Ocean Thermal Energy Corp - Annual Report: 2018 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____________ to
___________________
Commission File No. 033-19411-C
OCEAN THERMAL ENERGY CORPORATION
(Exact
name of registrant as specified in its charter)
|
Nevada
|
20-5081381
|
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
800 South Queen Street, Lancaster, PA 17603
(Address
of principal executive offices, including Zip Code)
717-299-1344
(Registrant’s
telephone number, including area code)
Securities
Registered pursuant to Section 12(b) of the Act: None
Securities
Registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
☐ No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
☒ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☒
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
|
Non-accelerated
filer
|
☒
|
Smaller
reporting company
|
☒
|
|
|
|
Emerging growth
company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes ☐ No ☒
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.
The aggregate market value of the
voting and nonvoting common equity held by nonaffiliates computed
as of the price at which the common equity was last sold on the
last business day of the registrant’s most recently completed
second fiscal quarter was $11,359,319.
Indicate
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date.
As of March 15, 2019, there were
132,838,944 shares of the registrant’s common stock
outstanding, par value $0.001.
DOCUMENTS
INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
|
|
Page
|
|
|
|
|
4
|
|
|
16
|
|
|
26
|
|
|
26
|
|
|
26
|
|
|
26
|
|
|
|
|
|
27
|
|
|
28
|
|
|
28
|
|
|
31
|
|
|
31
|
|
|
31
|
|
|
32
|
|
|
33
|
|
|
|
|
|
33
|
|
|
35
|
|
|
36
|
|
|
37
|
|
|
38
|
|
|
|
|
|
39
|
|
|
41
|
Throughout
this report, unless otherwise designated, the terms
“we,” “us,” “our,” and
“our company” refer to Ocean Thermal Energy
Corporation, a Nevada corporation. All amounts in this report are
in U.S. dollars, unless otherwise indicated.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This
report may contain certain “forward-looking” statements
as such term is defined by the U.S. Securities and Exchange
Commission (“SEC”) in its rules, regulations, and
releases, which represent our expectations or beliefs, including
statements concerning our operations, economic performance,
financial condition, growth and acquisition strategies,
investments, and future operational plans. For this purpose, any
statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as
“may,” “expect,” “believe,”
“anticipate,” “intent,”
“could,” “estimate,” “might,”
“plan,” “predict,” or
“continue,” or the negative or other variations thereof
or comparable terminology, are intended to identify forward-looking
statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond our control,
and actual results may differ materially depending on a variety of
important factors, including uncertainty related to acquisitions,
governmental regulation, management and maintenance of growth, the
operations of the company and its subsidiaries, volatility of stock
price, commercial viability of OTEC systems, and any other factors
discussed in this and our other filings with the SEC.
These
risks, uncertainties, and other factors include those set forth
under “Risk
Factors” of this report. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on
our forward-looking statements. All subsequent written and oral
forward-looking statements attributable to us or to persons acting
on our behalf are expressly qualified in their entirety by these
cautionary statements. Except as otherwise required by applicable
law, we undertake no obligation to publicly update or revise any
forward-looking statements or the risk factors described in this
report or in the documents we incorporate by reference, whether as
a result of new information, future events, changed circumstances,
or any other reason after the date of this report.
This
report contains forward-looking statements, including statements
regarding, among other things:
●
our ability to
continue as a going concern;
●
our anticipated
needs for working capital
●
our ability to
secure financing
●
the possibility
that actual capital costs, operating costs, production, and
economic returns may differ significantly from those that we have
anticipated;
●
the financial model
for our proposed projects has not been tested and may not be
successful;
●
we are subject to
changing attitudes about environmental risks;
●
our projects will
be subject to substantial regulation;
●
our efforts to
develop OTEC and SWAC/LWAC plants are subject to many financial,
technical, managerial, and sales risks that may make us
unsuccessful;
●
our exposure to
political and legal risks in developing or emerging markets where
we propose to locate our plants;
●
technological
advances may render our technologies obsolete; and
●
operational
problems, natural events or catastrophes, casualty loss, or other
events may impair the commercial operation of our
projects.
Actual
events or results may differ materially from those discussed in
forward-looking statements as a result of various factors,
including the risks outlined under “Risk Factors,” and matters
described in this report generally. In light of these risks and
uncertainties, we cannot assure that the forward-looking statements
contained in this report will in fact occur. In addition to the
information expressly required to be included in this report, we
will provide such further material information, if any, as may be
necessary to make the required statements, in light of the
circumstances under which they are made, not
misleading.
3
PART I
ITEM 1.
BUSINESS
Overview
OCEES
International Inc. (“OCEES”) was formed under the laws
of Hawaii on January 21, 1998. Ocean Thermal Energy Corporation
(“OTE Delaware”) was a Delaware corporation formed on
October 18, 2010. In 2011, OCEES and OTE Delaware entered into a
share exchange agreement. The transaction was treated as a merger
of entities under common control as 100% of the stockholders of
OCEES exchanged their shares for 100% of the outstanding shares of
OTE Delaware.
OTE
Delaware used its proprietary technology to develop, build, own,
and operate renewable energy systems, primarily in the Eastern and
Western Caribbean Islands.
On
December 17, 2013, Broadband Network Affiliates, Inc.
(“BBNA”), a Nevada corporation, changed its state
domicile and became a Delaware corporation. On December 23, 2013,
BBNA entered into a merger agreement with OTE Delaware, which was
effective December 31, 2013. Upon completion of the merger, BBNA
changed its name to Ocean Thermal Energy Corporation
(“OTE”) and the former OTE Delaware ceased to exist.
The transaction was treated as a reverse merger and
recapitalization by OTE Delaware.
We
previously operated under the corporate name of TetriDyn Solutions,
Inc. (“TetriDyn”). On March 10, 2017, TetriDyn entered
into an Agreement and Plan of Merger (the “Merger
Agreement”) with OTE. On May 9, 2017, TetriDyn consummated
the acquisition of all outstanding equity interests of OTE pursuant
to the terms of the Merger Agreement, with a newly created Delaware
corporation that is wholly owned by TetriDyn (“TetriDyn
Merger Sub”), merging with and into OTE (the
“Merger”) and OTE continuing as the surviving
corporation and a wholly owned subsidiary of TetriDyn. Effective
upon the consummation of the Merger (the “Closing”),
the OTE stock issued and outstanding or existing immediately prior
to the Closing was converted at the Closing into the right to
receive newly issued shares of TetriDyn common stock. As a result
of the Merger, TetriDyn succeeded to the business and operations of
OTE. In connection with the consummation of the Merger and upon the
consent of the holders of a majority of the outstanding common
shares, TetriDyn filed with the Nevada Secretary of State an
amendment to its articles of incorporation changing its name to
“Ocean Thermal Energy Corporation.”
Our Business
We
develop projects for renewable power generation, desalinated water
production, and air conditioning using proprietary intellectual
property designed and developed by our own experienced
oceanographers, engineers, and marine scientists. Plants using our
technologies are designed to extract energy from the temperature
difference between warm surface ocean water and cold deep seawater
at a depth of approximately 3,000 feet. We believe these
technologies provide practical solutions to mankind’s
fundamental needs for sustainable, affordable energy; desalinated
water for domestic, agricultural, and aquaculture uses; and
cooling, all without the use of fossil fuels.
●
Ocean Thermal
Electrical Conversion, known in the industry as “OTEC,”
power plants are designed to produce electricity. In addition, some
of the seawater running through an OTEC plant can be desalinated
efficiently, producing fresh water for agriculture and human
consumption.
●
Seawater Air
Conditioning, known in its industry as SWAC/LWAC, plants are
designed to use cold water from ocean depths to provide air
conditioning for large commercial buildings or other facilities.
This same technology can also use deep cold water from lakes, known
as Lakewater Air Conditioning or LWAC.
Both
OTEC and SWAC/LWAC systems can be engineered to produce desalinated
water for potable, agricultural, and fish farming/aquaculture
uses.
4
Many applications of technologies based on ocean
temperature differences between surface and deep seawater have been
developed at the Natural Energy Laboratory of Hawaii Authority, or
NELHA, test facility (http://nelha.hawaii.gov), including
applications for desalinated seawater, fish-farming, and
agriculture. We believe our proprietary advances to existing
technologies developed by others in the industry enhance their
commercialization for the plants we propose to develop.
We
have recruited a scientific and engineering team that includes
oceanographers, engineers, and marine scientists who have worked
for a variety of organizations since the 1970s on several systems
based on extracting the energy from the temperature differences
between surface and deep seawater, including projects by NELHA, the
Argonne National Laboratory (http://www.anl.gov), and others. Note:
All URL addresses in this report are inactive textual references
only. Our executive team members have complementary experience in
leading engineering and technical companies and projects from
start-up to commercialization.
In
addition, we expect to use our technology in the development of an
OTEC EcoVillage, which should add significant value to our
business. We will facilitate the development of sustainable living
communities by creating an ecologically sustainable “OTEC
EcoVillage” powered by 100% fossil-fuel free electricity. In
the development, buildings will be cooled by energy-efficient and
chemical-free systems, and water for drinking, aquaculture, and
agriculture will be produced onsite. The OTEC EcoVillage project
consists, in part, of an OTEC plant that will provide all power and
water to about 400 residences, a hotel, and a shopping center, as
well as models of sustainable agriculture, food production, and
other economic developments. Each sale of luxury EcoVillage
residences will support the development of environmentally
responsible affordable communities in tropical and subtropical
regions of the world currently in development. Our OTEC EcoVillage
will be the first development in the world offering a net-zero
carbon footprint. This will be our pilot project, launched to prove
the viability of OTEC technology to provide affordable renewable
energy for entire communities. We believe this project could be
highly profitable and generate significant value for our
shareholders. The U.S. Virgin Islands’ Public Service
Commission has granted regulatory approval to us for an OTEC plant,
and we have identified the specific plots of land for the site. The
first draft of the master plan for the entire development has been
completed.
Our Vision
Our
vision is to bring these technologies to tropical and subtropical
regions of the world where about three billion people live. Our
market includes 68 countries and 29 territories with suitable sea
depth, shore configuration, and market need; we plan to be the
first company in the world to design and build a commercial scale
OTEC plant and, to that end, have several projects in the planning
stages. Our initial markets and potential projects include several
U.S. Department of Defense bases situated in the Asia Pacific and
other regions where energy independence is crucial. Currently, we
have projects in the planning and development stages in Puerto Rico
and the U.S. Virgin Islands.
Our Technology
OTEC
is a self-sustaining energy source, with no supplemental power
required to generate continuous (24/7) electricity. It works by
converting heat from the sun, which has warmed ocean surface water,
into electric power, and then completing the process by cooling the
plant with cold water from deep in the ocean. The cold water can
also be used for very efficient air conditioning and desalinated to
produce fresh water. OTEC has worked in test settings where there
exists a natural temperature gradient of 20 degrees Celsius or
greater in the ocean. We believe OTEC can deliver sustainable
electricity in tropical and subtropical regions of the world at
rates approximately 20-40% lower than typical costs for electricity
produced by fossil fuels in those markets.
Further,
we believe that a small, commercial OTEC plant could offer
competitive returns even in a market where the cost of electricity
is as low as $0.30 per kilowatt-hour, or kWh. For example, the
Inter-American Development Bank, an international bank providing
development financing in Latin America and the Caribbean, reports
that energy prices for hydrocarbon-generated power during 2010-2012
for 15 Caribbean countries averaged $0.33 per kWh, with a high of
$0.43 per kWh in Antigua and Barbados. For the U.S. Virgin Islands,
the Water and Power Authority of the Virgin Islands reported that
as of February 1, 2017, the average price for electricity for
commercial customers was nearly $0.40 per kWh. We believe that we
have an opportunity to offer base-load energy (the amount of energy
required to meet minimum requirements) pricing that is better than
our customer’s next best alternative in the markets where
electricity costs are $0.30 or more per kWh.
5
Technology
advancements have significantly brought the capital costs of OTEC
down to make it competitive compared to traditional energy sources.
Technology improvements include larger diameter seawater pipes
manufactured with improved materials, increased pumping
capabilities from OTEC depths, better understanding of material
requirements in the deep ocean environment, more experience in deep
water pipeline and cable installation techniques, and more accurate
sea bottom mapping technology, which is required for platform
positioning and pipe installation. The cold-water pipes at a
demonstration site in Hawaii have been in continuous operation for
more than 20 years, and the technology has improved significantly
since the Hawaiian installation.
We
estimate that a small OTEC plant that delivers 13 megawatts (MWs)
per hour for 30 years would currently cost approximately $350
million. This is the plant size that we typically propose for our
initial target markets to meet 20% or more of their current demand
for electricity and a large portion of their need for fresh
drinking water and agricultural water. OTEC has been proven in test
settings at NELHA, where a Department of Energy-sponsored OTEC
plant operated successfully throughout the 1990s to produce
continuous, affordable electricity from the sea without the use of
fossil fuels. Spin-off technologies of desalination and seawater
cooling, developed from the OTEC plant at NELHA, have also become
economically and technically feasible.
Finally,
we believe the decreasing supply and increasing cost of
fossil-fuel-based energy has intensified the search for renewable
alternatives. We further believe that renewable energy sources,
although traditionally more expensive than comparable fossil-fuel
plants, have many advantages, including increased national energy
security, decreased carbon emissions, and compliance with renewable
energy mandates and air quality regulations. We believe these
market forces will continue and potentially increase. In remote
islands where shipping costs and limited economies of scale
substantially increase fossil-fuel-based energy, renewable energy
sources may be attractive. Many islands contain strategic military
bases with high-energy demands that we believe would greatly
benefit from a less expensive, reliable source of energy that is
produced locally, such as OTEC.
SWAC/LWAC
is a process that uses cold water from locations such as the ocean
or deep lakes to provide the cooling capacity to replace
traditional electrical chillers in an air conditioning system.
SWAC/LWAC applications can reduce the energy consumption of a
traditional air-conditioning system by as much as 90%. Even when
the capital cost amortization of building a typically sized
SWAC/LWAC system providing 9,800 tons of cooling ($140-$150
million) are taken into account, SWAC/LWAC can save the customer
approximately 25-40% when compared to conventional systems—we
estimate savings can be as high as 50% in locations where air
temperatures and electricity costs are high. Cooling systems using
seawater or groundwater for large commercial structures are in use
at numerous locations developed and operated by others worldwide,
including Heathrow Airport, UK; Finland (Google Data Center);
Cornell University, NY; Stockholm, Sweden; and the City of Toronto,
Canada.
How Our Technology Works
OTEC
uses the natural temperature difference between cooler deep ocean
water at a depth of approximately 3,000 feet and warmer shallow or
surface water to create energy. An OTEC plant project involves
installing about 6.0 feet diameter, deep-ocean intake pipes (which
can readily be purchased), together with surface water pipes, to
bring seawater onshore. OTEC uses a heat pump cycle to generate
power. In this application, an array of heat exchangers transfer
the energy from the warm ocean surface water as an energy source to
vaporize a liquid in a closed loop, driving a turbine, which in
turn drives a generator to produce electricity. The cold deep ocean
water provides the required temperature to condense vapor back into
a liquid, thus completing the thermodynamic cycle, which is
constantly and continuously repeated. The working fluid is
typically ammonia, as it has a low boiling point. Its high hydrogen
density makes ammonia a very promising green energy storage and
distribution media. Among practical fuels, ammonia has the highest
hydrogen density, including hydrogen itself, in either its low
temperature, or cryogenic, and compressed forms. Moreover, since
the ammonia molecule is free of carbon atoms (unlike many other
practical fuels), combustion of ammonia does not result in any
carbon dioxide emissions. The fact that ammonia is already a widely
produced and used commodity with well-established distribution and
handling procedures allows for its use as an alternative fuel. This
same general principle is used in steam turbines, internal
combustion engines, and, in reverse, refrigerators. Rather than
using heat energy from the burning of fossil fuels, OTEC power
draws on temperature differences of the ocean caused by the
sun’s warming of the ocean’s surface, providing an
unlimited and free source of energy.
6
OTEC
and SWAC/LWAC infrastructure offers a modular design that
facilitates adding components to satisfy customer requirements and
access to a sufficient supply of cold water. These components
include reverse-osmosis desalination plants to produce drinkable
water, bottling plants to commercialize the drinkable water, and
off-take solutions for aquaculture uses (such as fish farms), which
benefit from the enhanced nutrient content of deep ocean water. A
further advantage of a modular design is that, depending on the
patterns of electricity demand and output of the OTEC plant, a
desalination plant can be run using the excess electricity
capacity.
Currently,
OTEC requires a minimum temperature difference of approximately 20
degrees Celsius to operate, with each degree greater than this
increasing output by approximately 10-15%. OTEC has potential
applications in tropical and subtropical zones. OTEC is
particularly well suited for tropical islands and coastal areas
with proximate access to both deep water and warm surface water.
These communities are typically subject to high and fluctuating
energy costs ranging from $0.28-$0.75 per kWh, as they rely on
importing fossil fuels for power generation. Data from the National
Renewable Energy Laboratory of the U.S. Department of Energy
website indicated that at least 68 countries and 29 territories
around the globe appear to meet these criteria.
The
world’s largest OTEC power plant to date is operational at
the NELHA facility in Hawaii and is connected to the electrical
grid. It provides base-load electricity produced by OTEC to about
150 homes. Around the world, a couple of other successful
developmental and experimental plants have been built, and the U.S.
National Oceanic and Atmospheric Administration, or NOAA, has
stated that: “The qualitative analysis of the technical
readiness of OTEC by experts at this workshop suggest that a <10
MWe floating, closed-cycle OTEC facility is technically feasible
using current design, manufacturing, deployment techniques and
materials.” We believe that we have sufficient skill and
knowledge to now commercialize 5-MW to 30-MW land-based OTEC
plants, using off-the-shelf components, including the cold-water
piping.
SWAC/LWAC
is a significantly more cost-effective and environmentally friendly
way to implement air-conditioning using cold water sourced from
lakes or, analogous with OTEC, deep ocean water, rather than from
an electric chiller. Comparing Federal Energy Management Program
engineering efficiency requirements of approximately 0.94 kilowatts
of electricity per ton of cooling capacity with our own engineering
estimates of 0.09 kilowatts of electricity per ton of cooling
capacity, as calculated by DCO Energy, our engineering,
procurement, and construction partner, we estimate that SWAC/LWAC
systems can reduce electricity consumption by up to 80-90% when
compared to conventional systems. Therefore, we believe energy
reductions may make SWAC/LWAC systems well-suited for large
structures, such as office complexes, medical centers, resorts,
data centers, airports, and shopping malls. We believe that other
SWAC/LWAC plants we may develop will likely achieve similar
efficiencies. There are examples of proven successful SWAC/LWAC
systems in use, including a large 79,000-ton system used to cool
buildings in the downtown area of the City of Toronto, Canada;
Google’s data center in Finland operates a SWAC/LWAC system
that uses waters from the Baltic Sea to keep servers cool and a
system with more than 18,000 tons of cooling is in operation at
Cornell University, Ithaca, New York. On January 10, 2018, William
S. (Lanny) Joyce joined our board of advisors. Mr. Joyce was the
Director of Utilities and Energy Management in the Energy and
Sustainability Department at Cornell University, Ithaca, New York.
Mr. Joyce initiated and was project manager for the LWAC deep lake
water cooling project, an innovative and award-winning project
completed in 2000 that provides all of the chilled water production
on the central campus utilizing a renewable resource and 86% less
energy.
7
OTEC Versus Other Energy Sources
The
construction costs of power plants using any technology are much
higher in remote locations, such as tropical islands, than on the
mainland of the United States, principally due to the need to
transport materials, components, other construction supplies, and
labor not available locally. There are also considerations that
make those other technologies less attractive in those areas. We
believe the consistency of OTEC over its life provides clear
advantages over other power-generation technology in the tropical
and subtropical markets, because its base-load power (available at
all times and not subject to fluctuations throughout the day) is an
important asset to the small transmission grid, which is typical in
these regions.
Combined-cycle
natural gas plants typically need to be capable of generating
several hundred MWs to attain the lower cost per kilowatt installed
values to make the plant economically feasible. Tropical locations
do not have large enough grids and market demand to make that plant
size reasonable. Further, tropical locations frequently do not have
domestic fuel supplies, requiring fuel to be imported. In order to
import natural gas, it must be liquefied for shipment and then
vaporized at the location. There are initial cost and public safety
concerns with such facilities. In addition, gas-fired plants emit
undesirable nitrogen oxide, carbon dioxide, and volatile organic
compounds.
Solar
applications continue to increase as the cost and effectiveness of
photovoltaic panels improve. However, we estimate that the cost to
install solar panels in tropical regions remains high. Beyond the
issues with shipping and labor costs that all construction must
overcome, the design and building code requirements are tougher in
storm-prone areas subject to potential wind damage from hurricanes,
earthquakes, and typhoons than are typically encountered in
mainland nontropical installations. Support structures must be more
substantial in order to hold the solar panels in place in case of
hurricane-force winds. Solar power, like wind power, places
substantial stress on an electrical grid. Since the input of both
of these sources is subject to weather conditions, they cannot be
considered a reliable supply of power, and back-up capacity is
necessary. Further, instantaneous changes in output due to sporadic
cloud cover create transient power flow to the grid, creating
difficulties in maintaining proper voltages and stability. OTEC is
a stabilizing source to the grid, providing constant and
predictable power, and has no emissions. The ability of OTEC to
provide constant, continuous power is a large benefit as compared
to any of the other renewable options available.
