of the short-term financial instruments,
including cash and cash equivalents, prepaid expenses, accounts
payable, accrued liabilities, notes payable, deferred compensation,
and other liabilities reflected in the accompanying balance sheets
approximate fair value at December 31, 2020, and December 31, 2019,
due to the relatively short-term nature of these
instruments.
We
accounted for derivative liability at fair value on a recurring
basis under level 3 at December 31, 2020 and 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. As
of December 31, 2020, and 2019, $0 and $0, respectively, were
deposited in excess of FDIC-insured limits. Management believes the
risk in these situations to be minimal.
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 125,073 and 350,073 shares issuable upon the
exercise of warrants for the years ended December 31, 2020 and
2019, respectively, and 179,823,249 and 140,502,788 shares issuable
upon the conversion of convertible notes for the years ended
December 31, 2020 and 2019, respectively, that were not included in
the computation of dilutive loss per share because their inclusion
is antidilutive.
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 audited consolidated financial statements have been
prepared on the assumption that we will continue as a going
concern. As reflected in the accompanying consolidated financial
statements, we had a net loss of $6,450,457 and used $827,111 of
cash in operating activities for the year ended December 31, 2020.
We had a working capital deficiency of $28,027,820 and a
stockholders’ deficiency of $28,413,169 as of December 31,
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 increase sales 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.
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. The loan
principal was $3,779 with accrued interest of $0 as of December 31,
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
$29,318 as of December 31, 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 $13,234 as of December 31,
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
$51,613 as of December 31, 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 $25,817 as of December 31, 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
December 31, 2020, the outstanding loan balance was $394,380 and
the accrued but unpaid interest was $143,254 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 December 31,
2020, the outstanding balance of these notes was $75,000, plus
accrued interest of $21,311.
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 December 31, 2020, the outstanding
balance of these notes was $112,500, plus accrued interest of
$31,903.
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
December 31, 2020, the outstanding note balance was $12,500, plus
accrued interest of $3,277.
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 December 31, 2020, the outstanding note
balance was $1,000,000, plus accrued interest of $840,004. 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 December 31, 2020, the loan balances
were $158,334 and the accrued interest was $117,098.
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 December 31, 2020, the balance outstanding
was $130,000, and the accrued interest as of that date was $71,975.
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 December 31, 2020, the note balance
was $1,102,500 and the accrued interest was $741,134. 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 $381,062 as of December 31, 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 $29,070 as of December 31, 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 December
31, 2020, the balance outstanding was $177,000, plus accrued
interest of $68,792.
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. As of
December 31, 2020, the outstanding balance for the remaining three
notes was $65,000, plus accrued interest of $13,510. 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 year ended
December 31, 2020, we repaid $35,000. As of December 31, 2020, the
outstanding note balance was $543,093 and the accrued interest was
$199,298. 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 December
31, 2020, the balance of the outstanding loans was $979,156 and the
accrued interest was $257,815. 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 December 31, 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 had 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. During the year
ended December 31, 2019, we issued 1,936,192 shares of common stock
to L2 Capital for the conversion of a portion of our notes payable
in the amount of $44,733. As of December 31, 2020, we have
outstanding warrants to purchase 56,073 shares of common stock. As
of December 31, 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 $555,085. 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 December
31, 2020, we have outstanding warrants to purchase 2,000 shares of
common stock. As of December 31, 2020, the balance outstanding was
$10,000 and the accrued interest was $1,390.
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. On
August 1, 2019, Oasis Capital LLC purchased our note payable from
L2 Capital LLC. The terms and conditions of the original note
remain in place. During the year ended December 31, 2019, we issued
1,800,000 shares of common stock to L2 Capital for the conversion
of a portion of our notes payable in the amount of $49,614. During
the year ended December 31, 2020, we issued 3,071,869 shares of
common stock to Oasis Capital, LLC, with a fair value of $103,945,
for the conversion of a portion of our notes payable in the amount
of $50,000. We recorded a gain on conversion of $14,382. As of
December 31, 2020, the outstanding note balance was $1,042,905,
which includes a default penalty and fees of $770,469, and the
accrued interest was $415,906.
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 December 31, 2020, the
outstanding balance of these loans is $310,000 and the accrued
interest was $104,361.
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 December 31, 2020, we have
recorded a debt discount of $26,200 for the fair value of
derivative liability and amortized $16,355 of the debt discount. As
of December 31, 2020, the balance outstanding was $16,355, net of
debt discount of $9,845, and the accrued interest was
$3,423.