Our
estimated price for OTEC-generated power of approximately $0.30 per
kWh under current economic conditions, which can be as low as $0.18
net per kWh with maximum efficiency and revenue from water
production, is also constant both throughout the year and over a
plant’s life. OTEC’s power price, determined almost
entirely by the amortization of its initial cost, is a protection
against inflation and rising interest rates, which greatly affect
coal and oil. Customers in our target markets currently pay from
$0.35 to as high as $0.60 per kWh for power from coal and
oil-fueled power plants. However, imported fuels are subject to
price volatility, which has a direct impact on the cost of
electricity and adds operating risk during the life of a plant. The
fuel handling to allow for the shipping, storage, and local
transport is expensive, a potential source of damaging fuel spills
and a basis for environmental concerns. Fossil-fuel plants create
pollution, emit carbon dioxide, and are visually unappealing, which
is of particular concern in tropical areas renowned for their
clear, pristine air and beauty. We project OTEC can save these
markets up to 40%, compared to their current electrical costs, and
when revenues from fresh drinking water, aquaculture, and
agriculture production are considered, the justification is even
more compelling.
Overview of the Market and the Feasibility of OTEC in Current
Market Conditions
We
believe that OTEC is now an economically, technologically, and
environmentally competitive power source, especially for developing
or emerging countries in certain tropical and subtropical regions
contiguous to oceans. Our natural target markets are communities in
countries around the Caribbean, Asia, and the Pacific. These
locations are typically characterized by limited infrastructure,
high-energy costs, mostly imported or expensively generated
electricity, and frequently with significant fresh water and food
shortages. These are serious limitations on economic development,
which we believe our OTEC technology can address.
Data presented to the Sustainable Use of Oceans in
the Context of the Green Economy and the Eradication of
Poverty workshop in Monaco in
2011 by Whitney Blanchard of the Office of Ocean and Coastal
Resource Management, National Oceanic and Atmospheric
Administration, show that at least 98 nations and territories using
an estimated five terawatts of potential OTEC net power are
candidates for OTEC-power systems. Blanchard specifically notes
that Hawaii, Guam, Florida, Puerto Rico, and the U.S. Virgin
Islands are suitable for OTEC.
8
Over
the past decade, there have been substantial changes in many areas
that have now made the commercialization of OTEC a reality. First
and foremost is the price of oil, which until 2006/2007 had been
relatively inexpensive.
Recent
oil prices have been volatile, owing in large part to political
instability in the Middle East and elsewhere. Crude oil prices
averaged $71.40 in 2018. Oil prices are almost triple the 13-year
low of $26.55/bbl on January 20, 2016. Six months before that, oil
had been $60/bbl (June 2015). A year earlier, it had been
$100.26/bbl (June 2014).
Facts
like these have resulted in increased attention and interest in
OTEC in the commercial sector and among candidates. With OTEC
power, customers can decouple the price of electricity from the
price of oil.
The
International Energy Agency’s World Energy Outlook expects
liquid natural gas export capacity to grow rapidly in the short
term, with major new sources of supply coming mostly from Australia
and the United States.
Liquid
natural gas prices have collapsed, in part because demand is
turning out to be weaker than some previously anticipated.
Additionally, many rules and regulations are in effect to mitigate
the environmental issues associated with liquid natural gas
extraction, transportation, and storage, adding significant
costs.
According to the
U.S. Environmental Protection Agency, in the United States, nearly
28.5% of 2016 greenhouse gas emissions was generated primarily
from burning fossil fuel for our cars, trucks, ships, trains, and
planes. Over 90% of the fuel used for transportation is
petroleum-based, which includes gasoline and diesel.
The
electric power sector accounted for 28.4% of total greenhouse gas
emissions in 2016.
According to the
U.S. Environmental Protection Agency: “Global carbon
emissions from fossil fuels have significantly increased since
1900. Since 1970, CO2 emissions have increased by about 90%, with
emissions from fossil fuel combustion and industrial processes
contributing about 78% of the total greenhouse gas emissions
increase from 1970 to 2011.”
Greenhouse gas
emissions from electricity have increased by about 12% since 1990
as electricity demand has grown and fossil fuels have remained the
dominant source for generations.
Fossil-fuel-fired
power plants are a significant source of domestic carbon dioxide
emissions, the primary cause of global warming. To generate
electricity, fossil-fuel-fired power plants use natural gas,
petroleum, coal, or any form of solid, liquid, or gaseous fuel
derived from such materials.
The
U.S. Energy Information Administration states that renewable energy
plays an important role in reducing greenhouse gas emissions. Using
renewable energy can reduce the use of fossil fuels, which are
major sources of U.S. carbon dioxide emissions. The
consumption of biofuels and other nonhydroelectric renewable energy
sources more than doubled from 2000 to 2017, mainly because of
state and federal government requirements and incentives to use
renewable energy. The U.S. Energy Information Administration
projects that U.S. renewable energy consumption will continue to
increase through 2050.
People
in many countries today, including the United States, are concerned
with environmental issues caused by fossil-fuel-generated power.
Gallup surveys find public acceptance of climate change is rising.
The number of Americans that the organization terms
“concerned believers” on climate change has risen from
37% in 2015 to 47% in 2016 and to 50% in the spring of 2017. NASA
has long confirmed the scientific consensus that the Earth’s
climate is warming.
9
The
international concern about the harmful effects of climate change
led to the negotiation of the Paris Agreement in December 2015 as
the culmination of the 2015 United Nations Climate Change
Conference. The agreement provides for members to reduce their
carbon output as soon as possible and to do their best to keep
global warming to no more than two degrees Celsius, or 3.6 degrees
Fahrenheit. In order to achieve the desired results, there would
have to be a worldwide reduction in emissions from fossil fuels and
a shift to renewable resources. President Donald Trump has pulled
the United States out of the Paris accord, but other Americans are
standing with the world to help fight the ‘existential
crisis’ of global warming, A coalition of 14 U.S. states,
including California and New York, have said they are on track to
meet the U.S. target of a 26-28% reduction in greenhouse gas
emissions by 2025, compared to 2005 level.
In
November 2017, the United Nations Climate Conference opened in
Bonn, Germany, with the aim of a greater ambition for climate
action, as the world body’s weather agency issued a stark
warning that 2017 was set to be among the three hottest years on
record.
We
believe the ongoing concern about environmental issues and the
price instability of fossil-fuel prices are motivation for
increased commercial interest in OTEC, renewed activity in the
commercial sector, and increased interest among communities and
agencies that recognize the potential benefits of this technology,
including the U.S. Department of Defense and U.S. Department of the
Interior territories.
In
the last four years, several large companies have used their OTEC
technology experience to introduce OTEC systems worldwide,
supporting the argument that the technology is now at the point
where it can be introduced at a commercial level:
●
In June 2014, the
French companies, Akuo Energy and DCNS (now Naval Energies), were
funded to construct and install a number of OTEC plants adding up
to 16 MWs of power generation outside the coastline of Martinique
in the Caribbean. This is by far the biggest OTEC project announced
to date, and the European Union has allocated €72 million
(about $82 million at current exchange rates) for this purpose.
DCNS (now Naval Energies) is our teaming partner for potential
projects in the Caribbean.
●
Since early 2014,
we have been working with several industrialized and developing
countries, including U.S. Virgin Islands, The Bahamas, Cayman
Islands, and others, and investigating suitable OTEC sites,
infrastructural solutions, and funding opportunities.
●
Two nongovernmental
organizations promoting OTEC have been created: OTEC Foundation
(based in The Netherlands) and OTEC Africa (based in
Sweden)
●
New technological
advances for larger and more robust deep seawater pipes and more
efficient and cost-effective heat exchangers, pumps, and other
components have, in our opinion, further improved the economics for
OTEC.
●
Many countries,
including a large number of Caribbean nations, now have renewable
energy standards and are looking at ways to reduce their carbon
footprint, decouple the price of electricity from the volatile
price of oil, and increase energy security. Along with these
countries, we are aware that Hawaii, U.S. territories, and the U.S.
Department of Defense are looking at OTEC as a possible source of
renewable energy and water for drinking, fish farming, and
agriculture.
●
The NELHA
demonstration OTEC plant in Hawaii is producing 100 kilowatts of
sustainable, continuous electricity annually and is powering a
neighborhood of 120 homes. A potential next phase for OTEC
development at NELHA is being considered by an international
consortium under 2010 Okinawa-Hawaii clean energy agreement, which
was extended in 2015.
●
BARDOT Group, a
French SME specialized in subsea engineering and equipment
manufacturing for offshore energy, stated it has signed a contract
for the first commercial OTEC system to be installed in an
eco-resort in Maldives.
10
Global
acceptance of man’s influence on climate change may also
contribute to a shift in the demand for OTEC. As evidenced by the
Paris Agreement reached in December 2015 to combat climate change,
195 nations expressly recognized that conventional fossil-fuel
powered energy technologies affect global climate change and the
need to embrace a sustainable future in energy and water. Low-lying
coastal countries (sometimes referred to as small island developing
states) that tend to share similar sustainable development
challenges, including small but growing populations, limited
resources, remoteness, susceptibility to natural disasters,
vulnerability to external shocks, excessive dependence on
international trade, and fragile environments, have embraced this
recognition and are keenly aware that they are on the frontline of
early impact of sea level rise and are aggressively trying to
embrace sustainable-energy alternatives. This is a major driving
force for OTEC in primary early markets.
Recent
international political instability in fossil-fuel-producing
regions and oil price volatility have exposed the criticality of
energy security and independence for all countries. The need to
have a tighter control of domestic energy requirements is a matter
of increasing international concern. Continued reliance on other
countries (particularly those in oil-producing regions) is not a
favorable option any longer. We believe these considerations will
continue to drive renewable research and commercialization efforts
that benefit technologies with global potential to replace
fossil-fuel-based energy systems and benefit from base-load
capabilities like OTEC.
Our
current management team has led the development of the business
since 2010 and has established a pipeline of potential projects,
which include one signed 20-year energy services agreement, six
signed memoranda of understanding, and a written agreement to
support Lockheed Martin Corporation in proposing to the U.S. Navy a
SWAC/LWAC system for a military base in the Indian Ocean. The
projects under these agreements included the designs for OTEC,
SWAC/LWAC, or a combination of both plants in the U.S. Virgin
Islands, Bahamas, an island in the Indian Ocean, and in East
Africa. The Public Services Commission of the U.S. Virgin Islands
has approved our application to be a “qualified
facility” and build a 15MW OTEC plant on the island of St.
Croix. In addition to the OTEC plant, we are negotiating additional
opportunities to supply potable water to the U.S. Virgin Islands
government.
Discussions
are ongoing with Lockheed Martin Corporation to continue our
relationship with it for the SWAC/LWAC project for the U.S.
Department of Defense, Department of the Navy. We are discussing
both OTEC and SWAC/LWAC projects with the U.S. Department of
Agriculture and the Secretary of Commerce for Puerto Rico.
Currently, two projects are in the planning and discussion
phase:
●
EcoVillage powered
by an OTEC plant for Puerto Rico; and
●
Eco Village powered
by an OTEC plant for the U.S. Virgin Islands.
We
have provided a detailed study and designs for OTEC and/or
SWAC/LWAC to:
●
Lockheed Martin
Corporation for an SWAC/LWAC system to be built for the U.S. Navy
Base in Diego Garcia. We completed our preliminary assessment and
in early 2018, we briefed the preliminary assessment to the U.S.
Navy at a design charrette meeting.
●
The U.S. Department
of Agriculture for a combined OTEC/SWAC/LWAC plant for
Guam.
●
The Legislature of
the U.S. Virgin Islands for an OTEC plant for the island of St.
Croix.
Having
successfully developed this pipeline of opportunities, we believe
that it is now appropriate to seek additional funding to further
progress and build up our engineering and technical teams, develop
our intellectual property, file patents for several OTEC technical
systems, and advance our pipeline of current opportunities to
support our growth strategy.
11
Our Competition
We
compete in the development, construction, and operation of OTEC and
SWAC/LWAC plants with other operators that develop similar
facilities powered by other energy sources, primarily oil, natural
gas, nuclear energy, and solar power. These traditional energy
sources have well-established infrastructures for production,
delivery, and supply, with well-known commercial terms. In
developing our OTEC and SWAC/LWAC plants, we will need to satisfy
our customers that these technologies are sound and economical,
which may be a challenge until and unless we have an established
successful operating history. The energy industry is dominated by
an array of companies of all sizes that have proven technologies
and well-established fuel sources from a number of
suppliers.
We expect that we will encounter increasing
competition for OTEC and SWAC/LWAC plants. Other firms with greater
financial and technical resources are focusing commercialization of
these technologies. This includes, for example, Akuo Energy and
DCNS (now Naval Energies) and Bardot Energy of Paris, France. Our
competitors may benefit from collaborative relationships with
countries, including a large number of Caribbean nations that now
have renewable-energy standards and are looking at ways to reduce
their carbon footprint, decouple the price of electricity from the
volatile price of oil, and increase energy security. Other
competitors may have advantageous relationships with authorities
such as Hawaii, U.S. territories, and the U.S. Department of
Defense, which are looking at OTEC as a possible source of
renewable energy and water for drinking, fish farming, and
agriculture.
We
cannot assure that we will be able to compete effectively as the
industry grows and becomes more established and as OTEC and
SWAC/LWAC plants become more accepted as viable and economic energy
solutions.
We
believe competition in this industry is and will be based on
technical soundness and viability, the economics of plant outputs
as compared to other energy sources, developmental reputation and
expertise, financial capability, and ability to develop
relationships with potential customers. All of these factors are
outside our control.
Our Operational Strategy and Economic Models
We
have developed economic models of costs and potential revenue
structures that we will seek to implement as we develop OTEC and
SWAC/LWAC projects.
OTEC Projects
The
estimated construction costs for a 20-MW plant are approximately
$445 million. The hard costs of approximately $301 million consist
of the power system and platform construction and piping, which
make up 68% of the total. The remaining 32% consists of other
construction costs and the deployment of the cold water pipe and
soft costs of approximately $58 million for design, permits and
licensing, environmental impact assessment, bathymetry, contractor
fees, and insurance.
Once
operational, the capacity factor, which is the projected percent of
time that a power system will be fully operational, considering
maintenance, inspections, and estimated unforeseen events, is
expected to be 95% annually. This factor is used in our financial
calculations, which means the plant will not be generating revenue
for 5% of the year. Most fossil-fuel plants have capacity factors
around 90%, as a result of the major maintenance for
high-temperature boilers, fossil-fuel feed in systems, safety
inspections, cleaning, etc. The normal maintenance cycle for the
pumps, turbine, and generators used in the OTEC plant is typically
every five years. This includes the cleaning of the heat exchangers
and installation of new seals.
We
anticipate that project returns will be comprised of two
components: First, as the project developer, we will seek a
lump-sum payment as a development fee at the time of closing the
project financing for each project. These payments will be
allocated toward reimbursement of development costs and perhaps a
financial return at the early stage of each project. The
development fee will vary, but initially we will seek a fee of
approximately 3% of the project cost, payable upon closing project
financing. Second, we will retain a percentage of equity in the
project, with a goal to retain a minimum of 51% of the equity in
any OTEC project in order to participate in operating
revenues.
12
We
will seek to generate revenue from OTEC plants from contract
pricing charged on an energy-only price per kWh or on the basis of
a generating capacity payment priced per kilowatt per month and an
energy usage price per kWh. In many of the countries of the world
where we intend to build OTEC and SWAC/LWAC plants, water is in
short supply. In some locations, water is considered the more
important commodity. Depending on the part of the world in which
the plant is built, in addition to revenue from power generation,
supplying water for drinking, fish farming, and agriculture would
significantly increase plant revenue.
We
cannot assure that we can maintain the revenue points noted above,
that any fees received will offset development costs incurred to
date, or that any operating plant will generate
revenue.
SWAC/LWAC
Projects
The
estimated construction costs are approximately $150 million. The
hard costs of approximately $91 million consist of piping and
installation, which make up 60% of the total. The remaining 40%
consists of the pump house, central utility plant (CUP), mechanical
and engineering equipment, design, and other contingency costs and
soft costs of approximately $30 million consist of the CUP license,
permits, environmental impact assessment, bathymetry, and
insurance.
Under
our economic model, we will seek to generate revenue at two stages
of the project. First, as the project developer, we will seek a
lump-sum payment of a development fee equal to approximately 3% of
the project cost at the time of closing the project financing for
each project. These payments would provide us with income at the
early stage of each project. If we are able to negotiate a
development fee, we estimate that it will vary, but typically will
be in the $2,500,000-$3,500,000 range. The second component of
project returns is based upon the percentage of equity we will
retain in the project.
SWAC/LWAC
contract revenue will be based typically on three
charges:
●
Fixed
Price–this is based upon the capital costs of the project
paid over the term of the debt and with the intention of covering
the costs of debt.
●
Operation and
Maintenance–this payment covers the cost of the labor and
fixed overhead needed to run the SWAC/LWAC system, as well as any
traditional chiller plant operating to fulfill back-up or peak-load
requirements.
●
Chilled Water
Payment–this is a variable charge based on the actual chilled
water use and chilled water generated both by the SWAC/LWAC and
conventional system at the agreed upon conversion factors of
kilowatt/ton and current electricity costs in U.S. dollars per
kWh.
We
will seek to structure project financing with the goal of retaining
100% of the equity in any SWAC/LWAC project. We cannot assure that
we will recover project development costs or realize a financial
return over the life of the project.
Our Project Timeline
We
have not developed, designed, constructed, and placed into
operation any OTEC or SWAC/LWAC plants. However, based on our
planning process and early development experience to date, we
estimate that it will take approximately two to four years or more,
depending on local conditions, including regulatory and permitting
requirements, to take a project from a preliminary memorandum of
understanding with a potential power or other product purchaser to
completion and commencement of operation.
13
Our Strategic Relationships
We
have strategic relationships with each of the following parties for
potential plant construction, design and architectural services,
and the funding of projects.
●
DCO Energy, LLC,
Mays Landing, New Jersey, is an American energy development company
specializing in the development, engineering, construction,
start-up, commissioning, operation, maintenance and management, as
well as ownership of central energy centers, renewable energy
projects, and combined heat, chilling, and power-production
facilities. DCO Energy was formed in 2000 and has independently
developed and/or operated energy producing facilities of
approximately 275 MW of electric, 400 MMBtu/hr of heat recovery,
1,500 MMBtu/hr of boiler capacity, and 130,000 tons of chilled
water capacity, totaling over $1 billion of assets. DCO Energy
provides financing, engineering and design, construction
management, start-up and commissioning resources, and long-term
operating and maintenance services for its own projects as well as
third-party clients.
●
Naval Energies
(f/k/a DCNS) Paris, France, is a French naval defense company and
one of Europe’s largest ship builders. It employs 12,500
people and generates annual revenues of around $3.9 billion. In
2009, Naval Energies set up an incubator dedicated to marine
renewable energies and has stated its intention to be a leader in
this market, which includes marine turbines, floating wind
turbines, OTEC, and tidal stream turbines.
●
The Sky Institute
for the Future seeks to implement pragmatic and sustainable
strategies in design, energy, town planning, and agricultural
production, and to create and incubate transformational ideas that
will nourish healthy communities and educate current and future
generations.
Our Construction and Components
Once
we have designed the system, we will review the design with our
engineering, procurement, and construction partner to maximize the
chances that the project can be delivered according to plan and on
budget. We expect our construction contracts to be at a fixed price
and to include penalties if the construction timetable is missed.
We may, but are not obligated to, engage DCO Energy to construct
our plants or serve as our owners’ engineer.
In our systems, the two most important components
are heat exchangers and deep-water intake pipes. Although there are
multiple providers of each of these components, the supply of the
best components comes from just a few companies globally. We expect
to source our deep-water intake pipes from Pipelife of Norway, the
only company we know of that makes pipes of sufficient
quality, strength, and diameter (2.5
meters) to support our planned OTEC plants. However, we expect that
we could work around a lack of supply from Pipelife by using
multiple smaller pipes that are widely available on the market,
although this would increase our construction
costs.
We
will also need the highest quality, large heat exchangers for our
systems; heat exchangers represent a large percentage of the
projected costs of our OTEC and SWAC/LWAC systems and also account
for a significant portion of the design complexity inherent in
commercial OTEC and SWAC/LWAC designs. Our relationship with Alfa
Laval for heat exchangers provides us with the size and quality
heat exchangers that we expect to need, although we believe there
are several other companies that could provide us with adequate
supply of these devices meeting our specifications if we need to
source from them.
Other
major components, such as ammonia turbines, generators, and pumps,
are manufactured by several multinational companies, including
General Electric and Siemens.
Our Operations
For
OTEC electricity-generating facilities, we intend to enter into 20-
to 30-year power purchase agreements, or PPAs, pursuant to which
the project would supply fixed-price, baseload electricity to
satisfy the minimum demand of the purchaser’s customers. This
PPA structure allows customers to plan and budget their energy
costs over the life of the contract. For our SWAC/LWAC systems, we
intend to enter into 20- to 30-year energy service agreements, or
ESAs, to supply minimum quantities of chilled water for use in a
customer’s air conditioning system.
14
We
anticipate that operations of OTEC and SWAC/LWAC plants will be
subcontracted to third parties that will take responsibility for
ensuring the efficient operation of the plants. These arrangements
may reduce our exposure to operational risk, although they may
reduce our financial return if actual operating costs are less than
the subcontract payments. We cannot assure that any OTEC and
SWAC/LWAC plants will permit the PPAs and ESAs to yield minimum
target internal rates of return. Our first projects are likely to
have lower returns than subsequent projects. Variances in internal
rates of return may occur due to a range of factors, including
availability and structure of project financing and localized
issues such as taxes, some of which may be outside of our
control.
We expect our OTEC contract pricing will be
charged either on an energy-only price per kWh or on the basis of a
capacity payment priced per kilowatt per month and an energy usage
price per kWh. We cannot assure that this pricing will enable us to
recoup our funding costs and capital repayments and allow us to
earn a profit.
Marketing Strategies
Our marketing and sales efforts are managed and
directed by our
chairman and chief executive officer,
Jeremy P. Feakins, who has 35 years’ experience of
senior-level sales in both commercial and governmental markets. Our
marketing campaign has focused on explaining to potential customers
the economic, environmental, and other benefits of OTEC and
SWAC/LWAC through personal contacts, industry interactions, and our
website.
Our
target markets are comprised of large institutional customers that
typically include governments, utilities, large resorts, hospitals,
educational institutions, and municipalities. We market to them
directly through personal meetings and contact by our chief
executive officer and other key members of our team. We also make
extensive use of centers of influence either to heighten awareness
of our products in the minds of key customers’
decision-makers or to secure face-to-face meetings and preliminary
agreements between our customers and our chief executive
officer.
Sales
cycles in our business are extremely long and complex and often
involve multiple meetings with governmental, regulatory, electric
utility, and corporate entities. Therefore, we cannot predict when
or if any of the projects we currently have under development will
progress to the signed contract or operational phase and generate
revenue. We do not expect sales to be seasonal or
cyclical.
Material Regulation
Our
business and products are subject to material regulation. However,
because we contemplate offering our products and services in
different countries, the specific nature of the regulatory
requirements will be wholly dependent on the nation where the
project will be located and the national, state, and local
regulations that apply at that location.
In
all cases, we expect the level of regulation will be material and
will require significant permitting and ongoing compliance during
the life of the project. The most significant regulations will
likely be environmental and will include mitigating possible
adverse effects during both the construction and operational phases
of the project.
However,
we believe that the limited plant site disturbance of both
SWAC/LWAC and OTEC projects, together with the significantly lower
emissions that result from these projects as compared to
fossil-fuel electrical generation, will make compliance with all
such regulation manageable in the normal course.
The
second most significant regulations will likely involve
coordination with existing infrastructure. We believe compliance
with this type of regulation is a routine civil engineering
coordination process that exists for all new buildings and
infrastructure projects of all types. Again, we believe that the
design of both SWAC/LWAC and OTEC projects can readily be modified
to avoid interference with existing infrastructure in most
cases.
Facilities
Our
principal executive offices are located at 800 South Queen Street,
Lancaster, Pennsylvania 17603. Our telephone number at that address
is (717) 299-1344.
15
Intellectual Property
We
use, or intend to employ in the performance of our material
contracts, intellectual property rights in relation to the design
and development of OTEC plants. Our intellectual property rights
can be categorized broadly as proprietary know-how, technical
databases, and trade secrets comprising concept designs, plant
design, and economic models. Additionally, we have applied to
register the trademark TOO DEEP® at the U.S. Patent and
Trademark Office for the provision of desalinated deep ocean water
for consumption. The trademark has been “published for
opposition” as of February 12, 2019.
We
may apply for patents for components of our intellectual property
for OTEC and SWAC/LWAC systems, including novel or new
methodologies for cold-water piping, heat exchanges, and
computer-aided design programs. We cannot assure that any patents
we seek will be granted.
Our
intellectual property has been developed by our employees and is
protected under employee agreements confirming that the rights in
the inventions and developments made by the employees are our
property. Confidential information is protected by nondisclosure
agreements we entered into with prospective partners or other third
parties with which we do business.
We
have not received any notification from third parties that our
processes or designs infringe any third-party rights, and we are
not aware of any valid and enforceable third-party intellectual
property rights that infringe our intellectual property rights.
Currently, there is no patent for any company for OTEC
technology.
Employees
We
currently have five employees, consisting of one officer, three
engineers/technicians, and one general and administrative employee,
and three consultants. There are no collective-bargaining
agreements with our employees, and we have not experienced work
interruptions or strikes. We believe our relationship with
employees is good, and we provide health and life insurance for all
employees.
ITEM
1A. RISK FACTORS
Investing in our common stock involves a high degree of risk.
Investors should carefully consider the risks described below, as
well as the other information in this report, including our
financial statements and the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before deciding whether
to invest in our common stock. The occurrence of any of the events
or developments described below could harm our business, financial
condition, operating results, and growth prospects. In such an
event, the market price of our common stock could decline, and
investors may lose all or part of their investment. Additional
risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business
operations.
Risks Related to Our Financial Condition
The auditors’ report for the years ended December 31, 2018
and 2017, contains an explanatory paragraph about our ability to
continue as a going concern.
The
report of our auditors on our consolidated financial statements for
the years ended December 31, 2018 and 2017, as well as for prior
years, contains an explanatory paragraph raising substantial doubt
about our ability to continue as a going concern. We had a net loss
of $7,880,013 and $14,591,675, respectively; used cash in
operations of $1,638,582 and $1,469,169, respectively; and had a
working capital deficiency of $17,601,515 and $10,716,255,
respectively, and an accumulated deficit of $75,583,231 and
$67,703,218, respectively, at December 31, 2018 and 2017. This
raises substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern beyond December
31, 2019, is dependent on our ability to raise additional capital
through the sale of debt or equity securities or stockholder loans
and to implement our business plan during the next 12 months. The
financial statements do not include any adjustments that might be
necessary if we are unable to continue as a going concern.
Management believes that actions presently being taken to obtain
additional funding through implementing our strategic plans,
broadly based marketing strategy, and sales incentives to expand
operations will provide the opportunity for us to continue as a
going concern.
16
We have no current project that will generate revenues in the near
future.
None of
our several projects is to the development stage at which it will
generate revenues in the near future. Our project development
cycles are relatively long, extending over several years as we
identify a potential project site, complete negotiations with third
parties, complete permitting, obtain financing, complete
construction, and place a plant into service. We expect to receive
a development fee of approximately 3% of the project cost from our
projects, payable upon the close of project financing. Operating
revenues from projects are expected to be received when the plant
has been built and placed into operation. We are currently focusing
on developing a U.S. Virgin Island project, but even if we develop
it successfully, it will not generate revenues until several years
in the future. Until we receive revenues from this or another
project, we will be dependent on raising funds from external
sources.
We will require substantial amounts of additional capital from
external sources.
We do
not have any current source of revenues or sufficient cash or other
liquid resources to fund our planned activities until we receive
development fees from new contracts. Accordingly, as in the past,
we will need substantial amounts of capital from external sources
to fund day-to-day operations and project development. We have no
arrangements or commitment for such capital. We plan to continue
our practice of seeking external capital through the sale of debt
or equity, although we cannot assure that such efforts will be
successful. Any new investments will dilute the interest of the
current stockholders. Further, new investors may require
preferential financial returns, security, voting rights, or other
preferences that will be superior to the rights of the holders of
common stock. Alternatively, as project development advances, we
may be required to sell all or a portion of our interest in one or
more projects, which could reduce our retained financial interest
and potential return.
Risks Related to Our Business
Our efforts to develop OTEC and SWAC/LWAC plants are subject to
many financial, technical, managerial, and sales risks that may
make us unsuccessful.
We
incur substantial costs that we may not recover developing a new
project that we may not build, operate, or sell. The identification
of suitable locations, the investigation of the applicable
regulatory and economic framework, the identification of potential
purchasers, the completion of preliminary engineering and planning,
and the funding of related administrative and support costs
ordinarily require several years to complete before we determine to
further develop or abandon a project. Each of these steps is
fraught with risks and uncertainties, such as:
●
limited market due
to low demand, existing competitive energy sources, low power
costs, or the absence of a single or few large potential output
purchasers;
●
a regulatory scheme
suggesting that the development and operation of a plant would be
subject to excessively stringent utility regulations or
environmental requirements, burdensome zoning or permitting
practices and requirements, or similar factors;
●
shortage of
suitable onshore locations, lack of available cold water with
near-shore accessibility, sea wave and current conditions, and
exposure to hurricanes, typhoons, earthquakes, or similar extreme
events;
●
the unavailability
of favorable tax or other incentives or excessively stringent
applicable incentive requirements;
●
the high cost and
potential regulatory difficulties in integrating into new
markets;
●
the possibility
that new markets may be limited or unstable or exposed to
competition from other sources of existing or potentially new
energy sources;
17
●
difficulties in
negotiating power purchase agreements (PPAs) with potential
customers, including in some instances, the necessity to assist in
the formation of a power purchasing group; and
●
the need to educate
the market as well as investors regarding the reliability and
economical and environmental benefits of ocean thermal
technologies.
We
cannot assure that we will be able to overcome these risks as we
initiate the development of a project. We may incur substantial
costs in advancing a project through the early stages, only to
conclude eventually that the project is not economically or
technically feasible, in which case we may be unable to recover the
costs that we have then incurred. When we elect to proceed with a
project, we may continue to incur substantial costs and be unable
to complete the development, sell the project, or otherwise recover
our investment. Even when a project is developed, constructed, and
placed into operation, we cannot assure that we will be able to
operate at a profit sufficient to recover our total
investment.
We are dependent on the
performance of counterparties to our
agreements.
Our
projects are and will be complex, with a number of agreements among
several parties that purchase plant outputs; provide financing;
complete design, construction, and other services; design and
perform regulatory compliance; and fulfill other requirements. The
failure of any participant in one of our projects due to its own
management, financial, operating, or other deficiencies, all of
which may be outside our control, can materially and adversely
affect our operations and financial results. In circumstances in
which we are not the prime developer of a large-scale project
involving many large components in addition to our OTEC, SWAC/LWAC,
or other components, we would have little ability to address
problems resulting from performance failures by others or implement
project-wide remedial measures. The foregoing is illustrated in our
Baha Mar project, which is now on hold because of contract
performance and financing disputes by others and may never
resume.
Ongoing world economic, currency-exchange, energy-price, and
political circumstances adversely affect our project development
activities.
Recent
and ongoing world events outside of our control or influence
adversely affect our development activities. Economic uncertainties
have resulted in the unpredictable availability of credit, debt,
and equity financing; volatile interest rates; currency
exchange-rate fluctuations that add risk to international projects;
restrictions on the availability of borrowing; concerns respecting
inflation and deflation; economic turmoil resulting from
unpredictable political events and tensions in international
relations; substantial reductions in hydrocarbon energy prices and
the impact of such declines on the cost of energy generally; shifts
in the economic feasibility of competitive energy sources; and
similar factors. These adverse factors frequently have a
particularly intense effect on emerging markets and developing
countries, which we believe provide the greatest opportunity for
our development of our projects. The possibility that principal
energy prices will continue at current or even higher levels, which
could reduce the projected cost at which power could be generated
by hydrocarbon-fueled power plants, could make our relatively
higher-cost plants less competitive. These emerging and developing
markets are particularly vulnerable to the negative impacts of
these adverse circumstances. The economic feasibility of
alternative energy, including theprocess we develop and propose to
operate, as compared to hydrocarbon energy is adversely affected as
the prices for hydrocarbon fuels decline. Accordingly, possible
continuing low hydrocarbon prices may retard the potential increase
in the economic feasibility of alternative energy. The decline in
crude oil prices from over $100 per barrel several years ago to
approximately half that in mid-2016 has adversely affected
alternative energy development. Our ability to develop and operate
alternative energy plants and our ability to generate revenue will
be adversely affected by continuing, relatively soft hydrocarbon
energy prices. Further, alternative energy development may be
adversely affected by uncertainty in hydrocarbon prices or public
expectations that hydrocarbon prices may decline
again.
18
We require substantial amounts of capital for all phases of our
proposed activities.
We
require substantial amounts of capital to fund efforts to identify,
research, preliminarily engineer, permit, and design our projects
and to negotiate PPAs for them. These costs may not be recovered,
because we may not elect to complete the development of the project
or because the development and operation of the project are not
successful. We will rely on external capital to fund all of our
operations, and we cannot assure that such capital will be
available. Our efforts to access capital markets willbe limited,
particularly at the outset, because we have not yet developed and
placed into operation our first plant. Accordingly, we expect that
we will have to provide the potential for a significant economic
return for the initial capital we obtain, which will likely dilute
the interests of our existing stockholders. We expect that each
project that we are able to fully develop, construct, and place
into operation will require several stages and levels of debt and
equity financing. For example, we expect that a 20-MW OTEC plant
may require total capital expenditures of approximately $445
million, consisting of $365 million in project debt financing and
$80 million in equity. We cannot assure that we will be able to
obtain financing, and if obtained, such financing may be on terms
that we will retain only a minority financial interest in the
completed project and its operations. Our inability to obtain
required financing for any activity or project could have a
material adverse effect on our activities and
operations.
We are reliant on our key executives and personnel.
Our
business, development, and prospects are highly dependent upon the
continued services and performance of our directors and other key
personnel, on whom we rely for experience, technical skills, and
commercial relationships. We believe that the loss of services of
any existing key executives, for any reason, or failure to attract
and retain necessary personnel, could have a material adverse
impact on our business, development, financial condition, results
of operations, and prospects. Although we have entered into
employment agreements with our key executives, we may not be able
to retain our key executives. We do not maintain key-man life
insurance on any of our executive employees.
Regulations and policies governing energy projects, power
generation, desalinated water sales, and other aspects of our OTEC
and SWAC/LWAC plants may adversely affect our ability to develop
projects, and any changes in the applicable regulatory schemes may
adversely affect projects that we are constructing or have
constructed and are operating.
In
identifying possible plant locations and undertaking preliminary
development, an important factor in the overall economic
feasibility of a project will be the governing regulatory regime.
Such regulation includes the way the local jurisdiction regulates
the power, cooling energy, or water output from a plant. Any change
in that regulatory scheme after we determine to develop a plant
based on existing circumstances could have a material adverse
effect on our proposed operations. Generally, we will seek to
structure plant output sales agreements as privately negotiated
contracts not subject to utility or similar regulation, but we
cannot assure that we will be able to do so. Some PPAs that we may
seek to enter into may be subject to public utility commission
approval, which may not be obtained or may be delayed. In some
jurisdictions, the sale of output from a plant may be subject to
public service commission or regulation by a similar authority as a
public utility, even though we attempt to negotiate a private
purchaser agreement for that output. In these circumstances, we may
encounter delays in obtaining any required approval, approval may
be conditioned on specified prices or other operating conditions,
or the existence of the regulatory framework may delay or limit our
ability to seek price increases.
The financial model for our proposed projects has not been tested
and may not be successful.
We are
proposing a financial model for the development of individual
projects that includes development financing provided by us,
construction financing provided by equity investors in the specific
projects, and project debt financing; the payment of a development
fee to us at the time of construction; and continuing equity
participation by us throughout the plant’s operation. We have
not used this model in the financing or completion of any plant,
and we cannot assure that the financial model and, therefore, the
anticipated financial return to us will be acceptable to those that
might provide the requisite external capital.
19
We may
need to revise extensively our financing structure for each
project, and we cannot assure that any restructured proposal would
not substantially reduce our financial return or increase our risk.
The financial, investment, and credit community are generally
unfamiliar with OTEC and SWAC/LWAC projects, which will adversely
affect our financing efforts. We have no existing relationships
with potential sources of debt or equity capital, and any financing
sources that we may develop may be inadequate to support the
anticipated capital needs of our business. Our efforts to obtain
financing may be adversely affected by the fact that our projects
will likely be located in developing or emerging markets. Our
inability to obtain financing may force us to abandon projects in
which we have invested substantial costs, which we may be unable to
recover. The process of identifying new sources of debt and equity
financing and agreeing on all relevant business and legal terms
could be lengthy and could require us to limit the rate at which we
can develop projects or reduce our financial return.
We may be exposed to political and legal risks in the developing or
emerging markets in which we propose to locate plants.
Many of
the markets that may be suitable for a potential OTEC or SWAC/LWAC
plants are located in emerging or developing countries that may
have evolving and untested regulatory and legal environments for
large-scale, international, commercial enterprises. Further,
political instability, regime change, or other factors may increase
uncertainty and instability, which in turn may adversely affect our
ability to secure necessary regulatory approvals and obtain
required project financing, which increases related costs and
reduces our financial return. Any changes in applicable laws and
regulations, including any governmental incentives, environmental
requirements or restrictions, safety requirements, and similar
matters, and the risk or likelihood of such a change could
adversely affect the availability and cost of financing. Further,
in some jurisdictions, applicable legal requirements may not have
been fully tested and are still being developed in the face of
modern international commercial transactions and environmental
requirements, which may lead to changes in interpretation or
application that may be adverse to us. Our expectations regarding
the size of the potential OTEC and SWAC/LWAC markets and the number
of possible suitable locations may not be accurate.
Our
business plan and models are based on our identification of
potential suitable locations for OTEC or SWAC/LWAC plants based on
a preliminary evaluation of public information respecting
demographic data, current power-generation costs, and local
seafloor contours and seawater temperatures, which may be
inaccurate. Any material inaccuracy could substantially reduce the
total market available to us for plant development.
We may
be unable to arrange or complete future construction projects on
time, within expected budgets, or without interruption due to
materials availability and disruptions in supply, labor, or other
factors. If any project reaches the point at which we undertake
construction, such construction may be subject to actual prices
higher than the amount budgeted, the limited or delayed
availability of components or materials, shortages or interruptions
of labor or materials, or similar circumstances. In the case we
have insufficient budget flexibility to pay increased construction
costs, corresponding delays could result to construction completion
and the commencement of operations.
Emerging markets
are often associated with growth rates that may not be sustainable
and may be accompanied by periods of high inflation. Rising
inflation or related government monetary and economic policies in
certain project jurisdictions may affect our ability to obtain
external financing and reduce our ability to implement our
expansion strategy. We can give no assurances that a local
government will not implement general or project-specific measures
to tighten external financing standards, or that if any such
measure is implemented, it will not adversely affect our future
operating results and profitability.
We are subject to changing attitudes about environmental
risks.
Our
projects may face opposition from environmental groups that may
oppose our development, construction, or operation of OTEC or
SWAC/LWAC plants. Each project is expected to have different
environmental issues, especially as many of our projects are based
in different settings having a wide range of environmental
standards. We intend to solicit input from environmental
organizations and activists early in our design process for our
projects in an effort to consider appropriately these
organizations’ recommendations in order to mitigate
subsequent conflict or opposition, but we cannot assure that such
outreach will be effective in all cases, and if it is not,
opposition to our projects could increase our cost and adversely
affect the results of our operations.
20
We may be unable to find land suitable for our
projects.
Each
project site requires land of differing characteristics to permit
the cost-effective construction of OTEC or SWAC/LWAC plants, and
suitable land may not always be available. Even if available, such
land may be difficult to obtain in a timely or cost-effective
manner. For example, we would prefer to place OTEC power systems
and facilities as close to the ocean as possible. We hope to
mitigate this risk by using land owned by local governments, rather
than private individuals or entities, as targeting local
governments with favorable energy policies or mandates should
reduce land rights risks. Our inability to secure appropriate land
at a reasonable cost may render certain of our future projects
economically unfeasible.
We have a limited number of suppliers for certain materials, which
could increase our costs or delay completion of
projects.
In our
systems, the two most important components are heat exchangers and
deep-water intake pipes. Although there are multiple providers of
each of these components, the supply of the best components comes
from just a few companies globally. Should these resources become
unavailable for any reason or too costly, we would be required to
seek alternative suppliers. The products from such suppliers could
be of a lower quality or more costly, in any event requiring us to
expend additional monies or time to complete our projects as
planned. This could result in financial penalties or other costs to
us.
There may be greater cost in building OTEC plants that generate
over 10 MWs of electricity.
In
order to successfully obtain debt financing for OTEC facilities, we
must find engineering, procurement, and construction contractors
willing to enter into fixed-price contracts at a pricing that is
economically viable for us. Based on our preliminary discussions,
we believe that engineering, procurement, and construction
contractors may be willing to consider fixed-price arrangements for
up to 10-MW OTEC facilities, but we have not yet discussed
performance risk guarantees for OTEC plants greater than 10 MWs.
The cost of construction for larger OTEC power systems may vary
considerably, and these variances could include increased costs for
construction, design, and component procurement. As we gain more
experience, we may improve upon efficiencies and accuracy in
pricing. Failure to procure engineering, procurement, and
construction contractors willing to perform fixed-price contracts
on facilities that produce more than 20 MWs may have a material
adverse effect on our operations.
Technological advances may render our technologies, products, and
services obsolete.
We
operate in a fast-moving sector in which new forms of power
generation and new energy sources are continuously being
researched. New technologies may be able to provide power, coolant,
desalinated seawater, or other outputs at a lower cost, including
amortization of capital costs, or with less environmental impact.
We will remain subject to these risks for the useful life of our
projects, which could extend for 20 to 30 years or more. Any such
technological improvements could render our projects
obsolete.
We may not successfully manage growth.
We
intend to continue to develop the projects in our project pipeline
and to construct and operate plants as we deem warranted and as we
are able to finance. This is an ambitious growth strategy. Our
growth and future success will depend on the successfulcompletion
of the expansion strategies and the sufficiency of demand for our
energy products. The execution of our expansion strategies may also
place a strain on our managerial, operational, and financial
reserves. Should we fail to effectively implement such expansion
strategies or should there be insufficient demand for our products
and services, our business operations, financial performance, and
prospects would be adversely affected.
21
There will likely be a single or limited number of power purchasers
from each plant, so we will be dependent on their economic
viability and stability and continued operations.
We
expect that any plant that we operate will provide power, cooling,
desalinated water, or other products to a few or a limited number
of key power purchasers that will use the power for specific
commercial enterprises, such as resorts, manufacturing or
processing plants, or similar large-scale operations. Accordingly,
our ability to sell power and other outputs will be dependent on
the economicviability of these purchasers. If one or more key
purchasers were to fail, we would be required to obtain alternative
purchasers for our power and other outputs, and there may be no or
a limited number of alternative purchasers in the merging and
developing markets where we anticipate our plants may be located.
Accordingly, a failure of an output purchaser may result in the
failure of our power plant project. We do not anticipate that we
will be able to obtain insurance to protect us against such a loss
onacceptable terms. Further, our project output purchasers may not
comply with contractual payment obligations or may otherwise fail
to perform their contracts, and they may have greater economic
bargaining power and negotiating leverage as we seek to enforce our
contractual rights. To the extent that any of our project power
purchasers are, or are controlled by, governmental entities, our
projects may also be subject to legislative, administrative, or
other political action or policies that impair their contractual
performance. Any failure of any key power purchasers to meet their
contractual obligations for any reason could have a material
adverse effect on our business and operations.