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 December 31, 2020, we have recorded a debt
discount of $105,000 for the fair value of derivative liability and
amortized $61,639 the debt discount. As of December 31, 2020, the
total outstanding balances of all these loans are $55,723, net of
debt discount of $39,277 to unrelated parties, and $5,916 net of
debt discount of $4,084, to related parties. The accrued interest
was $9,915 as of December 31, 2020.
In the
fourth quarter of 2019 and the fiscal year 2020, we issued a series
of convertible promissory notes to accredited investors, which
totaled $306,750. 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 December 31, 2020, we have
recorded a debt discount of $306,750 for the fair value of
derivative liability and amortized $144,127 of the debt discount.
As of December 31, 2020, the total outstanding value of these loans
was $134,138, net of debt discount of $152,612, to unrelated
parties and $9,989, net of debt discount of $10,011, to related
parties. As of December 31, 2020, the accrued interest was
$22,356.
During
the year ended December 31, 2020, we issued a series of convertible
promissory notes to accredited investors, which totaled $15,000.
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 May 12, 2022, whichever comes first. As of December 31, 2020, we
have recorded debt discount of $15,000 for the fair value of
derivative liability and amortized $3,991 of debt discount. As of
December 31, 2020, the total outstanding value of these loans was
$3,991, net of debt discount of $11,009. The accrued interest was
$602 as of December 31, 2020,
During
the year ended December 31, 2020, we issued a series of convertible
promissory notes to accredited investors, which totaled $15,000.
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 September 1, 2022, whichever comes first. AS of December 31,
2020, we have recorded a debt discount of $15,000 for the fair
value of derivative liability and amortized $903 of debt discount.
As of December 31, 2020, the total outstanding value of these loans
was $903, net of debt discount of $14,097. The accrued interest was
$118 as of December 31, 2020
During
the year ended December 31, 2020, we issued a series of promissory
notes to accredited investors, which totaled $520,000. 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, for each additional of $20,000
(prorated), 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 December 31, 2020, was $520,000 and the accrued
interest was $19,507.
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. We received notice of our PPP
loan and interest payments forgiveness from the Small Business
Administration as of November 10, 2020. The outstanding loan
balance as of December 31, 2020, was $0 and the accrued interest
was $0. The forgiveness of this loan is recorded as gain on
forgiveness of debt.
The
following convertible note and notes payable were outstanding at
December 31, 2020:
|
|
|
|
|
|
|
|
|
Related Party
|
Non Related Party
|
|
Date of Issuance
|
Maturity Date
|
Interest Rate
|
In Default
|
Original Principal
|
Principal at
December 31,
2020
|
Discount at
December 31,
2020
|
Carrying Amount at
December 31,
2020
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|
12/12/06
|
01/05/13
|
6.25%
|
Yes
|
58,670
|
3,779
|
-
|
3,779
|
-
|
-
|
3,779
|
-
|
|
12/01/07
|
09/01/15
|
7.00%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
09/25/09
|
10/25/11
|
5.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/09
|
12/23/14
|
7.00%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/09
|
12/23/14
|
7.00%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/09
|
12/23/14
|
7.00%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
12/31/19
|
10.00%
|
Yes
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
|
-
|
1,000,000
|
-
|
|
08/15/13
|
10/31/23
|
10.00%
|
No
|
158,334
|
158,334
|
-
|
158,334
|
-
|
-
|
-
|
158,334
|
|
12/31/13
|
12/31/15
|
8.00%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
-
|
-
|
130,000
|
-
|
|
04/01/14
|
12/31/18
|
10.00%
|
Yes
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
|
12/22/14
|
03/31/15
|
22.00%
*
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
12/26/15
|
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
|
04/07/18
|
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
|
07/13/19
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/18/17
|
07/18/19
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/26/17
|
07/26/19
|
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
|
12/31/18
|
10.00%
|
Yes
|
646,568
|
543,093
|
-
|
543,093
|
543,093
|
-
|
-
|
-
|
|
02/19/18
|
(3)
|
18.00%*
|
Yes
|
629,451
|
1,161,136
|
-
|
1,161,136
|
-
|
-
|
1,161,136
|
-
|
|
09/19/18
|
09/28/21
|
6.00%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
10,000
|
|
|
12/14/18
|
12/22/18
|
24.00%*
|
Yes
|
474,759
|
1,042,905
|
-
|
1,042,905
|
-
|
-
|
1,042,905
|
-
|
|
01/02/19
|
(4)
|
17.00%
|
No
|
310,000
|
310,000
|
-
|
310,000
|
-
|
-
|
310,000
|
-
|
|
08/14/19
|
10/31/21
|
8.00%
|
No
|
26,200
|
26,200
|
9,845
|
16,355
|
-
|
-
|
-
|
16,355
|
|
(5)
|
10/31/21
|
8.00%
|
No
|
105,000
|
105,000
|
43,361
|
61,639
|
-
|
5,916
|
-
|
55,723
|
|
(6)
|
(6)
|
8.00%
|
No
|
336,750
|
336,750
|
187,729
|
149,021
|
-
|
9,989
|
-
|
139,032
|
|
(7)
|
(7)
|
10.00%
|
No
|
520,000
|
520,000
|
-
|
520,000
|
-
|
-
|
520,000
|
-
|
|
|
|
|
|
$ 9,381,768
|
$ 8,892,773
|
$ 240,935
|
$ 8,651,838
|
$ 2,416,973
|
$ 15,905
|
$ 5,849,516
|
$ 369,444
|
(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 $306,750 mature 1/2/22; $15,000 mature
on 5/12/22; and $15,000 mature on 9/1/22..