Operational problems, natural events or catastrophes, casualty
loss, or other events may impair the commercial operation of our
projects.
Our
ability to meet our delivery obligations under power-generation
contracts, as well as our ability to meet economic projections,
will depend on our ability to maintain the efficient working order
of our plants. Severe weather, natural disasters, accidents,
failure of significant equipment components, inability to obtain
replacement parts, failure of power transmission facilities, or
other catastrophes or occurrences could materially interrupt our
activities and consequently reduce our economic return. Since all
of our plants will be located on the shore within close proximity
to deep-ocean or lake water, our plants will be subject to
extraordinary natural occurrences, such as wave surges from
hurricanes or typhoons, tsunamis, earthquakes, and other events,
over which we will have absolutely no control. We cannot assure
that we can obtain sufficient insurance to protect us from all
risks resulting from such catastrophes. Further, we cannot assure
that any design features or operating policies that we may use will
mitigate the risks to which our plants may be exposed. Any
threatened or actual events could expose us to plant shutdowns,
substantial repairs, interruptions of operations, damages to our
power purchasers, and similar events that could require us to incur
substantial costs and significantly impair our revenues and results
of operations.
We may be adversely affected by climate change.
Climate
change may result in changes in ocean currents and water
temperatures that could have a material adverse effect on our
results of operations. These changes may require additional capital
costs or impair the efficiency of our operations. Because of the
size and cost of major components of ourpower plants, we typically
will not inventory spare components, so that any substantial damage
may require that we await the custom manufacture and delivery of
such items, which may involve substantial delays. Significant
changes may render any plant inefficient and
uneconomical.
Our projects will be subject to substantial
regulation.
Our
projects likely will be significant commercial or industrial
enterprises in each of their locations and, as such, will be
subject to numerous environmental, health and safety,
antidiscrimination, and similar laws and regulations in each of the
jurisdictions governing our locations. These laws and regulations
will require our projects to obtain and maintain permits and
approvals; complete environmental impact assessments or statements
prior to construction; and review processes and operations to
implement environmental, health and safety, antidiscrimination, and
other programs and procedures to control risks associated with our
operations.
Our
in-water facilities and operations may be deemed to threaten living
coral, sea plants and animals, shoreline contours, and similar
items. In some circumstances, we may encounter environmental
problems that we may unable to overcome, which may force us to
relocate our facilities, at considerable additional
costs.
22
If our
projects do not comply with applicable laws, regulations, or permit
conditions, or if there are endangered or threatened species
fatalities on our projects, we may be required to pay penalties or
fines or curtail or cease operations of the affected projects. In
addition, violations of environmental and other laws, including
certain violations of laws protecting wetlands, shorelines and
land, and sea plant and animal life, may result in civil fines,
criminal sanctions, or injunctions.
Some
environmental laws impose liability on current and previous owners
and operators of real property for the cost of removal or
remediation of hazardous substances, without regard to whether the
owner or operator knew of, or was responsible for, the release of
such hazardous substance. In some jurisdictions, private plaintiffs
may also bring claims arising from the presence of hazardous
substances or their unlawful release or exposure. We will likely be
unable to purchase insurance against these risks at all or on
acceptable terms.
Environmental
health and safety laws, regulations, and permit requirements
applicable to any specific project at the time of construction may
change or become more stringent during the life of the operation.
Any such changes could require that our projects incur substantial
additional costs, alter their operations, or limit or curtail their
operations in order to comply, which would have a material adverse
effect on our operations. We may not be able to pass on any
additional costs that we incur to our power purchasers,
particularly in those cases in which we sell power pursuant to a
long-term, fixed-price agreement. The OTEC and SWAC/LWAC industry
may be subject to increased regulatory oversight.
As the
OTEC and SWAC/LWAC industries develop, new regulatory schemes may
be adopted by one or more jurisdictions in which we develop or
operate plants in order to address actual or perceived threats or
problems. In addition to more stringent environmental, safety, and
other regulations that may be applicable to usgenerally under the
current regulatory scheme, whole new areas of regulation may be
adopted, which could have a material adverse effect on our results
of operations. New regulations may specifically regulate, for
example, the price at which power that is generated from different
seawater temperatures may be sold, even to private purchasers. We
may have plants in various locations subject to different governing
jurisdictions, so the complexity of this developing and expanding
regulatory pattern may be particularly cumbersome and
expensive.
Insurance to cover anticipated risks may become more
expensive.
There
are no known commercial OTEC and SWAC/LWAC plants in operation, so
the nature and cost of insurance is difficult to predict. Insurance
costs may substantially exceed the costs forecast during the
planning process or budgeted during actual operations. We cannot
assure that adequate insurance coverage will be available to
protect us against all risks or that any related costs will be
economical. Accordingly, if we are unable or cannot afford to
purchase insurance against specific risks, our projects may be
fully exposed to those risks, which also could have a material
adverse effect on the viability of any affected plant.
Risks Related to Our International Operations
Certain risks of loss arise from our need to conduct transactions
in foreign currencies.
Our
business activities outside the United States and its territories
may be conducted in foreign currencies. In the future, our capital
costs and financial results may be affected by fluctuations in
exchange rates between the applicable currency and the dollar.
Other currencies used by us may not be convertible at satisfactory
rates. In addition, the official conversion rates between a
particular foreign currency and the U.S. dollar may not accurately
reflect the relative value of goods and services available or
required in other countries. Further, inflation may lead to the
devaluation of such other currencies.
23
Foreign governmental entities may have the authority to alter the
terms of our rights or agreements if we do not comply with the
terms and obligations indicated in such agreements.
Pursuant to the
laws in some jurisdictions in which we may develop or operate
plants, foreign governmental entities may have the authority to
alter the terms of our contractual or financial rights or override
the terms of privately negotiated agreements. In extreme
circumstances, some foreign governments have taken the step of
confiscating private property on theassertion that such action is
necessary in the public interest of the country. If this were to
occur, we may not be compensated fairly or at all. We cannot assure
that we have complied, and will comply, with all the terms and
obligations imposed on us under all foreign laws to which one or
more of our operations and assets may be subject.
Our operations will require our compliance with the Foreign Corrupt
Practices Act.
We must
conduct our activities in or related to foreign companies in
compliance with the U.S. Foreign Corrupt Practices Act, or FCPA,
and similar anti-bribery laws that generally prohibit companies and
their intermediaries from making improper payments to foreign
government officials for the purpose of obtaining or retaining
business. Enforcement officials interpret the FCPA’s
prohibition on improper payments to government officials to apply
to officials of state-owned enterprises, including state-owned
enterprises with which we may develop or operate projects or to
which we may sell plant outputs. While our employees and agents are
required to acknowledge and comply with these laws, we cannot
assure that our internal policies and procedures will always
protect us from violations of these laws, despite our commitment to
legal compliance and corporate ethics. The occurrence or allegation
of these activities may adversely affect our business, performance,
prospects, value, financial condition, reputation, and results of
operations.
Our competitors may not be subject to laws similar to the FCPA,
which may give them an advantage in negotiating with underdeveloped
countries and the government agencies.
Our
competitors outside the United States may not be subject to
anti-bribery or corruption laws as encompassing or stringent as the
U.S. laws to which we are subject, which may place us at a
competitive disadvantage.
We may encounter difficulties repatriating income from foreign
jurisdictions.
As we
develop and place plants into operation, we intend to enter into
revenue-generating agreements in which we are paid only in U.S.
dollars directly to our U.S. banks or through countries in which
repatriation of the funds to our U.S. accounts is unrestricted.
However, situations could arise in which we agree to accept payment
in foreign jurisdictions and for which restrictions make it
difficult or costly to transfer these funds to our U.S. accounts.
In this event, we could incur costs and expenses from our U.S.
assets for which we cannot recover income directly. This could
require us to obtain additional working capital from other sources,
which may not be readily available, resulting in increased costs
and decreased profits, if any.
Risks Related to Our Common Stock
Our common stock is thinly traded, and there is no guarantee of the
prices at which the shares will trade.
Our
common stock is quoted on the OTCQB Marketplace operated by the OTC
Markets Group, Inc., under the ticker symbol “CPWR.”
Not being listed on an established securities exchange has an
adverse effect on the liquidity of our common stock, not only in
terms of the number of shares that can be bought and sold at a
given price, but also through delays in the timing of transactions
and reduction in security analysts’ and the media’s
coverage of our company. This may result in lower prices for our
common stock than might otherwise be obtained and could also result
in a larger spread between the bid and asked prices for our common
stock. Historically, our common stock has been thinly traded, and
there is no guarantee of the prices at which the shares will trade
or of the ability of stockholders to sell their shares without
having an adverse effect on market prices.
24
We have never paid dividends on our common stock and we do not
anticipate paying any dividends in the foreseeable
future.
We have
not paid dividends on our common stock to date, and we may not be
in a position to pay dividends in the foreseeable future. Our
ability to pay dividends depends on our ability to successfully
develop our OTEC business and generate revenue from future
operations. Further, our initial earnings, if any, will likely be
retained to finance our growth. Any future dividends will depend
upon our earnings, our then-existing financial requirements, and
other factors and will be at the discretion of our board of
directors.
Because our common stock is a “penny stock,” it may be
difficult to sell shares of our common stock at times and prices
that are acceptable.
Our
common stock is a “penny stock.” Broker-dealers that
sell penny stocks must provide purchasers of these stocks with a
standardized risk disclosure document prepared by the U.S.
Securities and Exchange Commission (“SEC”). This
document provides information about penny stocks and the nature and
level of risks involved in investing in the penny stock market. A
broker must also give a purchaser, orally or in writing, bid and
offer quotations and information regarding broker and salesperson
compensation, make a written determination that the penny stock is
a suitable investment for the purchaser, and obtain the
purchaser’s written agreement to the purchase. The penny
stock rules may make it difficult for investors to sell their
shares of our common stock. Because of these rules, many brokers
choose not to participate in penny stock transactions and there is
less trading in penny stocks. Accordingly, investors may not always
be able to resell shares of our common stock publicly at times and
prices that they feel are appropriate.
In
addition to the “penny stock” rules described above,
the Financial Industry Regulatory Authority (known as
“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have
reasonable grounds for believing that the investment is suitable
for that customer. Prior to recommending speculative, low-priced
securities to their noninstitutional customers, broker-dealers must
make reasonable efforts to obtain information about the
customer’s financial status, tax status, investment
objectives, and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that
speculative, low-priced securities will not be suitable for at
least some customers. FINRA requirements make it more difficult for
broker-dealers to recommend that their customers buy our common
shares, which may limit an investor’s ability to buy and sell
our stock and have an adverse effect on the market for our
shares.
Our management concluded that our internal control over financial
reporting was not effective as of December 31, 2018. Compliance
with public company regulatory requirements, including those
relating to our internal control over financial reporting, have and
will likely continue to result in significant expenses and, if we
are unable to maintain effective internal control over financial
reporting in the future, investors may lose confidence in the
accuracy and completeness of our financial reports and the market
price of our common stock may be negatively affected.
As a
public reporting company, we are subject to the Sarbanes-Oxley Act
of 2002 as well as to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended, and other federal
securities laws. As a result, we incur significant legal,
accounting, and other expenses, including costs associated with our
public company reporting requirements and corporate governance
requirements. As an example of public reporting company
requirements, we evaluate the effectiveness of disclosure controls
and procedures and of our internal control over financing reporting
in order to allow management to report on such
controls.
Our
management concluded that our internal control over financial
reporting was not effective as of December 31, 2018, due to a
failure to maintain an effective control environment, failure of
segregation of duties, failure of entity-level controls, and our
sole executive’s access to cash.
If
significant deficiencies or other material weaknesses are
identified in our internal control over financial reporting that we
cannot remediate in a timely manner, investors and others may lose
confidence in the reliability of our financial statements. This
would likely have an adverse effect on the trading price of our
common stock and our ability to secure any necessary additional
equity or debt financing.
25
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our
principal corporate offices located at 800 South Queen Street,
Lancaster, PA contain approximately 28,000 square feet and are
leased from Queen Street Development Partners 1, LP at $10,000 per
month. Our lease is a month-to-month basis. Queen Street
Development Partners 1, LP is owned by our chief executive officer
and director. We believe the terms of this lease are similar to
those that we could negotiate in an arm’s-length transaction
with an unrelated third party. The facilities and equipment
described above are generally in good condition, well maintained,
and suitable and adequate for our current and projected operating
needs.
ITEM 3.
LEGAL
PROCEEDINGS
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. On August 8, 2018, an $8 million judgment was entered
against the defendants and in our favor. We have reason to believe
the defendants have adequate assets to satisfy this judgment in
full. Between May 30 and July 19, 2018, we received three
payments totaling $100,000 from the defendants. This process is ongoing. Information will be
updated as it progresses.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
26
PART II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is quoted on the OTCQB Marketplace operated by the OTC
Markets Group, Inc., under the ticker symbol “CPWR.”
The following table sets forth the range of high and low closing
prices of our common stock per quarter as reported by the OTCQB for
the past two fiscal years ended December 31, 2018 and 2017,
respectively, and subsequent fiscal quarter ending March 31, 2019
(through March 14, 2019). All quoted prices reflect interdealer
prices without retail mark-up, mark-down, or commission, adjusted
to account for past stock splits, and may not necessarily represent
actual transactions:
|
|
Low
|
High
|
|
Year
Ending December 31, 2019
|
|
|
|
First Quarter
(through March 14, 2019)
|
$0.038
|
$0.055
|
|
|
|
|
|
Year
Ended December 31, 2018
|
|
|
|
Fourth
Quarter
|
$0.04
|
$0.08
|
|
Third
Quarter
|
$0.055
|
$0.12
|
|
Second
Quarter
|
$0.107
|
$0.30
|
|
First
Quarter
|
$0.12
|
$0.52
|
|
|
|
|
|
Year
Ended December 31, 2017
|
|
|
|
Fourth
Quarter
|
$0.05
|
$2.25
|
|
Third
Quarter
|
$1.00
|
$7.00
|
|
Second
Quarter
|
$3.00
|
$12.25
|
|
First
Quarter
|
$1.70
|
$17.50
|
On
March 14, 2019, the closing price per share of our common stock as
quoted on the OTCQB was $0.0479. As of March 15, 2019, there were
approximately 1,508 stockholders of record of our common
stock.
Dividends
We have
not paid or declared any cash dividends since our inception and do
not intend to declare or pay any such dividends in the foreseeable
future. Our ability to pay cash dividends is subject to limitations
imposed by state law.
Equity Compensation Plan
We do
not have any securities authorized under equity compensation
plans.
Recent Sales of Unregistered Securities
For the
three months ended December 31, 2018, we issued 393,512 shares of
common stock for $13,980 in cash.
In
November 2018, we issued 190,840 shares of common stock to our
chief executive officer for $5,000 in cash.
In
November and December 2018, we issued 2,700,000 shares of common
stock to L2 Capital for the conversion of a portion of our notes
payable to L2 Capital in the amount of $70,690.
In
December 2018, we issued 400,000 shares of common stock to L2
Capital as a commitment fee for $21,200 to purchase our outstanding
note payable from Collier Investments LLC.
In
January and February 2019, we issued 1,800,000 shares of common
stock to L2 Capital for the conversion of a portion of our notes
payable to L2 Capital in the amount of $49,614.
27
These
securities were issued in reliance on the exemption from
registration provided in Section 4(a)(2) of the Securities Act of
1933, as amended, for transactions not involving any public
offering. Each investor is an “accredited investor,” as
that term is defined in Rule 501(a) of Regulation D, and confirmed
the foregoing and acknowledged, in writing, that the securities
were acquired and will be held for investment. No underwriter
participated in the offer and sale of these securities, and no
commission or other remuneration was paid or given directly or
indirectly in connection therewith.
ITEM
6. SELECTED FINANCIAL
DATA
Not
applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition
and operating results should be read together with our financial
statements and related notes included elsewhere in this report.
This discussion and analysis and other parts of this report contain
forward-looking statements based upon current beliefs, plans, and
expectations that involve risks, uncertainties, and assumptions.
Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including those set forth under “Risk Factors” or in
other parts of this report. Our fiscal quarters end on March 31,
June 30, September 30, and December 31, and our current fiscal year
ended on December 31, 2018.
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
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.
Description of Expenses
General
and administrative expenses consist primarily of salaries and
related costs for accounting, administration, finance, human
resources, and information systems. Professional fees expenses
consist primarily of fees related to legal, outside accounting,
auditing, and investor relations services.
Results of Operations
Comparison of Years Ended December 31, 2018 and 2017
We had
no revenue in the years ended December 31, 2018 and
2017.
During
the year ended December 31, 2018, we had salaries and wages of
$1,361,706, compared to salaries and wages of $2,044,882 during the
same period for 2017, a decrease of 33.4%, which is attributable to
a reduction in staff because of cost-cutting measures due to our
lack of revenue and funding.
28
During
the years ended December 31, 2018 and 2017, we recorded
professional fees of $1,201,956 and $1,669,202, respectively, a
decrease of 28% year over year, which is attributable to a decrease
in the use of outside consultants due to our lack of revenue and
funding.
General
and administrative expenses were $595,306 during the year ended
December 31, 2018, compared to $2,169,577 for the same period in
2017, a decrease of 72.6%. This decrease was the result of a
concerted effort to reduce all expenses during 2018. In 2017, we
incurred additional travel expenses for due diligence on a
potential acquisition and increased marketing expense to increase
our visibility.
Our
interest expense was $1,281,134 for the year ended December 31,
2018, compared to $614,749 for the same period of the previous
year, an increase of 108%. In addition to interest of $810,455 on
our notes payable, we also incurred liquidated damages of $56,250
on the replacement of one of our notes and a note default penalty
of $414,429.
During
the year ended December 31, 2017, we repriced warrants to purchase
14,692,500 shares of common stock and options to purchase 100,000
shares of common stock to $0. The warrants and options were then
exercised, and we issued 14,792,500 shares of common stock. These
warrants had a fair value of $6,769,562, which we recognized as an
expense in operations. There was no similar activity in
2018.
Our
amortization of debt discount and loan fee expenses was $1,160,983
for the year ended December 31, 2018, compared to $44,960 for the
same period of the previous year. This increase is due to our
payments of original discount fees and transaction fees for L2
Capital, LLC and Collier Investments, LLC. The expense also
reflects the fair value of warrants issued with notes payable and
recorded as discount, which we amortized during the year. In
addition, there was change in the fair value of the derivative
liability of $1,206,857 during the year ended December 31, 2018,
and $0 for the same period in 2017. We incurred a loss on the
extinguishment of debt of $279,432 in 2018, as compared to a loss
on settlement of debt $1,105,203 in 2017.
Our
operations used net cash of $1,638,582 during the year ended
December 31, 2018, as compared to using net cash of $1,469,169
during the year ended December 31, 2017. The change was primarily
due to the $1,206,857 of change in the derivative liability in
2018. The recognition of the impairment of assets under
construction of $892,639 also impacted the cash flow in
2018.
Investing
activities for the years ended December 31, 2018 and 2017, used
cash of $0 and $140,613, respectively. Of cash used in the year of
2017, $95,352 was an increase in our assets under construction and
the balance represents cash paid in connection with the
Merger.
Financing
activities provided cash of $1,221,965 for our operations during
the year ended December 31, 2018, as compared to $2,027,302, a
decrease of 39.7%. One of the major factors was the decrease in
proceeds of approximately $748,535 from warrants that were
exercised in 2017. In 2018, we received $165,885 in cash for the
sale of stock and received $615,086 in cash from the issuance of
convertible notes.
Liquidity and Capital Resources
At
December 31, 2018, our principal source of liquidity consisted of
$8,398 of cash, as compared to $425,015 of cash at December 31,
2017. At December 31, 2018, we had negative working capital
(current assets minus current liabilities) of $17,601,515. In
addition, our stockholders’ deficiency was $17,769,177 at
December 31, 2018, compared to stockholders’ deficiency of
$10,509,554 at December 31, 2017, an increase in the deficiency of
$7,259,623. 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.
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. On August 8, 2018, an $8 million federal court judgment
was entered against the defendants and in our favor. We believe the
defendants have adequate assets to satisfy this judgment in full.
Between May 30 and July 19, 2018, we received three payments
totaling $100,000 from the defendants. This process is ongoing.
29
Our
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
management’s plans, which include the raising of capital
through debt and/or equity markets until such time that funds
provided by operations are 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. If we are unable to access the
equity line pursuant to the Equity Purchase Agreement of December
2017 with L2 Capital, LLC, we believe our current available cash
may be insufficient to meet our cash needs for the near future. We
cannot assure that the L2 Capital equity line or other financing
will be available in amounts or terms acceptable to us, if at all.
Further, we cannot assure that we will be able to collect all or
any portion of our judgment against third parties as discussed
above. The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. These consolidated 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.
We have
no significant contractual obligations or commercial commitments
not reflected on our balance sheet as of this date.
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also
known as “special purpose entities.
Critical Accounting Policies
We have
identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. The
list is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting
principles generally accepted in the United States, with no need
for management’s judgment in their application. The impact
and any associated risks related to these policies on our business
operations is discussed throughout Management’s Discussion
and Analysis of Financial Condition and Results of Operations when
such policies affect our reported and expected financial results.
For a detailed discussion on the application of these and other
accounting policies, see the notes to our consolidated financial
statements for the year ended December 31, 2018. Note that our
preparation of the consolidated financial statements requires us to
make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of our consolidated financial statements,
and the reported amounts of revenue and expenses during the
reporting period. We cannot assure that actual results will not
differ from those estimates.