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.
* Default interest rate.
The
following convertible notes and notes payable were outstanding at
December 31, 2019:
|
|
|
|
|
|
|
|
|
Related Party
|
Non Related Party
|
|
Date of Issuance
|
Maturity Date
|
Interest Rate
|
In Default
|
Original Principal
|
Principal at
December 31,
2019
|
Discount at
December 31,
2019
|
Carrying Amount at
December 31,
2019
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|
12/12/06
|
01/05/13
|
6.25%
|
Yes
|
58,670
|
4,555
|
-
|
4,555
|
-
|
-
|
4,555
|
-
|
|
12/01/07
|
09/01/15
|
7.00%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
09/25/09
|
10/25/11
|
5.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/09
|
12/23/14
|
7.00%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/09
|
12/23/14
|
7.00%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/09
|
12/23/14
|
7.00%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
12/31/19
|
10.00%
|
Yes
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
|
-
|
1,000,000
|
-
|
|
08/15/13
|
10/31/23
|
10.00%
|
No
|
158,334
|
158,334
|
-
|
158,334
|
-
|
-
|
-
|
158,334
|
|
12/31/13
|
12/31/15
|
8.00%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
-
|
-
|
130,000
|
-
|
|
04/01/14
|
12/31/18
|
10.00%
|
Yes
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
|
12/22/14
|
03/31/15
|
22.00%
*
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
12/26/15
|
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
|
04/07/18
|
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
|
07/13/19
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/18/17
|
07/18/19
|
6.00%
|
Yes
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/26/17
|
07/26/19
|
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
|
12/31/18
|
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
|
09/28/21
|
6.00%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
|
10,000
|
|
12/14/18
|
12/22/18
|
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
|
10/31/21
|
8.00%
|
No
|
26,200
|
26,200
|
21,211
|
4,989
|
-
|
-
|
-
|
4,989
|
|
(5)
|
10/31/21
|
8.00%
|
No
|
105,000
|
105,000
|
95,559
|
9,441
|
-
|
1,000
|
-
|
8,441
|
|
(6)
|
01/02/22
|
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
Maturities of Long-Term Obligations for Five Years and
Beyond
The
minimum principal payments of convertible notes and notes payable
at December 31, 2020:
|
2021
|
$8,397,689
|
|
2022
|
336,750
|
|
2023 and
thereafter
|
158,334
|
|
Total
|
$8,892,773
|
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. We value the derivative liabilities using
the Black-Scholes option valuation model. The derivative
liabilities are valued at each reporting date and the change in
fair value is reflected as change in fair value of derivative
liablity.
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:
|
|
Fair value
at
December
31,
2020
|
Quoted market
prices
for
identical
assets/liabilities
(Level
1)
|
Significant
other
observable
inputs
(Level
2)
|
Significant
unobservable
inputs
(Level
3)
|
|
Derivative
Liability
|
$5,321,395
|
$-
|
$-
|
$5,321,395
|
|
|
|
|
Derivative
liability as of December 31, 2019
|
$3,032,056
|
|
Addition to
derivative instruments
|
300,489
|
|
Reclassification
upon conversion
|
(68,327)
|
|
Loss on change in
fair value of derivative liability
|
2,057,177
|
|
Derivative
liability as of December 31, 2020
|
$5,321,395
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value of derivative liability at the beginning of
period
|
$-
|
|
Day one
gains/(losses) on valuation
|
659,885
|
|
Gains/(losses) from
the change in fair value of derivative liability
|
1,397,292
|
|
Change in fair
value of derivative liability at the end of the period
|
$2,057,177
|
* Gains
(losses) related to the revaluation of Level 3 financial
liabilities is included in “Change in fair value of
derivative liabilities” in the accompanying consolidated
statement of operations.