Revenue Recognition
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) 2014-09,
Revenue from Contracts with
Customers (Topic 606). This ASU is a comprehensive new
revenue recognition model that 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. We adopted the ASU on
January 1, 2018. The adoption of the ASU did not have an impact on
our consolidated financial statements during the years ended
December 31, 2018 and 2017.
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.
30
Capitalization Policy
Furniture,
vehicles, equipment, and software are recorded at cost and include
major expenditures, which increase productivity or substantially
increase useful lives. Maintenance, repairs, and minor replacements
are charged to expenses when incurred. When furniture, vehicles,
and equipment are sold or otherwise disposed of, the asset and
related accumulated depreciation are removed from this account, and
any gain or loss is included in the statement of operations. The
cost of furniture, vehicles, equipment, and software is depreciated
over the estimated useful lives of the related assets.
Assets
under construction represent costs incurred by us for our renewable
energy systems currently in process. We capitalize costs incurred
once the project has met the project feasibility stage. Costs
include environmental engineering, permits, government approval
costs, and site engineering costs. We currently have several
projects in the development stage. We capitalize direct interest
costs associated with the projects.
Recent Accounting Pronouncements
In June
2018, the FASB issued ASU 2018-07, Compensation–Stock Compensation (Topic
718): Improvements to Nonemployee Share-Based Payment
Accounting. This ASU relates to the accounting for
nonemployee share-based payments. The amendment in this update
expands the scope of Topic 718 to include all share-based payment
transactions in which a grantor acquired goods or services to be
used or consumed in a grantor’s own operations by issuing
share-based payment awards. The ASU excludes share-based payment
awards that relate to: (1) financing to the issuer; or (2) awards
granted in conjunction with selling goods or services to customers
as part of a contract accounted for under Topic 606, Revenue from Contracts from Customers.
The share-based payments are to be measured at grant-date fair
value of the equity instruments that the entity is obligated to
issue when the good or service has been delivered or rendered and
all other conditions necessary to earn the right to benefit from
the equity instruments have been satisfied. This standard will be
effective forpublic business entities for fiscal years beginning
after December 15, 2018, including interim periods within that
fiscal year. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, but no earlier than an entity’s
adoption of Topic 606. We are currently reviewing the provisions of
this ASU to determine if there will be any impact on our results of
operations, cash flows, or financial condition.
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.
ITEM
7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Our
consolidated financial statements, including the Report of
Independent Registered Public Accounting Firm on our consolidated
financial statements, are included beginning on page F-1 of this
report, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
31
ITEM 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us, in the
reports that we file or submit to the SEC under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
is recorded, processed, summarized, and reported within the periods
specified by the SEC’s rules and forms and that information
is accumulated and communicated to our management, including our
principal executive and principal financial officer (whom we refer
to in this periodic report as our Certifying Officer), as
appropriate to allow timely decisions regarding required
disclosure. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting. Our
management evaluated, with the participation of our Certifying
Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of December 31, 2018, pursuant to Rule 13a-15(b) under the Exchange
Act. Based upon that evaluation, our Certifying Officer concluded
that, as of December 31, 2018, our disclosure controls and
procedures were not effective to provide reasonable assurance
because certain deficiencies involving internal controls
constituted material weaknesses, as discussed below. The material
weaknesses identified did not result in the restatement of any
previously reported financial statements or any other related
financial disclosure, and management does not believe that the
material weaknesses had any effect on the accuracy of our financial
statements for the current reporting period.
Limitations on Effectiveness of Controls
A
system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the system will
meet its objectives. The design of a control system is based, in
part, upon the benefits of the control system relative to its
costs. Control systems can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by
management override of the control. In addition, over time,
controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. In addition, the design of any control system is based
in part upon assumptions about the likelihood of future
events.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
that occurred during the fourth quarter of fiscal year 2018 that
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule
13a-15(f) under the Exchange Act. We have assessed the
effectiveness of those internal controls as of December 31, 2018,
using the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) Internal Control—Integrated
Framework (2013) as a basis for our assessment.
Because
of inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable
assurance respecting financial statement preparation and
presentation. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.
A
material weakness in internal controls is a deficiency in internal
control, or combination of control deficiencies, that adversely
affects our ability to initiate, authorize, record, process, or
report external financial data reliably in accordance with
accounting principles generally accepted in the United States of
America such that there is more than a remote likelihood that a
material misstatement of our annual or interim financial statements
that is more than inconsequential will not be prevented or
detected.
Based
on our evaluation of internal control over financial reporting, our
management concluded that our internal control over financial
reporting was not effective as of December 31, 2018.
32
As of
December 31, 2018, management identified the following material
weaknesses:
●
Control Environment
- We did not maintain an effective control environment for internal
control over financial reporting.
●
Segregation of
Duties - As a result of limited resources and staff, we did
not maintain proper segregation of incompatible duties. The effect
of the lack of segregation of duties potentially affects multiple
processes and procedures.
●
Entity Level
Controls - We failed to maintain certain entity-level
controls as defined by the 2013 framework issued by COSO.
Specifically, our lack of staff does not allow us to effectively
maintain a sufficient number of adequately trained personnel
necessary to anticipate and identify risks critical to financial
reporting. There is a risk that a material misstatement of the
financial statements could be caused, or at least not be detected
in a timely manner, due to lack of adequate staff with such
expertise.
●
Access to Cash - One
executive had the ability to transfer from our bank
accounts.
These
weaknesses are continuing. Management and the board of directors
are aware of these weaknesses that result because of limited
resources and staff. Management has begun the process of formally
documenting our key processes as a starting point for improved
internal control over financial reporting. Efforts to fully
implement the processes we have designed have been put on hold due
to limited resources, but we anticipate a renewed focus on this
effort in the near future. Due to our limited financial and
managerial resources, we cannot assure when we will be able to
implement effective internal controls over financial
reporting.
This
annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual
report.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth the names, ages, and positions of our
executive officers and directors as of December 31,
2018:
|
Name
|
Age
|
Position
|
|
Jeremy
P. Feakins
|
65
|
Chairman
of the Board, Chief Executive Officer, Chief Financial Officer and
Secretary/Treasurer
|
|
Peter
H. Wolfson
|
54
|
Director
|
|
Antoinette
K. Hempstead
|
54
|
Director
|
33
Jeremy P. Feakins
has served as our chief executive
officer, chief financial officer, and secretary/treasurer since
March 2015. Mr. Feakins has over 35 years of experience as an
entrepreneur and investor, having founded two technology-based
companies. Between 1990 and 2006, Mr. Feakins was the chairman and
chief executive officer of Medical Technology & Innovations,
Inc. (MTI), a developer and manufacturer of a microprocessor-based,
vision-screening device and other medical devices located in
Lancaster, PA. In 1996, he managed the public listing of MTI on the
over-the-counter markets and subsequently structured the sale of
the rights to MTI’s vision-screening product to a major
international eyewear company. Between 1998 and 2006, he was a
managing member of Growth Capital Resources LLC, a venture capital
company located in Lancaster, PA, where he successfully managed the
public listings for four small companies on the over-the-counter
market. Between 2005 and 2008, he served as executive vice chairman
and member of the board of directors of Caspian International Oil
Corporation (OTC: COIC), an oil exploration and services company
located in Houston, TX and Almaty, KZ, where he managed its public
listing. Since 2008, Mr. Feakins has been the chairman and managing
partner of the JPF Venture Fund 1, LP, an early-stage venture
capital company located in Lancaster, PA, focused on companies
involved with humanitarian and/or sustainability projects. Since
2014, Mr. Feakins has been chairman and chief executive officer of
JPF Venture Group, Inc. JPF Venture Group, Inc., provides strategic
and operational business assistance to start-up, early-stage, and
middle-market high-growth businesses and is a principal stockholder
of our stock. Mr. Feakins graduated from the Defence College of
Logistics and Personnel Administration, Shrivenham, UK, and served
seven years in the British Royal Navy. He is a member of the
Institute of Directors in the United Kingdom and the British
American Business Council in the United States. Based on his
background in the technology industry and his financial and
management background, the board of directors has concluded that
Mr. Feakins is qualified to serve as a
director.
Peter Wolfson
has served as one of our directors
since March 2015. Mr. Wolfson is also the founder, president, and
chief executive officer of Hans Construction, a developer and
builder of upscale homes located in Lancaster, PA. Mr. Wolfson is a
qualified commercial pilot at a major U.S.-owned international
airline company and has over 30 years’ experience in the
aviation business. He also has 10 years’ experience as a
financial consultant with a subsidiary of Mass Mutual, developing
financial strategies and tax planning. Based on his financial
background, the board of directors has concluded that Mr. Wolfson
is qualified to serve as director.
Antoinette Knapp
Hempstead was appointed as a
director in February 2017. Prior to that, Ms. Hempstead served as
our chief executive officer and president from April 2013 until
March 2015 and as our deputy chief executive officer and vice
president since August 2002. Ms. Hempstead has over 30 years’
experience in management, software management, software
development, and finance. Ms. Hempstead has also served as adjunct
faculty for University of Idaho where she taught Computer Science
courses. Ms. Hempstead has a Master’s degree in Computer
Science from the University of Idaho and a Bachelor’s of
Science Degree in Applied Mathematics from the University of Idaho.
Ms. Hempstead provides experience in software development and
project management, as well as experience in financial statement
preparation and regulatory reporting, to our board of directors.
Based on her technical background, the board of directors has
concluded that Ms. Hempstead is qualified to serve as a
director.
Family Relationships
There
are no family relationships between any director and executive
officer.
Involvement in Certain Legal Proceedings
During
the past 10 years, none of our directors and executive officers has
been involved in any of the events described in Item 401(f) of
Regulation S-K.
Shareholder Nominations to the Board
Our
board of directors, acting as the nominating committee, will
consider shareholder nominations to the board of
directors.
34
Committees of the Board
We
currently do not have nominating, compensation, or audit committees
or committees performing similar functions and we do not have a
written nominating, compensation, or audit committee charter. Our
board of directors believes that it is not necessary to have these
committees, at this time, because the directors can adequately
perform the functions of such committees.
Code of Ethics
We have
adopted a code of ethics that applies to all of our employees,
including our executive officers, a copy of which is included as an
exhibit to this report.
ITEM 11. EXECUTIVE
COMPENSATION
The
following table sets forth, for the fiscal years ended December 31,
2018 and 2017, the dollar value of all cash and noncash
compensation earned by any person that was our principal executive
officer, or PEO, during the preceding fiscal year:
|
Name and
Principal Position
|
Year
Ended
Dec
31
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Jeremy
Feakins
|
2018
|
388,320
(1)
|
0
|
0
|
0
|
0
|
0
|
0
|
388,320
|
|
Principal
Executive Officer
|
2017
|
381,110
(2)
|
0
|
581,571
|
0
|
0
|
0
|
0
|
962,681
|
|
Principal
Financial Officer
|
|
|
|
|
|
|
|
|
|
_______________________
(1) For
the fiscal year ended December 31, 2018, $194,110 of Mr.
Feakins’ salary was accrued but unpaid.
(2) For
the fiscal year ended December 31, 2017, $205,807 of Mr.
Feakins’ salary was accrued but unpaid.
The
table above does not include prerequisites and other personal
benefits in amounts less than 10% of the total annual salary and
other compensation.
Narrative Disclosure to Summary Compensation Table
On
January 1, 2011, we entered into a five-year employment agreement
with an individual to serve as our chief executive officer. The
employment agreement 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, the 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 annual salary plus 500,000
shares of common stock for each additional project that generates
$25 million or more revenue to us. The 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. As of December 31, 2017,
we issued 258,476 shares of common stock, with a fair value of
$581,571, to compensate the chief executive officer for his
performance.
On June
29, 2017, the board of directors approved extending the employment
agreement for the chief executive officer for an additional five
years. The salary and other compensation will be increased to
account for inflation since the original employment agreement was
executed.
Outstanding Equity Awards at Fiscal Year-End
No stock option awards were exercisable or unexercisable as of
December 31, 2018, for any executive officer.
35
Director Compensation
For
the year ended December 31, 2018, no compensation was awarded to,
earned by, or paid to our nonemployee directors. Mr. Feakins, who
is our chief executive officer, did not receive compensation for
his service as a director. The compensation received by Mr. Feakins
as an officer is presented in the above summary compensation
table.
ITEM
12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth certain information
regarding the beneficial ownership of our outstanding common stock,
as of March 15, 2019, by:
(i) each of our directors; (ii) each of our named
executive officers (as defined by Item 402(a)(3) of Regulation S-K
promulgated under the Exchange Act); (iii) all of our
directors and named executive officers as a group; and
(iv) each person known to us to beneficially own more than 5%
of our outstanding common stock.
|
Name and Address
of Person or Group (1)
|
Number of Shares of
Common
Stock Beneficially
Owned
|
Percent
of Common
Stock Beneficially
Owned
|
|
|
|
|
|
Principal Stockholders:
|
|
|
|
Steve
Oney
|
7,648,000
|
5.8%
|
|
Jeremy P. Feakins
(2)
|
18,405,285
|
13.9
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
Jeremy P. Feakins
(2)
|
18,405,285
|
13.9
|
|
Antoinette
Hempstead (3)
|
115,151
|
*
|
|
Peter H. Wolfson
(4)
|
2,089,012
|
1.6%
|
|
|
|
|
|
Executive Officers
and Directors as a Group (3 persons):
|
20,609,448
|
15.5%
|
_______________
|
*
|
Less than 1%
|
|
(1)
|
800
South Queen Street, Lancaster, PA 17603, is the address for all
stockholders in the table. Applicable percentages are based on
132,838,944 shares of our common stock outstanding on March 15,
2019, and are calculated as required by rules promulgated by the
SEC.
|
|
(2)
|
Consists
of (i) 8,288,051 shares of common stock owned of record by
Jeremy P. Feakins; (ii) 3,901,645 shares of common stock owned
of record by JPF Venture Group, Inc., which is an investment entity
that is majority-owned and controlled by Jeremy P. Feakins, and, as
such, is deemed to be beneficially owned by Mr. Feakins; and
(iii) 6,215,589 shares of common stock issuable to JPF Venture
Group, Inc. on the conversion of $75,000 in promissory notes,
convertible at $0.01384 per share. All calculations in this
footnote are based on conversion of the principal
only.
|
|
(3)
|
Consists
of: (i) 452 shares of common stock owned of record by
Antoinette Hempstead; and (ii) 114,699 shares of common stock
owned of record by A.R. Hempstead Revocable Trust, which is owned
and controlled by Ms. Hempstead and, as such, is deemed to be the
beneficial owner of record. Ms. Hempstead is a member of the board
of directors.
|
|
(4)
|
Consists
of: (i) 1,185,833 shares of common stock owned of record by
Peter H. Wolfson; and (ii) 976,921 shares of common stock
issuable to Mr. Wolfson on the conversion of a $12,500 promissory
note dated October 2016, convertible at $0.01384 per share into
shares of common stock. Mr. Wolfson is a member of the board of
directors.
|
36
Beneficial
ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. The percentages in the table have been calculated
on the basis of treating as outstanding for a particular person,
all shares of our common stock outstanding on that date and all
shares of our common stock issuable to that holder in the event of
exercise of outstanding options, warrants, rights, or conversion
privileges owned by that person at that date which are exercisable
within 60 days of that date. Except as otherwise indicated, the
persons listed below have sole voting and investment power with
respect to all shares of our common stock owned by them, except to
the extent that power may be shared with a spouse. We do not know
of any arrangements the operation of which may at a subsequent date
result in a change of control of our company.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED PERSONS, AND DIRECTOR INDEPENDENCE
Related-Party Transactions
We pay
rent to Queen Street Development Partners 1, LP, a company
controlled by our chief executive officer, under an operating lease
agreement. For the years ended December 31, 2018 and 2017, we paid
rent of $120,000 and $95,000, respectively.
On
October 20, 2016, we borrowed $12,500 from Peter Wolfson, 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, 2018, the
outstanding balance was $12,500, plus accrued interest of $1,754.
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.
On
March 9, 2017, we issued a promissory note payable of $200,000 to
Jeremy P. Feakins & Associates, LLC, an entity 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, 2017, we received an additional
$2,000 and repaid $25,000. The outstanding balance was $177,000 and
accrued interest was $32,851 as of December 31, 2018.
On May
8, 2017, JPF Venture Group, Inc., an investment entity that is
majority-owned by our director, chief executive officer, and chief
financial officer, transferred 148,558 shares of common stock for
$111,440 to us to fulfill an over-commitment of Series D
warrants.
We
remain liable for the loans made to us by JPF Venture Group, Inc.
before the merger on May 9, 2017. As of December 31, 2018, the
outstanding balance of these loans was $581,880 and the accrued
interest was $125,381. All of these notes are in
default.
On June
5, 2017, a shareholder elected to convert $25,000 of a convertible
note payable balance into 1,806,298 shares of our common stock
($0.014 per share).
On
September 8, 2017, JPF Venture Group, Inc., elected to convert
$50,000 of a note payable balance into 3,612,596 shares of our
common stock at a conversion rate of $0.014 per share. In addition,
accrued interest of $6,342 was converted into 458,198 shares of our
common stock.
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, 2018, or
when we are otherwise able to pay. As of December 31, 2018, the
outstanding balance was $612,093 and the accrued interest was
$80,568. For the years ended December 31, 2018 and 2017, we repaid
$29,474 and $39,432, respectively. On September 30, 2018, the note
was amended to extend the maturity date to the earliest of a
resolution of the Memphis litigation, December 31, 2018, or when we
are otherwise able to pay. This note is in default.
37
On
November 8, 2017, Jeremy P. Feakins & Associates. LLC, a Series
B note holder, elected to convert $50,000 in notes payable for
50,000 shares of our common stock at a conversion rate of $1.00. In
addition, it converted accrued interest in the amount of $16,263
for 16,263 shares of our common stock.
On
January 18, 2018, Jeremy P. Feakins & Associates, LLC 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. During 2016, we
repaid $5,000. On August 15, 2017, 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. For the
year ended December 31 2018, we repaid $35,000. As of
December 31, 2018, the note balance was $1,102,500 and the
accrued interest was $511,818. This note is in
default.
For the
year ended December 31, 2018, we sold 240,840 shares of common
stock for $10,000 in cash to our chief executive officer and an
independent director.
On
December 17 and December 29, 2018, our chief executive officer
provided two short-term advances totaling $4,600 to us for working
capital, which was repaid on January 23, 2019.
Director Independence
Other
than Peter Wolfson, none of our directors is considered to be an
independent member of our board of directors under the rules of
Nasdaq.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND
SERVICES
Principal Accountant Fees and Services
The
aggregate fees for professional services rendered to us by Liggett
& Webb, P.A., our independent registered public accounting
firm, for the fiscal years ended December 31, 2018 and 2017, were
as follows:
|
|
Year Ended
December 31,
|
|
|
|
2018
|
2017
|
|
Audit
fees (1)
|
$46,200
|
$37,800
|
|
Audit-Related
fees (2)
|
3,500
|
-
|
|
Tax
fees
|
-
|
-
|
|
Other
fees
|
-
|
-
|
|
Total fees
|
$49,700
|
$37,800
|
_____________________
|
(1)
|
Includes
fees for (i) audits of our consolidated financial statements for
the fiscal years ended December 31, 2018 and 2017; (ii) review of
our interim period financial statements for fiscal year 2018; and
(iii) fees related to services normally provided by the accountant
in connection with statutory and regulatory filings or
engagements.
|
|
(2)
|
Includes
fees for review of our registration statements filed with U.S.
Securities and Exchange Commission.
|
Audit and Non-Audit Service Preapproval Policy
In
accordance with the requirements of the Sarbanes-Oxley Act of 2002
and the rules and regulations promulgated thereunder, our board of
directors has adopted an informal approval policy that it believes
will result in an effective and efficient procedure to preapprove
services performed by the independent registered public accounting
firm.
38
Audit Services. Audit services include
the annual financial statement audit (including quarterly reviews)
and other procedures required to be performed by the independent
registered public accounting firm to be able to form an opinion on
our consolidated financial statements. The board of directors
preapproves specified annual audit services engagement terms and
fees and other specified audit fees. All other audit services must
be specifically preapproved by the board of directors. The board of
directors monitors the audit services engagement and may approve,
if necessary, any changes in terms, conditions, and fees resulting
from changes in audit scope or other items.
Audit-Related Services. Audit-related
services are assurance and related services that are reasonably
related to the performance of the audit or review of our
consolidated financial statements, which historically have been
provided to us by the independent registered public accounting firm
and are consistent with the SEC’s rules on auditor
independence. The board of directors has approved specified
audit-related services within preapproved fee levels. All other
audit-related services must be preapproved by the board of
directors.
Tax Services. The board of directors
preapproves specified tax services that the it believes would not
impair the independence of the independent registered public
accounting firm and that are consistent with Securities and
Exchange Commission’s rules and guidance. The board of
directors must specifically approve all other tax
services.
All Other Services. Other services are
services provided by the independent registered public accounting
firm that do not fall within the established audit, audit-related,
and tax services categories. The board of directors preapproves
specified other services that do not fall within any of the
specified prohibited categories of services.