The
fair value of the derivative liability was estimated using the
Black-Scholes option-valuation 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
Common Stock
For the
year ended December 31, 2020, we issued 3,071,869 shares of common
stock to Oasis Capital LLC, with a fair value of $103,945, for the
conversion of a portion of our notes payable in the amount of
$50,000. During the year ended December 31, 2019, we issued
3,736,192 shares of common stock to Oasis Capital, LLC with a fair
value of $215,874 for the conversion of a portion of our notes
payable in the amount of $94,347.
Preferred Stock
On June
3, 2019, our board of directors approved the following issuances of
Preferred Stock:
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 December 31, 2020, 518,750 shares of Series B
Preferred Stock have been issued for $207,500 in cash.
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 December 31, 2020,
2,300,000 shares of Series C Preferred Stock have been issued for
services with a fair value of $159,337. The shares were issued as
follows: 1,000,000 shares to our chief executive officer, 400,000
shares to our two independent directors, and 900,000 shares to
employees and consultants.
Warrants and Options
The
following table summarizes all warrants outstanding and exercisable
for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
Balance at December
31, 2018
|
350,073
|
$0.18
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Balance at December
31, 2019
|
350,073
|
$0.18
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
(225,000)
|
-
|
|
Balance at December
31, 2020
|
125,073
|
$0.18
|
|
Exercisable at
December 31, 2020
|
125,073
|
$0.18
|
During
the year ended December 31, 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 $0.0268 per share on
December 31, 2020. Of the total warrants outstanding on December
31, 2020, warrants to purchase 125,073 shares had no intrinsic
value, as the price of the stock on that date was lower than the
exercise price.
NOTE 7 – INCOME TAX
The
Jobs Act significantly revised the U.S. corporate income tax law by
lowering the corporate federal income tax rate from 35% to
21%.
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 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.
A
reconciliation of income tax expense and the amount computed by
applying the statutory federal income tax rate of 18.9% to the
income before provision for income taxes is as
follows:
|
|
For the Years
Ended
December
31
|
|
|
|
|
|
Statutory rate
applied to loss before income taxes
|
$(1,863,672)
|
$(1,409,990)
|
|
Increase (decrease)
in income taxes results from:
|
|
|
|
Nondeductible
permanent differences
|
647,722
|
259,070
|
|
Change
in valuation allowance
|
1,215,950
|
1,150,920
|
|
Income tax expense
(benefit)
|
$-
|
$-
|
Deferred income
taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities
are as follows:
|
|
For the Years
Ended
December
31
|
|
|
|
|
|
Deferred tax
assets
|
$2,358,860
|
$2,358,860
|
|
Operating loss
carryforwards
|
10,284,021
|
9,068,070
|
|
Gross deferred tax
assets
|
12,642,881
|
11,426,930
|
|
Valuation
allowance
|
(12,642,881)
|
(11,426,930)
|
|
Net deferred income
tax asset
|
$-
|
$-
|
We have
net operating loss carryforwards for income tax purposes of
approximately $23.2 million. This loss is allowed to be offset
against future income through 2037. We have net operating loss
carryforwards of approximately $12.3 million that can be used
indefinitely subject to limitations. The tax benefits relating to
all timing differences have been fully reserved for in the
valuation allowance account due to the substantial losses incurred
through December 31, 2020. The change in the valuation allowance
for the years ended December 31, 2020 and 2019, was an increase of
$1.22 million and $1.15 million, respectively.
NOTE 8 – 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. During
year ended December 31, 2020, we did not execute any put options
with L2 Capital to purchase any shares of common stock. The
agreements expired on December 11, 2020, and are no longer in
effect.
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 December 31,
2020, we have issued 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 outstanding of warrants to purchase 125,073 shares of
common stock, none of which has been exercised. These warrants have
a fair value of $0 based on the Black-Scholes option-pricing model
as the exercise price is higher than the share value of our common
stock on December 31, 2020. 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
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
court has not yet addressed the claims of that third
party.
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 would pay Fugro $375,000 by December 31,
2020. We have recorded the amount of accrued legal settlement as of
December 31, 2020. During 2020, we repaid $70,000 and the balance
at December 31, 2020 was $305,000. We were unable to pay the
remaining $305,000 by December 31, 2020, and therefore, entered
into an amendment to the settlement agreement on December 29, 2020,
extending the deadline for full payment, with 18% interest per
annum, until March 31, 2021.
NOTE 9 – 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 December 31, 2020, we have not issued the shares. As of
December 31, 2020, and 2018, 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 December 31, 2020,
we have not issued the shares and have accrued the
amount.
NOTE 10 – 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
party 100 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 11 – RELATED-PARTY TRANSACTIONS
For the
years ended December 31, 2020 and 2019, we paid rent of $120,000
and $120,000, respectively, to a company controlled by our chief
executive officer under an operating lease agreement.
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, 2020, or the date of the financial closings of our
Baha Mar project (or any other project of $25 million or more),
whichever occurs first. On August 15, 2018, principal of $618,500
and accrued interest of $207,731 were converted to 826,231 shares
at $1.00 per share, which was ratified by a disinterested majority
of the board of directors. The conversion was recorded at
historical cost due to the related-party nature of the transaction.
As of December 31, 2020, the note balance was $1,102,500 and the
accrued interest was $741,134. This 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. During the year ended December 31,
2018, we received an additional $2,000 and repaid $25,000. The
outstanding balance was $177,000 and accrued interest was $68,792
as of December 31, 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 is due and payable at the earliest of resolution of
the Memphis litigation (as defined therein), December 31, 2020, or
when we are otherwise able to pay. As of December 31, 2020, the
outstanding balance was $543,093 and the accrued interest was
$199,298. For the years ended December 31, 2020 and 2019, we repaid
$35,000 and $34,000 respectively. This note is in
default.
We
remain liable for the loans made to us by JPF Venture Group, Inc.
before the Merger. As of December 31, 2020, the outstanding balance
of these loans was $594,380 and the accrued interest was $200,649.
All of these notes are in default.
On June
3, 2019, our board of directors approved the issuances of Series C
Preferred Stock. We issued 1,000,000 shares to our chief executive
officer and 400,000 shares to our two independent directors with a
fair value of $96,987.
On
October 20, 2016, we borrowed $12,500 from an 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, 2020, the
outstanding balance was $12,500, plus accrued interest of
$3,277.
In June
2019, JPF Venture Group, Inc., a company in which our chief
executive officer is an officer and director, provided a short-term
advances totaling $32,000 to us for working capital. It was repaid
in two payments in the third quarter of 2019.
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 October
31, 2021, whichever comes first. On October 14, 2019, we borrowed
$5,000 from Jeremy P. Feakins, our chief executive officer. As of
December 31, 2020, the outstanding balance of his loan was $5,000
and the accrued interest was $487. On October 14, 2019, we borrowed
$5,000 from an independent director. As of December 31, 2020, the
outstanding balance of his loan was $5,000 and the accrued interest
was $479 (see Note 4).
In the
fourth quarter of 2019, and during the year ended December 31,
2020, 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
December 9, 2019, we borrowed $5,000 from Jeremy P. Feakins, our
chief executive officer. On January 21, 2020, we borrowed an
additional $5,000 from Jeremy P. Feakins, our chief executive
officer. As of December 31, 2020, the outstanding balance of his
loans was $10,000 and the accrued interest was $425. On December 7,
2019, we borrowed $5,000 from an independent director. On January
21, 2020, we borrowed an additional $5,000 from an independent
director. As of December 31, 2020, the outstanding balance of his
loans was $10,000 and the accrued interest was $425.
NOTE 12 – SUBSEQUENT EVENTS
On
December 14, 2018, Oasis Capital, LLC (formerly, L2 Capital LLC)
purchased our note payable from Collier Investments, LLC. 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. Subsequent to
December 31, 2020, we issued 7,329,587 shares of common stock to
Oasis Capital, LLC for the conversion of a portion of our notes
payable in the amount of $115,000. The balance of the loan
outstanding as the date of this filing is $927,905.
On
March 29, 2020, Ocean Capital, LLC. has submitted a request for the
issuance of 1,693,877 shares of common stock as additional second
commitment shares related to the note purchased from Collier, LLC
(see Note 4). As of the date of this report, the shares have not
been issued.
Subsequent to
December 31, 2020, we issued a series of convertible promissory
notes to accredited investors in the amount of $85,000. The notes
bear interest at 8% per annum. The maturity date for each note is
January 2, 2022. Each note 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 occurs first.
Subsequent to
December 31, 2020, we issued a series of promissory notes to
accredited investors, which totaled $105,000. 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 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.