Procedures. All proposals for services
to be provided by the independent registered public accounting
firm, which must include a detailed description of the services to
be rendered and the amount of corresponding fees, are submitted to
the chairman of the board of directors and the chief financial
officer. The chief financial officer authorizes services that have
been preapproved by the board of directors. The chief financial
officer submits requests or applications to provide services that
have not been preapproved by the board of directors, which must
include an affirmation by the chief financial officer and the
independent registered public accounting firm that the request or
application is consistent with the Securities and Exchange
Commission’s rules on auditor independence, to the board of
directors (or its chair or any of its other members pursuant to
delegated authority) for approval.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a)
The following
financial statements are filed as part of this report:
|
|
Page
|
|
|
|
|
Audited
Consolidated Financial Statements for the Years
|
|
|
Ended
December 31, 2018 and 2017:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2018 and 2017
|
F-3
|
|
Consolidated
Statements of Operations for the Years Ended
|
|
|
December
31, 2018 and 2017
|
F-4
|
|
Consolidated
Statements of Changes in Stockholders’
Deficiency
|
|
|
Years
Ended December 31, 2018 and 2017
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended
|
|
|
December
31, 2018 and 2017
|
F-6
|
|
Notes
to the Consolidated Financial Statements
|
F-7
|
39
(b)
The following
exhibits are filed as part of this report:
|
Exhibit Number*
|
|
Title of Document
|
|
Location
|
|
|
|
|
|
|
|
Item 3
|
|
Articles
of Incorporation and Bylaws
|
|
|
|
|
Articles of
Incorporation of TetriDyn Solutions, Inc., dated May 15,
2006
|
|
Incorporated
by reference from the Current Report on Form 8-K filed June 7,
2006
|
|
|
|
Bylaws
|
|
Incorporated
by reference from the Current Report on Form 8-K filed June 7,
2006
|
|
|
|
Designation of
Rights, Privileges, and Preferences of Series A Preferred
Stock
|
|
Incorporated
by reference from the Annual Report on Form 10-K for the year ended
December 31, 2009, filed March 31, 2010
|
|
|
|
Certificate of
Change Pursuant to NRS 78.209 of TetriDyn Solutions, Inc., filed
with the Nevada Secretary of State on December 6, 2016
|
|
Incorporated
by reference from the Current Report on Form 8-K filed December 12,
2016
|
|
|
|
Certificate of
Correction of TetriDyn Solutions, Inc., filed with the Nevada
Secretary of State on December 15, 2016
|
|
Incorporated
by reference from the Current Report on Form 8-K filed December 12,
2016
|
|
|
|
Certificate of
Amendment to Articles of Incorporation dated May 8,
2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed May 12,
2017
|
|
|
Item 4
|
|
Instruments
Defining the Rights of Security Holders, including
indentures
|
|
|
|
|
Specimen Stock
Certificate
|
|
Incorporated
by reference from the Registration Statement on Form S-8 filed
August 25, 2017
|
|
|
Item 10
|
|
Material
Contracts
|
|
|
|
|
Loan
Agreement between TetriDyn Solutions, Inc., and Southeast Idaho
Council of Governments, Inc., together with related promissory
notes, dated December 23, 2009
|
|
Incorporated
by reference from the Annual Report on Form 10-K for the year ended
December 31, 2009, filed March 31, 2010
|
|
|
|
Consolidated
Promissory Note for $394,350 dated December 31, 2014
|
|
Incorporated
by reference from the Current Report on Form 8-K filed June 8,
2015
|
|
|
|
Promissory Note
dated February 25, 2016
|
|
Incorporated
by reference from the Current Report on Form 8-K filed March 1,
2016
|
|
|
|
Promissory Note
dated November 23, 2015
|
|
Incorporated
by reference from the Annual Report on Form 10-K for the year ended
December 31, 2015, filed March 30, 2016
|
|
|
|
Asset
Purchase Agreement between TetriDyn Solutions, Inc. and JPF Venture
Group, Inc. dated December 8, 2016
|
|
Incorporated
by reference from the Current Report on Form 8-K filed December 12,
2016
|
|
|
|
Promissory Note
dated October 20, 2016
|
|
Incorporated
by reference from the Current Report on Form 8-K filed October 20,
2016
|
|
|
|
Promissory Note
dated May 20, 2016
|
|
Incorporated
by reference from the Current Report on Form 8-K filed May 24,
2016
|
|
|
|
Amendment to
Convertible Promissory Notes dated February 24, 2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed March 2,
2017
|
|
|
|
Agreement and Plan
of Merger between TetriDyn Solutions, Inc. and Ocean Thermal Energy
Corporation dated March 1, 2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed March 10,
2017
|
|
|
|
Equity
Purchase Agreement with L2 Capital, LLC dated December 18,
2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed December 21,
2017
|
|
|
|
Registration Rights
Agreement with L2 Capital, LLC dated December 18, 2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed December 21,
2017
|
|
|
|
Common
Stock Purchase Warrant (L2 Capital, LLC) dated December 18,
2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed December 21,
2017
|
|
|
|
Note
and Warrant Purchase Agreement dated December 28, 2017
|
|
Incorporated
by reference from the Current Report on Form 8-K filed January 3,
2018
|
|
|
|
Form of
Unsecured Promissory Note
|
|
Incorporated
by reference from the Current Report on Form 8-K filed January 3,
2018
|
|
|
|
Form of
Unsecured Common Stock Purchase Warrant
|
|
Incorporated
by reference from the Current Report on Form 8-K filed January 3,
2018
|
|
|
|
Securities Purchase
Agreement dated May 22, 2018, between Ocean Thermal Energy
Corporation and Collier Investments, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed June 1,
2018
|
|
|
|
Convertible Note
dated May 22, 2018, issued to Collier Investments, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed June 1,
2018
|
|
|
|
Security Agreement
dated May 22, 2018, between Ocean Thermal Energy Corporation and
Collier Investments, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed June 1,
2018
|
|
|
|
Securities Purchase
Agreement dated February 16, 2018, between Ocean Thermal Energy
Corporation and L2 Capital, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed February 23,
2018
|
|
|
|
Senior
Secured Promissory Note dated February 16, 2018, issued to L2
Capital, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed February 23,
2018
|
|
|
|
Security Agreement
dated February 16, 2018, between Ocean Thermal Energy Corporation
and L2 Capital, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed February 23,
2018
|
|
|
|
Common
Stock Purchase Warrant dated February 16, 2018, issued to L2
Capital, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed February 23,
2018
|
|
|
|
Common
Stock Purchase Warrant dated February 16, 2018, issued to
Craft Capital Management, LLC
|
|
Incorporated
by reference from the Current Report on Form 8-K filed February 23,
2018
|
|
|
|
Lease
Agreement between Ocean Thermal Energy Corporation and Queen Street
Development Partners 1, LP, as amended
|
|
This
filing.
|
|
|
|
Employment
Agreement with Jeremy P. Feakins dated January 1,
2011**
|
|
This
filing.
|
|
|
|
Loan
Agreement, Promissory Note, and Warrant to Purchase up to 3,295,761
Shares of Common Stock between Ocean Thermal Energy Corporation and
DCO Energy, LLC, dated February 10, 2012, including Forbearance and
Loan Extension Agreement dated April 1, 2016
|
|
This
filing.
|
|
|
|
Form of
Loan Agreement, Promissory Note (Series B), Security Agreement, and
Warrant (with related schedule) [2013]
|
|
This
filing
|
|
|
|
Promissory Note for
$290,000 payable to Theodore Herman dated December 31,
2013
|
|
This
filing.
|
|
|
|
Loan Agreement,
Promissory Note, and Warrant to Purchase up to 12,912,500 Shares of
Common Stock between Ocean Thermal Energy Corporation and Jeremy P.
Feakins & Associates, LLC, dated April 1, 2014, including
Forbearance and Loan Extension Agreement (Revised and Reformed)
dated April 1, 2016
|
|
This
filing.
|
|
|
|
|
Loan
Agreement, Promissory Note, and Warrant to Purchase up to 200,000
Shares of Common Stock between Ocean Thermal Energy Corporation and
Mart Inn, Inc., dated December 22, 2014
|
|
This
filing.
|
|
|
|
Loan
Agreement, Promissory Note, and Warrant to Purchase up to 100,000
Shares of Common Stock between Ocean Thermal Energy Corporation and
James G. Garner, Jr., dated December 26, 2014
|
|
This
filing.
|
|
|
Promissory Note
dated April 17, 2015, with extensions
|
|
This
filing.
|
|
|
|
Promissory Note
dated October 20, 2016, to Peter Wolfson
|
|
Incorporated by reference from the Current Report on Form 8-K filed
October 20, 2016.
|
|
|
|
Promissory Note
dated December 21, 2016, to JPF Venture Group
|
|
This
filing.
|
|
|
|
Promissory Note
dated March 9, 2017, to Jeremy P. Feakins & Associates,
LLC
|
|
This
filing.
|
|
|
|
Loan
Agreement and Promissory Note with JPF Venture Group, Inc., dated
November 6, 2017
|
|
This
filing.
|
|
|
|
Form of
Bridge Loan, Warrant, and Promissory Note for December 2017,
together with schedule of investors
|
|
This
filing.
|
|
|
|
Replacement Convertible Promissory Note to L2 Capital, LLC, dated
December 14, 2018
|
|
This
filing.
|
|
|
Item 14
|
|
Code
of Ethics
|
|
|
|
|
TetriDyn Solutions,
Inc. Code of Ethics
|
|
Incorporated
by reference from the annual report on Form 10-KSB for the year
ended December 31, 2006, filed April 2, 2007
|
|
|
Item 21
|
|
Subsidiaries
of the Registrant
|
|
|
|
|
|
Schedule of
Subsidiaries
|
|
Incorporated
by reference from Post-Effective Amendment No. 1/A to the
Registration Statement on Form S-1 (Amendment No. 1) filed
January 10, 2019
|
|
Item 23
|
|
Consents of Experts and Counsel
|
|
|
|
|
Consent
of Liggett & Webb, P.A.
|
|
This
filing
|
|
|
Item 31
|
|
Rule 13a-14(a)/15d-14(a) Certifications
|
|
|
|
|
|
Certification of
Principal Executive and Principal Financial Officer Pursuant to
Rule 13a-14
|
|
This
filing
|
|
Item 32
|
|
Section 1350 Certifications
|
|
|
|
|
|
Certification of
Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
This
filing
|
|
Item 101
|
|
Interactive
Data Files***
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
This
filing
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
This
filing
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
This
filing
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
This
filing
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
This
filing
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
This
filing
|
___________________________
|
*
|
All
exhibits are numbered with the number preceding the decimal
indicating the applicable SEC reference number in Item 601 and the
number following the decimal indicating the sequence of the
particular document. Omitted numbers in the sequence refer to
documents previously filed as an exhibit.
|
|
**
|
Identifies
each management contract or compensatory plan or arrangement
required to be filed as an exhibit, as required by Item 15(a)(3) of
Form 10-K.
|
|
***
|
The
XBRL related information in Exhibit 101 shall not be deemed
“filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to liability
of that section and shall not be incorporated by reference into any
filing or other document pursuant to the Securities Act of 1933, as
amended, except as shall be expressly set forth by specific
reference in such filing or document.
|
40
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
OCEAN
THERMAL ENERGY CORPORATION
|
|
|
Dated:
March 22, 2019
|
By:
|
/s/
Jeremy P. Feakins
|
|
|
|
Jeremy
P. Feakins
|
|
|
|
Principal
Executive Officer and
|
|
|
|
Principal
Financial Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jeremy
P. Feakins
|
|
Director,
Chief Executive Officer and Chief
|
|
March
22, 2019
|
|
Jeremy
P. Feakins
|
|
Financial
Officer (Principal Executive Officer and
|
|
|
|
|
|
Principal
Financial Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Peter
Wolfson
|
|
Director
|
|
March
22, 2019
|
|
Peter
Wolfson
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Antoinette
K. Hempstead
|
|
Director
|
|
March
22, 2019
|
|
Antoinette
K. Hempstead
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
We will
furnish to the Securities and Exchange Commission, at the same time
that it is sent to stockholders, any proxy or information statement
that we send to our stockholders in connection with any annual
stockholders’ meeting.
41
OCEAN THERMAL ENERGY CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 and 2017
|
Report of Independent Registered Public Accounting
Firm
|
|
F-2
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2018 and December
31, 2017
|
|
F-3
|
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended December
31, 2018 and 2017
|
|
F-4
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Deficiency for the
Years Ended December 31, 2018 and 2017
|
|
F-5
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2018 and 2017
|
|
F-6
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Shareholders and Board of Directors of:
Ocean
Thermal Energy Corporation
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Ocean
Thermal Energy Corporation and Subsidiaries (the
“Company”) as of December 31, 2018 and 2017, the
related consolidated statements of operations, changes in
stockholders’ deficiency and cash flows for each of the two
years in the period ended December 31, 2018, and the related notes.
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for the years ended December 31, 2018
and 2017, in conformity with accounting principles generally
accepted in the United States of America.
Explanatory Paragraph – Going Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has a
net loss of $7,880,013, a working capital deficiency of
$17,601,515, and an accumulated deficit of $75,583,231. These
factors raise substantial doubt about the Company's ability to
continue as a going concern. Management’s plans in regard to
these matters are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal controls over financial
reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/
Liggett & Webb, P.A.
LIGGETT
& WEBB, P.A.
Certified
Public Accountants
We have
served as the Company’s auditor since 2008
Boynton
Beach, Florida
March
22, 2019
F-2
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND DECEMBER 31, 2017
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
$8,398
|
$425,015
|
|
Prepaid
expenses
|
-
|
25,000
|
|
Total
Current Assets
|
8,398
|
450,015
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
Property
and equipment, net
|
672
|
1,352
|
|
Assets
under construction
|
-
|
892,639
|
|
Property
and Equipment, net
|
672
|
893,991
|
|
|
|
|
|
Total
Assets
|
$9,070
|
$1,344,006
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payables and accrued expense
|
$8,876,222
|
$6,846,010
|
|
Notes payable
- related party, net
|
2,398,473
|
3,592,948
|
|
Convertible notes
payable - related party, net
|
87,500
|
87,500
|
|
Notes
payable, net
|
2,671,640
|
589,812
|
|
Convertible notes
payable, net
|
1,283,824
|
50,000
|
|
Derivative
Liability
|
2,292,254
|
-
|
|
Total
Current Liabilities
|
17,609,913
|
11,166,270
|
|
|
|
|
|
Notes
payable, net
|
168,334
|
607,290
|
|
Notes
payable, convertible
|
-
|
80,000
|
|
Total
Liabilities
|
17,778,247
|
11,853,560
|
|
|
|
|
|
Stockholders'
deficiency
|
|
|
|
Preferred
Stock, $0.001 par value; 5,000,000 shares authorized,
|
-
|
-
|
|
0
and 0 shares issued and outstanding, respectively
|
|
|
|
Common
stock, $0.001 par value; 200,000,000 shares
authorized,
|
|
|
|
131,038,944
and 122,642,247 shares issued and outstanding,
respectively
|
131,039
|
122,642
|
|
Additional
paid-in capital
|
57,683,015
|
57,071,022
|
|
Accumulated
deficit
|
(75,583,231)
|
(67,703,218)
|
|
Total
Stockholders' Deficiency
|
(17,769,177)
|
(10,509,554)
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficiency
|
$9,070
|
$1,344,006
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
OCEAN THERMAL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,
2017
|
|
2018
|
2017
|
|
Operating
Expenses
|
|
|
|
Salaries
and wages
|
$1,361,706
|
$2,044,882
|
|
Professional
fees
|
1,201,956
|
1,669,202
|
|
General
and administrative
|
595,306
|
2,169,577
|
|
Warrant
expense
|
-
|
6,769,562
|
|
Impairment
of assets under construction
|
892,639
|
48,998
|
|
Total
Operating Expenses
|
4,051,607
|
12,702,221
|
|
|
|
|
|
Loss
from Operations
|
(4,051,607)
|
(12,702,221)
|
|
|
|
|
|
Other
Income & Expenses
|
|
|
|
Interest
expense, net
|
(1,281,134)
|
(614,749)
|
|
Amortization
of debt discount
|
(1,160,983)
|
(44,960)
|
|
Loss on
settlement of debt
|
(279,432)
|
(1,105,203)
|
|
Change
in fair value of liability
|
-
|
(124,542)
|
|
Change
in fair value of derivative liability
|
(1,206,857)
|
-
|
|
Income
from legal settlement
|
100,000
|
-
|
|
Total
other income & expenses
|
(3,828,406)
|
(1,889,454)
|
|
|
|
|
|
Loss
Before Income Taxes
|
(7,880,013)
|
(14,591,675)
|
|
|
|
|
|
Provision
for Income Taxes
|
-
|
-
|
|
|
|
|
|
Net
Loss
|
$(7,880,013)
|
$(14,591,675)
|
|
|
|
|
|
Net
Loss per Common Share
|
|
|
|
Basic
and Diluted
|
$(0.06)
|
$(0.13)
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding - Basic and
Diluted
|
124,725,638
|
111,735,383
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
OCEAN THERMAL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,
2017
|
|
|
|
|
|
|
|
Total
|
|
|
Preferred
Stock
|
Common
Stock
|
Paid
In
|
Accumulated
|
Stockholders'
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficiency
|
|
Balance, December 31, 2016
|
-
|
$-
|
94,343,776
|
$94,344
|
$44,352,962
|
$(53,111,543)
|
$(8,664,237)
|
|
Warrants and
options exercised at $0.00: 1/1/17 to 5/8/17 (prior to
merger)
|
|
|
14,792,500
|
14,793
|
(14,793)
|
-
|
-
|
|
D Warrants
exercised at $0.75: 1/1/17 to 5/8/17 (prior to
merger)
|
|
|
998,079
|
998
|
747,537
|
-
|
748,535
|
|
Stock issued for services and commitment fee
|
|
|
3,887,802
|
3,888
|
2,898,876
|
-
|
2,902,764
|
|
Stock issued for cash
|
|
|
11,250
|
11
|
44,989
|
-
|
45,000
|
|
Stock issued
for conversion of note payable and accrued
interest
|
|
|
7,386,872
|
7,387
|
2,348,008
|
-
|
2,355,395
|
|
Stock repurchased from related parties
|
|
|
(148,588)
|
(149)
|
(111,291)
|
-
|
(111,440)
|
|
Stock issued for conversion of accounts payable
|
|
|
425,000
|
425
|
702,700
|
-
|
703,125
|
|
Stock issued for employee bonuses
|
|
|
409,066
|
409
|
919,990
|
-
|
920,399
|
|
Stock issued for TetriDyn Solutions, Inc.
|
|
|
536,490
|
536
|
(1,628,562)
|
|
(1,628,026)
|
|
FV of warrant modifications
|
|
|
-
|
-
|
6,769,562
|
-
|
6,769,562
|
|
Beneficial conversion feature on notes payable
|
|
|
-
|
-
|
41,044
|
-
|
41,044
|
|
Net
Loss
|
|
|
-
|
-
|
-
|
(14,591,675)
|
(14,591,675)
|
|
Balance,
December 31, 2017
|
-
|
$-
|
122,642,247
|
$122,642
|
$57,071,022
|
$(67,703,218)
|
$(10,509,554)
|
|
Stock issued for
warrants
|
|
|
39,000
|
39
|
9,481
|
-
|
9,520
|
|
Stock issued for services
|
|
|
673,345
|
673
|
138,313
|
-
|
138,986
|
|
Stock issued for conversions of notes payable
|
|
|
4,000,000
|
4,000
|
110,078
|
-
|
114,078
|
|
Shares issued as a commitment fee
|
|
|
400,000
|
400
|
20,800
|
-
|
21,200
|
|
Beneficial conversion features
|
|
|
-
|
-
|
13,248
|
-
|
13,248
|
|
Reclassification of derivative liabilities
|
|
|
-
|
-
|
157,473
|
-
|
157,473
|
|
Stock issued
for cash under equity agreement, net of offering
costs
|
|
|
2,300,000
|
2,300
|
104,605
|
|
106,905
|
|
Stock issued for cash
|
|
|
743,512
|
744
|
48,236
|
|
48,980
|
|
Stock issued for cash to related parties
|
|
|
240,840
|
241
|
9,759
|
|
10,000
|
|
Net
Loss
|
|
|
-
|
-
|
-
|
(7,880,013)
|
(7,880,013)
|
|
Balance, December 31, 2018
|
-
|
$-
|
131,038,944
|
$131,039
|
$57,683,015
|
$(75,583,231)
|
$(17,769,177)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
OCEAN THERMAL ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,
2017
|
|
2018
|
2017
|
|
Cash
Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(7,880,013)
|
$(14,591,675)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities
|
|
|
|
Depreciation
|
680
|
1,014
|
|
Impairment of
assets under construction
|
892,639
|
48,998
|
|
Stock issued for
services
|
138,986
|
2,902,764
|
|
Stock issued for
bonuses
|
-
|
920,399
|
|
Penalties upon
default
|
470,679
|
-
|
|
Change in fair
value of liability
|
-
|
124,542
|
|
Change in
derivative liability
|
1,206,857
|
-
|
|
Loss on settlement
of debt
|
-
|
1,105,203
|
|
Warrant
expense
|
-
|
6,769,562
|
|
Amortization of
debt discounts
|
1,160,983
|
44,960
|
|
Loss on
extinguishment of debt
|
279,432
|
-
|
|
Changes in assets
and liabilities:
|
|
|
|
Other
current assets
|
-
|
-
|
|
Prepaid
expenses
|
25,000
|
5,549
|
|
Accounts
payable and accrued expenses
|
2,066,175
|
1,199,515
|
|
Net
Cash Used In Operating Activities
|
(1,638,582)
|
(1,469,169)
|
|
|
|
|
|
Cash
Flow From Investing Activities:
|
|
|
|
Cash
acquired in acquisition
|
-
|
4,512
|
|
Assets
under construction
|
-
|
(95,352)
|
|
Payments
for acquisition
|
-
|
(49,773)
|
|
Net
Cash Used In Investing Activities
|
-
|
(140,613)
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Repayment
of notes payable - related party
|
(64,474)
|
(64,432)
|
|
Repayment
of government loans
|
(3,208)
|
(4,539)
|
|
Proceeds
from notes payable
|
499,156
|
490,000
|
|
Proceeds
from notes payable, convertible
|
615,086
|
80,000
|
|
Proceeds
from issuance of common stock for cash
|
155,885
|
45,000
|
|
Proceeds
from notes payable - related party
|
-
|
844,178
|
|
Stock
repurchased from related parties
|
-
|
(111,440)
|
|
Stock
issued for exercise of warrants for cash
|
9,520
|
748,535
|
|
Stock
issued for cash - related party
|
10,000
|
-
|
|
Net
Cash Provided by Financing Activities
|
1,221,965
|
2,027,302
|
|
|
|
|
|
Net increase in
cash and cash equivalents
|
(416,617)
|
417,520
|
|
Cash
and cash equivalents at beginning of year
|
425,015
|
7,495
|
|
Cash
and Cash Equivalents at End of Year
|
$8,398
|
$425,015
|
|
|
|
|
|
Supplemental disclosure of cash flow
information
|
|
|
|
Cash
paid for interest expense
|
$26,342
|
$17,162
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
Convertible note
payable and accrued interest - related party converted to common
stock
|
$114,078
|
$80,275
|
|
Note payable and
accrued interest - related party converted into common
stock
|
$-
|
$668,500
|
|
Note payable and
accrued interest converted into common stock
|
$878,292
|
$-
|
|
Penalties upon
default on notes payable
|
$470,680
|
$-
|
|
Due to related
party, converted into note payable - related party
|
$-
|
$38,822
|
|
Accounts payable
converted into common stock
|
$-
|
$326,250
|
|
Stock issued for
commitment fee on issuance of note payable
|
$21,200
|
$-
|
|
Debt discount on
notes payable
|
$13,248
|
$41,044
|
|
Reclassification of
derivative liability
|
$157,473
|
$-
|
|
|
|
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
F-6
OCEAN THERMAL ENERGY CORPORATION AND SUBSIDIARIES
(FORMERLY KNOWN AS TETRIDYN SOLUTIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND DECEMBER 31,
2017
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 (“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. EcoVillages are communities 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 our
existing line of business.
On
May 9, 2017, TetriDyn Solutions, Inc. (“TDYS”) acquired
Ocean Thermal Energy Corporation (“OTE”) in a merger
(the “Merger”), in which outstanding securities of OTE
were converted into securities of TDYS, which changed its name to
Ocean Thermal Energy Corporation. For accounting purposes, this
transaction was accounted for as a reverse merger and has been
treated as a recapitalization of TDYS with OTE as the accounting
acquirer. The historical financial statements of the accounting
acquirer became the financial statements of the company. We did not
recognize goodwill or any intangible assets in connection with the
transaction. The 110,273,767 shares issued to the shareholders of
the accounting acquirer in conjunction with the share exchange
transaction have been presented as outstanding for all periods. The
historical financial statements include the operations of the
accounting acquirer for all periods presented and the accounting
acquiree for the period from May 9, 2017, through December 31,
2017. Our accounting year end is December 31, which was the
year-end of the accounting acquirer.
On
May 25, 2017, we received approval from the Financial Industry
Regulatory Authority, Inc. (“FINRA”) to change the
trading symbol for our common stock to “CPWR,”
pronounced “sea power” to reflect our core technology,
from “TDYS.” Our common stock began formally trading
under the symbol “CPWR” on June 21, 2017.
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).
F-7
Principal Subsidiary Undertakings
Our
consolidated financial statements for the years ended December 31,
2018 and 2017, 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
|
|
|
|
|
|
|
Ocean
Thermal Energy UK Limited
|
England
and Wales
|
Dormant
|
07/22/2010
|
|
|
|
|
|
|
OTEC
Innovation Group Inc.
|
Delaware,
USA
|
Dormant
|
06/02/2011
|
|
|
|
|
|
|
OTE-BM
Energy Partners LLC
|
Delaware,
USA
|
Dormant
|
06/02/2011
|
|
|
|
|
|
|
OTE
Bahamas O&M Ltd.
|
Bahamas
|
Dormant
|
09/07/2011
|
|
|
|
|
|
|
Ocean
Thermal Energy Holdings Ltd.
|
Bahamas
|
Dormant
|
03/05/2012
|
|
|
|
|
|
|
Ocean
Thermal Energy Cayman Ltd.
|
Caymans
|
Dormant
|
03/26/2013
|
|
|
|
|
|
|
OTE HC
Ltd.
|
Caymans
|
Dormant
|
03/26/2013
|
|
|
|
|
|
|
Ocean
Thermal Energy USVI, Inc.
|
Virgin
Islands
|
Dormant
|
07/12/2016
|
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 valuing equity
investments and issuances, 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, 2018 and 2017, we had no cash
equivalents.
Income Taxes
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Jobs
Act”) was enacted. The Jobs Act significantly revised the
U.S. corporate income tax law by lowering the corporate federal
income tax rate from 35% to 21%.
F-8
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
conduct operations in various foreign jurisdictions where we are
developing projects to use our technology. Our segments were based
on the location of these projects. The U.S. territories segment
consists of projects in the U.S. Virgin Islands and Guam; and the
other segment currently consists of projects in the Cayman Islands.
Direct revenues and costs, depreciation, depletion, and
amortization costs, general and administrative costs, and other
income directly associated with their respective segments are
detailed within the following discussion. Identifiable net property
and equipment are reported by business segment for management
reporting and reportable business segment disclosure purposes.
Current assets, other assets, current liabilities, and long-term
debt are not allocated to business segments for management
reporting or business segment disclosure purposes.
Reportable
business segment information is as follows:
|
December 31,
2018
|
||||
|
|
Headquarters
|
U.S.
Territories
|
Other
|
Total
|
|
Revenue
|
$-
|
$-
|
$-
|
$-
|
|
Assets
|
$9,070
|
$-
|
$-
|
$9,070
|
|
Net
Loss
|
$(6,987,374)
|
$(892,639)
|
$-
|
$(7,880,013)
|
|
Property
and equipment
|
$672
|
$-
|
$-
|
$672
|
|
Depreciation
|
$680
|
$-
|
$-
|
$680
|
|
Addtions
to Property and equipment
|
$-
|
$-
|
$-
|
$-
|
|
Impairment
of assets under construction
|
$-
|
$892,639
|
$-
|
$892,639
|
F-9
|
December
31, 2017
|
||||
|
|
Headquarters
|
U.S.
Territories
|
Other
|
Total
|
|
Revenue
|
$-
|
$-
|
$-
|
$-
|
|
Assets
|
$451,367
|
$892,639
|
$-
|
$1,344,006
|
|
Net
loss
|
$(14,542,677)
|
$-
|
$(48,998)
|
$(14,591,675)
|
|
Property
and equipment
|
$1,352
|
$-
|
$-
|
$1,352
|
|
Assets
under construction
|
$-
|
$892,639
|
$-
|
$892,639
|
|
Depreciation
|
$1,014
|
$-
|
$-
|
$1,014
|
|
Additions
to assets under construction
|
$-
|
$95,352
|
$-
|
$95,352
|
|
Impairment
of assets under construction
|
$-
|
$-
|
$48,998
|
$48,998
|
During
the year ended December 31, 2018, $892,639 of Guam and U.S. Virgin
Islands assets under construction were considered to be impaired
due to the uncertainty of the project and were written
off.
For the
year ended December 31, 2017, the U.S. territories are comprised of
U.S. Virgin Islands project (approx. $728,000) and Guam project
(approx. $165,000). Other territories are comprised of Cayman
Islands project); however, during the year ended December 31, 2017,
$48,998 of Cayman Islands assets under construction was considered
to be impaired due to the uncertainty of the project and were
written off. The additions to assets under construction in 2017
were primarily salaries and consulting services.
Property and Equipment
Furniture,
equipment, and software are recorded at cost and include major
expenditures that increase productivity or substantially increase
useful lives.
Maintenance,
repairs, and minor replacements are charged to expenses when
incurred. When furniture, vehicles, or equipment is sold or
otherwise disposed of, the asset and related accumulated
depreciation are removed from this account, and any gain or loss is
included in the statement of operations.
Assets
under construction represent costs incurred by us for our renewable
energy systems currently in process. Generally, all costs incurred
during the development stage of our projects are capitalized and
tracked on an individual project basis and are included in
construction in progress until the project has been placed into
service. If a project is abandoned, the associated costs that have
been capitalized are charged to expense in the year of abandonment.
Expenditures for repairs and maintenance are charged to expense as
incurred. Interest costs incurred during the construction period of
defined major projects from debt that is specifically incurred for
those projects are capitalized.
Direct
labor costs incurred for specific major projects expected to have
long-term benefits are capitalized. Direct labor costs subject to
capitalization include employee salaries, as well as related
payroll taxes and benefits. With respect to the allocation of
salaries to projects, salaries are allocated based on the
percentage of hours that our key managers, engineers, and
scientists work on each project. These individuals track their time
worked at each project. Major projects are generally defined as
projects expected to exceed $500,000. Direct labor includes all of
the time incurred by employees directly involved with construction
and development activities. Time spent in general and indirect
management and in evaluating the feasibility of potential projects
is expensed when incurred.
We
capitalize costs incurred once the project has met the project
feasibility stage. Costs include environmental engineering,
permits, government approval, and site engineering costs. We
currently have several EcoVillage projects in the development
stage. We capitalize direct interest costs associated with the
projects. As of December 31, 2018 and 2017, we have no interest
costs capitalized for any of these projects.
The
cost of furniture, vehicles, equipment, and software is depreciated
over the estimated useful lives of the related assets.
F-10
Depreciation is
computed using the straight-line method for financial reporting
purposes. The estimated useful lives and accumulated depreciation
for land, buildings, furniture, vehicles, equipment, and software
are as follows:
|
|
Years
|
|
Computer
Equipment
|
3
|
|
Software
|
5
|
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 and other
assets, accounts payable, accrued liabilities, notes payable,
deferred compensation, and other liabilities reflected in the
accompanying balance sheets approximate fair value at
December 31, 2018, and December 31, 2017, 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 December 31, 2018 (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, 2018, and 2017, $0 and $179,855, 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 350,073 and 134,000 shares issuable upon the
exercise of warrants and 47,046,431 and 7,056,721 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 years ended December 31, 2018 and 2017,
respectively.
F-11
Revenue Recognition
In May
2014, the FASB issued Accounting Standard Update
(“ASU”) 2014-09, Revenue from Contracts with Customers (Topic
606). This ASU is a comprehensive new revenue recognition
model that 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. We adopted the ASU on January 1, 2018. The
adoption of the ASU did not have an impact on our consolidated
financial statements during the years ended December 31, 2018 and
2017.
Recent Accounting Pronouncements
In June
2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic
718): Improvements to Nonemployee Share-Based Payment
Accounting. This ASU relates to the accounting for
non-employee share-based payments. The amendment in this update
expands the scope of Topic 718 to include all share-based payment
transactions in which a grantor acquired goods or services to be
used or consumed in a grantor’s own operations by issuing
share-based payment awards. The ASU excludes share-based payment
awards that relate to: (1) financing to the issuer; or (2) awards
granted in conjunction with selling goods or services to customers
as part of a contract accounted for under Topic 606, Revenue from Contracts from Customers.
The share-based payments are to be measured at grant-date fair
value of the equity instruments that the entity is obligated to
issue when the goods or service has been delivered or rendered and
all other conditions necessary to earn the right to benefit from
the equity instruments have been satisfied. This standard will be
effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that
fiscal year. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, but no earlier than an entity’s
adoption of Topic 606. We are currently reviewing the provisions of
this ASU to determine if there will be any impact on our results of
operations, cash flows, or financial condition.
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 2 – GOING CONCERN
The
accompanying 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 $7,880,013 and used cash of $1,638,582 in
operating activities for the year ended December 31, 2018. We had a
working capital deficiency of $17,601,515 and a stockholders’
deficiency of $17,769,177 as of December 31, 2018. 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 3 – PROPERTY AND EQUIPMENT
Property and
equipment as of December 31, 2018, consist of the
following:
|
Property & Equipment as of December 31, 2018
|
|
|||
|
|
|
Accumulated
|
Net Book
|
Useful Life
|
|
|
Cost
|
Depreciation
|
Value
|
Life
|
|
Computer
& Office Equipment
|
$13,751
|
$13,079
|
$672
|
3
Years
|
|
Software
(Video System)
|
19,061
|
19,061
|
-
|
5
Years
|
|
|
$32,812
|
$32,140
|
$672
|
|
F-12
Property and
equipment as of December 31, 2017, consist of the
following:
|
|
|
Accumulated
|
Net Book
|
Useful Life
|
|
|
Cost
|
Depreciation
|
Value
|
Life
|
|
Computer
& Office Equipment
|
$13,751
|
$12,399
|
$1,352
|
3
Years
|
|
Software
(Video System)
|
19,061
|
19,061
|
-
|
5
Years
|
|
Construction
in Process
|
892,639
|
|
892,639
|
|
|
|
$925,451
|
$31,460
|
$893,991
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017, was $680
and $1,014, respectively. During the
year ended December 31, 2018, $892,639 of Guam and U.S. Virgin
Islands assets under construction were considered to be impaired
due to the uncertainty of the projects and written-off. During the
year ended December 31, 2017, $48,998 of Cayman Islands assets
under construction was considered to be impaired due to the
uncertainty of the project and were written
off.
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 year ended December 31, 2018, we made a repayment of $3,208.
The loan principal was $9,379 with accrued interest of $186 as of
December 31, 2018. 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
$22,864 as of December 31, 2018. 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 loan principal was $47,239
with accrued interest of $11,349 as of December 31, 2018. 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
$39,414 as of December 31, 2018. 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 $20,740 as of December 31, 2018. 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, 2018, the outstanding loan balance was $394,380 and
the accrued but unpaid interest was $95,011 on the Consolidated
Note. This note is in default.
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, the
outstanding balance was $75,000, plus accrued interest of $12,173.
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.
F-13
During
2016, we borrowed $112,500 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 note
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. This
conversion price is not required to adjust for the reverse stock
split as per the note agreement. On February 24, 2017, the notes
were amended to eliminate the conversion features. As of December
31, 2018, the outstanding balance was $112,500, plus accrued
interest of $18,197.
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, 2018, the
outstanding balance was $12,500, plus accrued interest of $1,754.
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.
On
October 20, 2016, we borrowed $25,000 from a stockholder 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 September 5, 2017, the note holder converted
the note principal of $25,000 into 1,806,298 shares common stock.
As of December 31, 2018, there was an outstanding balance of
accrued interest of $904.
During
2012, we issued a note payable for $1,000,000 and three-year
warrants to purchase 3,295,761 shares of common stock with an
exercise price of $0.50 per share. 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. We determined the warrants had a
fair value of $378,500 based on the Black-Scholes option-pricing
model. The fair value was recorded as a discount on the note
payable and was being amortized over the life of the note. We
repriced the warrants during 2013 and took an additional charge to
earnings of $1,269,380 related to the repricing. The warrants were
exercised upon the repricing. On March 6, 2018, the note was
amended to extend the due date to December 31, 2018. As of
December 31, 2018, the outstanding balance was $1,000,000,
plus accrued interest of $636,948. 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, a security agreement, and a warrant to purchase 10,000
shares of common stock at an exercise price to be determined
pursuant to a specified formula and expires on September 30, 2023.
During 2013, we issued $525,000 of 10% promissory notes and
warrants to purchase 105,000 shares of common stock. We determined
the warrants had a fair value of $60,068 based on the Black-Scholes
option-pricing model. As part of our agreement with a proposed
external financing source, the board repriced the warrants to
$0.00, exercised the warrants, and issued shares of common stock.
On August 15, 2017, loans of $316,666 and accrued interest of
$120,898 were converted to 437,564 shares at $1.00 per share, which
was ratified by a disinterested majority of the board of directors.
The shares were recorded at fair value of $1,165,892, which
resulted in a loss on settlement of debt of $728,328 on the
conversion date. As of December 31, 2018, the loan balance was
$158,334 and the accrued interest was $84,947.
During
2013, we issued a note payable for $290,000 in connection with the
reverse merger transaction with Broadband Network Affiliates, Inc.,
or BBNA. 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
such, we are confident that if the note holder were to seek legal
redress, a court would decide in our favor by either voiding the
note or awarding damages sufficient to offset the note value. As of
December 31, 2018, the balance outstanding was $130,000, and the
accrued interest as of that date was $50,857. This note is in
default.
F-14
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. On August 15, 2017, 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.
For the year ended December 31, 2018, we repaid $35,000. As of
December 31, 2018, the note balance was $1,102,500 and the accrued
interest was $511,818. 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 $247,045 as of December 31,
2018.
The due
date of April 7, 2017, on a $50,000 promissory note with an
unaffiliated investor, has been 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 $18,917 as of December 31, 2018.
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, 2018, the balance outstanding was $177,000, plus
accrued interest of $32,851.
During
the third quarter of 2017, we completed a $2,000,000 convertible
promissory note private placement offering. The terms of the note
are as follows: (i) interest is payable at 6% per annum;
(ii) the note is 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 note (principal and interest) will be repaid in full. As of
December 31, 2018, the outstanding balance for all four notes was
$80,000, plus accrued interest of $7,003.
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, September 30, 2018, or when we are
otherwise able to pay. For the year ended December 31, 2018 and
2017, we repaid $29,474 and $39,432 respectively. As of December
31, 2018, the outstanding balance was $612,093 and the accrued
interest was $80,568. On September 30, 2018, the note was amended
to extend the maturity date to the earliest of a resolution of the
Memphis litigation, December 31, 2018, or when we are otherwise
able to pay. This note is in default.
In
December 2017, we entered into a note and warrant purchase
agreement pursuant to which we issued a series of unsecured
promissory notes to accredited investors, in the aggregate
principal amount of $979,156 as of December 31, 2018. 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 will receive 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
F-15
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, 2018, and December 31, 2017, the balance outstanding was
$979,156 and $490,000, respectively. As of December 31, 2018, and
December 31, 2017, the accrued interest was $71,542 and $613,
respectively. As of December 31, 2018, and December 31, 2017, we
had issued warrants to purchase 262,000 and 134,000 shares of
common stock, respectively. As of December 31, 2018, and December
31, 2017, we determined that the warrants had a fair value of
$34,975 and $41,044, respectively, based on the Black-Scholes
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 amortized $51,584 of debt
discount. As of December 31, 2018, warrants to purchase 39,000
shares have been exercised (see Note 6), and the debt discount
related to the exercised warrants has been fully expensed. As of
December 31, 2018, $21,367 of the principal payments of two notes
are due and 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 to us and 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. As of December 31,
2018, we have received five tranches totaling $482,222 with debt
issuance cost of $91,222. The debt issuance cost is amortized over
the life of the note. In addition, we also issued warrants to
purchase 56,073 shares of common stock in accordance with a
non-exclusive finder’s fee arrangement (see Note 6). These
warrants have a fair value of $13,280 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. During the year ended December 31, 2018,
L2 Capital converted $114,078 of the note into 4,000,000 shares of
common stock at an average conversion price of $0.0285 per share.
As of December 31, 2018, we have recorded a debt discount of
$475,481 for the fair value of derivative liability and fully
amortized the debt discount. As of December 31, 2018, the
outstanding balance of the original loan was $368,145 plus a
default penalty of $261,306 for a total of $629,451. The accrued
interest was $59,938. The note is in default as of December 31,
2018.
On May
22, 2018, we executed a convertible note with Collier Investments,
LLC, an unaffiliated California company, in the amount of $281,250
with an interest rate of 12% per annum. The maturity date of the
note is the earlier of: (i) seven months after the issuance date;
or (ii) the date on which we consummate a capital-raising
transaction for $6,000,000 or more primarily from the sale of
equity in the company. The note, or any portion of it, can be
convertible by the holder into shares of our common stock at any
time after the issuance date. The conversion price is equal to the
lesser of 80% multiplied by the price per share paid by the
investors in a “qualified financing” (as defined in the
note) or $0.20, subject to certain adjustments. At any time within
a 90-day period following the issuance date, we have the option to
prepay 145% of the outstanding balance. There were an original
issue discount and transaction fees of $36,250, yielding net
proceeds of $245,000 to us. In addition, we paid a finder’s
fee of $20,914. The original issue discount and transaction finder
fees are being amortized over the life of the note payable as debt
issuance cost. As of December 31, 2018, we have fully amortized the
debt issuance cost. As of December 31, 2018, we have recorded a
debt discount of $5,267 for the fair value of derivative liability
and fully amortized the debt discount. On December 14, 2018, L2
Capital LLC purchased this note payable from Collier Investments,
LLC. The total consideration was $371,250, including the
outstanding note balance, the accrued interest, and liquidated
damages (see below for convertible note issued to L2 Capital on
December 14, 2018). We recorded the loss on the extinguishment of
debt of $279,432.
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, 2018, the balance outstanding was $10,000 and the accrued
interest was $172.
F-16
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, LLC as commitment shares with
a fair value of $21,200 in connection with the purchase of the
note. We executed a 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 $371,250 for the fair value of derivative liability and
fully amortized the debt discount. On December 31, 2018, the
outstanding balance was $524,373, which includes a default penalty,
and the accrued interest was $4,183. This note is in
default.
The
following convertible note and notes payable were outstanding at
December 31, 2018:
|
|
|
|
|
|
|
|
|
Related
Party
|
Non
Related Party
|
||
|
Date
of Issuance
|
Maturity
Date
|
Interest
Rate
|
In
Default
|
Original
Principal
|
Principal
at
December
31,
2018
|
Discount
at
December
31,
2018
|
Carrying
Amount at December 31,
2018
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|
12/12/06
|
01/05/13
|
6.25%
|
Yes
|
58,670
|
9,379
|
-
|
9,379
|
-
|
-
|
9,379
|
-
|
|
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
|
-
|
|
02/10/18
|
12/31/18
|
10.00%
|
Yes
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
|
-
|
1,000,000
|
-
|
|
08/15/13
|
10/31/23
|
10.00%
|
No
|
525,000
|
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
|
04/17/19
|
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%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/18/17
|
07/18/19
|
6.00%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/26/17
|
07/26/19
|
6.00%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
15,000
|
-
|
|
07/27/17
|
07/27/19
|
6.00%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
15,000
|
-
|
|
12/20/17
|
(2)
|
10.00%
|
Yes**
|
979,156
|
979,156
|
24,435
|
954,721
|
-
|
-
|
954,721
|
-
|
|
11/06/17
|
12/31/18
|
10.00%
|
Yes
|
646,568
|
612,093
|
-
|
612,093
|
612,093
|
-
|
-
|
-
|
|
02/19/18
|
(3)
|
18.00%*
|
Yes
|
629,451
|
629,451
|
-
|
629,451
|
-
|
-
|
629,451
|
-
|
|
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
|
524,373
|
524,373
|
-
|
524,373
|
-
|
-
|
524,373
|
-
|
|
Totals
|
|
|
$8,515,098
|
$6,634,206
|
$24,435
|
$6,609,771
|
$2,485,973
|
$-
|
$3,955,464
|
$168,334
|
|
(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 traunches between 02/16/18 and
05/02/18.
**
Partially
in default as of December 31, 2018
*
Default interest
rate
F-17
The following convertible notes and notes payable were outstanding
at December 31, 2017:
|
|
|
|
|
|
|
|
|
Related Party
|
Non Related Party
|
||
|
Date of Issuance
|
Maturity Date
|
Interest Rate
|
In Default
|
Original Principal
|
Principal at
December 31,
2017
|
Discount at
December 31
2017
|
Carrying Amount at
December 31,
2017
|
Current
|
Long-Term
|
Current
|
Long-Term
|
|
12/12/06
|
01/05/13
|
6.25%
|
Yes
|
58,670
|
12,272
|
-
|
12,272
|
-
|
-
|
12,272
|
-
|
|
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
|
12/31/18
|
10.00%
|
No
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
1,000,000
|
-
|
-
|
-
|
|
08/15/13
|
10/31/23
|
10.00%
|
No
|
525,000
|
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%
|
No
|
2,265,000
|
1,137,500
|
-
|
1,137,500
|
1,137,500
|
-
|
-
|
-
|
|
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%
|
No
|
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%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
|
07/18/17
|
07/18/19
|
6.00%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
|
07/26/17
|
07/26/19
|
6.00%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
|
07/27/17
|
07/27/19
|
6.00%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
|
12/20/17
|
(2)
|
10.00%
|
No
|
490,000
|
490,000
|
41,044
|
448,956
|
-
|
-
|
-
|
448,956
|
|
11/06/17
|
(3)
|
10.00%
|
No
|
646,568
|
641,568
|
-
|
641,568
|
641,568
|
-
|
-
|
-
|
|
Totals
|
|
|
|
$5,048,594
|
$41,044
|
$5,007,550
|
$3,680,448
|
$-
|
$639,812
|
$687,290
|
|
(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)
Principal
and accrued interest will be due and payable at the earliest of A)
resolution of Memphis litigation; B) December 31, 2018 , or C) when
OTE is able to pay.
*
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, 2018:
|
2019
|
$6,441,437
|
|
2020
|
-
|
|
2021
|
10,000
|
|
2022
and thereafter
|
158,334
|
|
Total
|
$6,609,771
|
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 generally accepted accounting principles, 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.
F-18
On August 19, 2018, the note issued to L2 Capital
on February 19, 2018, went into default. In accordance with the
terms of the note, at any time on or after the occurrence of
any event of default, the conversion price per share would 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. 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:
|
|
Fair value
at
December
31,
2018
|
Quoted
prices in active markets for
identical
assets/liabilities
(Level
1)
|
Significant
other
observable
inputs
(Level
2)
|
Significant
unobservable
inputs
(Level
3)
|
|
|
|
|
|
|
|
Derivative
Liability
|
$2,292,254
|
$-
|
$-
|
$2,292,254
|
The
tables below set forth a summary of changes in fair value of our
Level 3 financial liabilities for the year ended December 31, 2018.
The tables reflect changes for all financial liabilities at fair
value categorized as Level 3 as of December 31, 2018:
|
|
Derivative
Liability
|
|
Derivative
liability as of December 31, 2017
|
$-
|
|
Fair
value at the commitment date for convertible
instruments
|
1,690,124
|
|
Change
in fair value of derivative liability
|
759,603
|
|
Reclassification
to additional paid-in capital for financial instruments that ceased
to be a derivative liability
|
(157,473)
|
|
Derivative
liability as of December 31, 2018
|
$2,292,254
|
|
|
Change in Fair Value
|
|
|
of Derivative Liability*
|
|
Change
in fair value of derivative liability at the beginning of
year
|
$-
|
|
Day
one gains/(losses) on valuation
|
441,865
|
|
Gains/(losses)
from the change in fair value of derivative liability
|
764,992
|
|
Change
in fair value of derivative liability at the end of
year
|
$1,206,857
|
_______________
*
Gains/(losses)
related to the revaluation of Level 3 financial liabilities is
included in “Change in fair value of derivative
liability” in the accompanying consolidated audited 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:
|
|
Commitment Date
|
|
Remeasurement Date**
|
|
Expected dividends
|
0%
|
|
0%
|
|
Expected volatility
|
81% to 503%
|
|
87% to 515%
|
|
Risk free interest rate
|
2.05% to 3.07%
|
|
2.19% to 2.60%
|
|
Expected term (in years)
|
0.25 to 5.0
|
|
0.23 to 4.81
|
_______________
**
The
fair value at the remeasurement date is equal to the carrying value
on the balance sheet.
F-19
NOTE 6 – STOCKHOLDERS’ EQUITY
Common Stock
For the
year ended December 31, 2017, individuals exercised Series D
warrants to purchase 998,079 shares of common stock at a price of
$0.75 per share for cash totaling $748,535. These warrants were
related to the BBNA merger.
For the
year ended December 31, 2017, we issued 2,173,517 shares of common
stock for services performed with a fair value of
$2,388,478.
For the
year ended December 31, 2017, we issued 1,714,285 shares of common
stock to L2 Capital, LLC with a fair value of $514,286 under the
equity purchase agreement.
For the
year ended December 31, 2017, we issued 11,250 shares of common
stock pursuant to our private placement memorandum with a fair
value of $45,000 ($4.00 per share).
As part
of the Merger, 94,343,776 shares of common stock were issued to the
shareholders of OTE in exchange for common stock in the merged
company.
As a
part of our agreement with the Memphis Investors, the board
repriced 14,792,500 warrants and 100,000 options to $0.00 per
share, the Memphis Investors exercised the warrants and options,
and we issued 14,792,500 shares of common stock. These warrants had
a fair value of $6,769,562. Per ASC Topic 718, this exchange is
treated as a modification. The incremental value of $6,769,562
measured as the excess of the fair value of the modified award over
the fair value of the original award immediately before the
modification using the Black-Scholes option pricing model was
expensed fully when they were exercised.
On May
8, 2017, JPF Venture Group, Inc., an investment entity that is
majority-owned by our director, chief executive officer, and chief
financial officer, transferred 148,588 shares of common stock for
$111,440 to us to fulfill an overcommitment of Series D
warrants.
On May
9, 2017, we issued 536,490 shares of common stock to the former
shareholders of TetriDyn Solutions, Inc. for the assumption of
$617,032 of accrued expenses and $1,015,506 of convertible notes
and notes payable from related and unrelated parties. We recorded a
debit of $1,628,026 to additional paid-in capital as part of the
recapitalization.
On June
5, 2017, a note holder elected to convert a $25,000 convertible
note payable for 1,806,298 shares of common stock ($0.014 per
share).
On June
29, 2017, the board of directors approved a stock bonus for our
chief executive officer and and our senior financial advisor of
258,476 and 150,590 shares of common stock, respectively, at fair
value of $920,399. These shares were issued on November 1,
2017.
On
August 3, 2017, we entered into a compensation agreement with our
former legal counsel wherein we agreed to pay an outstanding legal
bill in the amount of $197,950 by issuance of 65,000 shares covered
by a registration statement on Form S-8, filed with the Securities
and Exchange Commission on August 25, 2017. The former legal
counsel may, at any time and from time to time following the filing
of the Form S-8, elect to call for the issuance of shares as
payment for the outstanding legal bill. As the shares are sold into
the market, the outstanding balance will be reduced. On October 17,
2017, we issued 65,000 shares of common stock pursuant to the
agreement with a fair value of $146,250. As of December 31, 2017,
our former legal counsel had sold 704 shares with total proceeds of
$1,133. As of December 31, 2017, the fair value of the 64,296
shares of common stock was $20,575 and $124,542 was recorded as a
change in fair value of liability. As of December 31, 2018, our
former legal counsel has sold the remaining 64,296 shares with
total proceeds of $14,367. The legal fees balance of $182,450
remains outstanding as of December 31, 2018.
F-20
On
August 15, 2017, Series B note holders elected to convert $316,666
in notes payable for 316,666 shares of common stock at a conversion
rate of $1.00. In addition, they converted accrued interest in the
amount of $120,898 for 120,898 shares of common stock. The shares
were recorded at fair value of $1,165,892. We recorded a loss on
the settlement of debt of $728,328 on the conversion
date.
On
August 15, 2017, Clean Energy note holders elected to convert
$166,800 in notes payable for 139,000 shares of common stock at a
conversion rate of $1.20. In addition, they converted accrued
interest in the amount of $48,866 for 40,722 shares of common
stock.
On
August 15, 2017, Jeremy P. Feakins & Associates, LLC, an
investment entity that is majority-owned by our director, chief
executive officer, and chief financial officer, elected to convert
$618,500 in notes payable for 618,500 shares of common stock at a
conversion rate of $1.00. In addition, it converted accrued
interest in the amount of $207,731 for 207,731 shares of common
stock.
On
September 8, 2017, JPF Venture Group, Inc., an investment entity
that is majority-owned by our director, chief executive officer,
and chief financial officer, elected to convert $50,000 in notes
payable for 3,612,596 shares of common stock at a conversion rate
of $0.014. In addition, it converted accrued interest in the amount
of $6,342 for 458,198 shares of common stock.
We
entered into a settlement agreement to convert an outstanding
payable balance totaling $180,000 into 360,000 shares of common
stock. The shares were recorded at fair value of $556,875. We
recorded a loss on settlement of debt of $376,875 on settlement
date.
On
November 8, 2017, Jeremy P. Feakins & Associates LLC, an
investment entity that is majority-owned by our director, chief
executive officer, and chief financial officer, elected to convert
$50,000 of Series B notes payable into 50,000 shares of common
stock at a conversion rate of $1.00. In addition, accrued interest
of $16,263 was converted into 16,263 shares of common
stock.
For the
year ended December 31, 2018, we issued 673,345 shares of common
stock for services performed with a fair value of
$138,986.
For the
year ended December 31, 2018, we issued 2,300,000 shares of common
stock for financing to L2 Capital with a fair value of $106,905 in
cash, net of offering cost.
For the
year ended December 31, 2018, we issued 4,000,000 shares of common
stock to L2 Capital for the conversion of a portion of our notes
payable to L2 Capital in the amount of $114,078.
For the
year ended December 31, 2018, note holders elected to exercise
warrants to purchase 39,000 shares of common stock for $9,520 in
cash.
For the
year ended December 31, 2018, we sold 984,352 shares of common
stock for $58,980 in cash. This includes 240,840 shares of common
stock for $10,000 that were issued to our chief executive officer
and an independent director.
For the
year ended December 31, 2018, we issued 400,000 shares to L2
Capital as a commitment fee for $21,200 to purchase our outstanding
note payable from Collier Investments LLC.
Warrants and Options
We used
the following assumptions for options during the year ended
December 31, 2018:
|
Expected
volatility:
|
462% -
509%
|
|
Expected
lives:
|
3
years
|
|
Risk-free
interest rate:
|
2.01% -
2.85%
|
|
Expected
dividend yield:
|
None
|
F-21
We used
the following assumptions for options during the year ended
December 31, 2017:
|
Expected
volatility:
|
485%
|
|
Expected
lives:
|
3
Years
|
|
Risk-free
interest rate:
|
1.98% -
2.01%
|
|
Expected
dividend yield:
|
None
|
During
2012, we issued warrants to purchase 1,075,000 shares of common
stock in conjunction with Series A notes payable that were
exercisable at a price of $3.00 per share and expired on March 31,
2017. The warrants were fully exercised at $0.00 per share upon
board of directors’ approval during the year ended December
31, 2017.
During
2013, we issued warrants to purchase 105,000 shares of common stock
in conjunction with Series B notes payable that were exercisable at
a price to be determined pursuant to a specified formula. Effective
July 21, 2014, our common stock was approved for listing on the GXG
Markets First Quote platform with an $0.85 per share price,
establishing a price of $0.68 per share for the warrants and making
them all exercisable. The warrants were fully exercised at $0.00
per share upon board of directors’ approval during the year
ended December 31, 2017.
During
2013, we issued warrants to purchase 300,000 shares of common
stock, with an exercise price equal to the greater of a 50%
discount of the stock price at our initial public offering of
shares or $0.425 per share (subject to adjustment), in conjunction
with a note payable to Jeremy P. Feakins & Associates, LLC, an
entity owned by our chief executive officer, in the amount of
$100,000. Effective July 21, 2014, we were approved for listing on
the GXG Markets First Quote platform with an $0.85 per share price,
establishing a price of $0.425 per share for the warrants and
making them all exercisable. The warrants were fully exercised at
$0.00 upon board of directors’ approval during the year ended
December 31, 2017.
As part
of the merger with BBNA, we assumed outstanding warrants to
purchase 10,000,000 shares of common stock with an expiration date
of December 31, 2018. These warrants are grouped into five tranches
of 2,000,000 shares. The pricing for each tranche was as follows:
Series A and Series B were $0.50 per share; Series C was $0.75 per
share; Series D was $1.00 per share; and Series E was $1.25 per
share. During 2014, 5,786,635 of these warrants were exercised and
1,157,989 were exercised during 2015. In addition, we repriced the
Series D warrants to $0.75 per share and Series E warrants to $0.50
per share. During the year ended December 31, 2017, 998,079 were
exercised.
During
2014, we issued warrants to purchase 12,912,500 shares of common
stock, with an exercise price of $0.425 per share (subject to
adjustment) in conjunction with a note payable to Jeremy P. Feakins
& Associates, LLC, an entity owned by our chief executive
officer, in the amount of $2,265,000. On April 4, 2016, the note
holder agreed to amend the note to extend the due date of the note
to December 31, 2017. We did not modify the terms of the warrants.
The warrants were fully exercised at $0.00 per share upon board of
directors’ approval during the year ended December 31,
2017.
During
2014, we issued warrants to purchase 300,000 shares of common
stock, with an exercise price of $1.00 per share and an expiration
date of December 31, 2018, in conjunction with notes payable to
individuals, including a then-related party, in the amount of
$300,000. The warrants were fully exercised at $0.00 per share upon
board of directors’ approval during the year ended December
31, 2017.
F-22
The
following table summarizes all warrants outstanding and exercisable
for the years ended December 31, 2018 and 2017:
|
Warrants
|
Number of
Warrants
|
Weighted Average Exercise
Price
|
|
Balance at December
31, 2016
|
15,912,210
|
$0.76
|
|
Granted
|
134,000
|
*
|
|
Exercised
|
(998,079)
|
$0.31
|
|
Exercised
(re-priced to $0.00)
|
(14,692,500)
|
$0.00
|
|
Forfeited
|
(221,631)
|
$0.00
|
|
Balance at December
31, 2017
|
134,000
|
$0.76
|
|
Granted
|
255,073
|
$0.21
|
|
Exercised
|
(39,000)
|
$0.24
|
|
Forfeited
|
-
|
$0.00
|
|
Balance
at December 31, 2018
|
350,073
|
$0.18
|
|
Exercisable
December 31, 2018
|
350,073
|
$0.18
|
__________
*Discount of 15% of
CPWR closing price on OTCQB the day before the warrant is
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 $0.06 per share on
December 31, 2018. The intrinsic value of warrants to purchase
350,073 shares on that date was $3,408.
During
the year ended December 31, 2018, we issued warrants to purchase
125,073 shares of our common stock, none of which has been
exercised, to Craft Capital Management, LLC, as a finder’s
fee for debt and equity transactions between L2 Capital and
us.
As of
December 31, 2017, we issued warrants to purchase 134,000 shares of
our common stock to note holders. During 2018, we issued additional
warrants to purchase 128,000 shares of our common stock (see Note
4). During 2018, the note holders elected to exercise warrants and
purchase 39,000 shares of common stock for $9,520 in cash (see Note
6). As of December 31, 2018, we have outstanding warrants to
purchase 223,000 shares of our common stock.
On,
January 1, 2015, we issued to our independent director, who was
then vice president shareholder relations, three-year options to
purchase an aggregate of 100,000 shares of common stock at $0.75
per share, which would expire on January 1, 2018. The options vest
in four segments of 25,000 shares per quarter commencing on: March
31, 2015; June 30, 2015; September 30, 2015, and December 31, 2015.
We calculated the fair value of the options by using the
Black-Scholes option-pricing model with the following weighted
average assumptions: no dividend yield for all the years; expected
volatility of 54%; risk-free interest rate of 0.25%; and an
expected life of one year. The fair value of the options was
$22,440 or $0.2244 per option. These options were fully exercised
at $0.00 upon approval by our board of directors during the year
ended December 31, 2017.
F-23
The
following table summarizes all options outstanding and exercisable
for the years ended December 31, 2018 and 2017:
|
|
Number
of
|
Weighted
Average
Exercise
|
|
|
Options
|
Price
|
|
Balance
at December 31, 2016
|
100,000
|
$0.75
|
|
Granted
|
-
|
-
|
|
Exercised
|
(100,000)
|
$0.75
|
|
Forfeited
|
-
|
-
|
|
Balance at December 31, 2017
|
-
|
-
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Balance at December 31, 2018
|
-
|
-
|
|
Exercisable December 31, 2018
|
-
|
-
|
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
|
|
|
|
2018
|
2017
|
|
Statutory rate
applied to loss before income taxes
|
$(2,276,031)
|
$(5,903,355)
|
|
Increase (decrease)
in income taxes results from:
|
|
|
|
Nondeductible
permanent differences
|
806,885
|
4,446,014
|
|
Change
in tax rate estimates
|
-
|
3,566,781
|
|
Change
in valuation allowance
|
1,469,146
|
(2,109,440)
|
|
Income
tax expense (benefit)
|
$-
|
$-
|
F-24
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
|
|
|
|
2018
|
2017
|
|
Depreciation
and impairment
|
$2,358,860
|
$2,100,958
|
|
Operating loss
carryforwards
|
7,917,151
|
6,705,907
|
|
Gross deferred tax
assets
|
10,276,011
|
8,806,865
|
|
Valuation
allowance
|
(10,276,011)
|
(8,806,865)
|
|
Net
deferred income tax asset
|
$-
|
$-
|
We have
net operating loss carryforwards for income tax purposes of
approximately $27,400,000. This loss is allowed to be offset
against future income. 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,
2018. The change in the valuation allowance for the years ended
December 31, 2018 and 2017 was an increase (decrease) of $1,469,146
and $(2,109,440), 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. During the year ended December 31,
2018, we executed 12 put options for L2 Capital to purchase
2,300,000 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 or equity transaction or to finance a
merger/acquisition 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. These warrants have a fair value
of $13,280 based on the Black-Scholes option-pricing model. The
warrants have an exercise price 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, grant any option to purchase or sell, 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. As of December 31, 2018,
we have issued to Craft warrants to purchase 125,073 shares of
common stock, none of which has been exercised, as a finder’s
fee for debt and equity transactions between L2 Capital and
us.
F-25
On
August 7, 2018, we signed a non-binding letter of intent proposing
to acquire a heavy-duty commercial air conditioning company. We
believe that the acquisition will help support our existing
projects and enable us to enter new markets. Closing is subject to
additional due diligence, the negotiation of definitive agreements,
satisfaction of agreed conditions, and financing. We continue to
focus our efforts on satisfying the above conditions.
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. On August 8, 2018, an $8 million judgment was entered
against the defendants and in our favor. We have reason to believe
the defendants have adequate assets to satisfy this judgment in
full. The collection process is ongoing. Between May 30 and July
19, 2018, we received three payments totaling $100,000 from the
defendants.
NOTE 9 – CONSULTING AGREEMENTS
For the
year ended December 31, 2018, we issued 673,345 shares of common
stock for services performed with a fair value of
$138,986.
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, we have not issued the shares. As of December 31, 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, 2018,
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 June
29, 2017, the board of directors approved extending the employment
agreements for the chief executive officer and the senior financial
advisor for an additional five years. The salary and other
compensation were increased to account for inflation since the
original employment agreements were executed and became effective
June 30, 2017. These modifications were never reduced to
writing.
NOTE 11 – RELATED-PARTY TRANSACTIONS
For the
years ended December 31, 2018 and 2017, we paid rent of $120,000
and $95,000, 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, 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. On August 15, 2017, 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.
For the year ended December 31, 2018, we repaid $35,000. As of
December 31, 2018, the note balance was $1,102,500 and the accrued
interest was $511,818. This note is in default.
F-26
During
the year ended December 31, 2017, we made a repayment of note
payable to a related party in the amount of $64,432.
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,
2017, we received an additional $2,000 and repaid $25,000. The
outstanding balance was $177,000 and accrued interest was $32,851
as of December 31, 2018.
On May
8, 2017, JPF Venture Group. Inc., an investment entity that is
majority-owned by Jeremy Feakins, our director, chief executive
officer, and chief financial officer transferred 148,558 shares of
common stock for $111,440 to us to fulfill an over commitment of
"D'" warrants.
On June
5, 2017, a note holder and a shareholder elected to convert a
$25,000 convertible note payable for 1,806,298 shares of common
stock ($0.014 per share).
On
September 8, 2017, JPF Venture Group, Inc., an investment entity
that is majority-owned by our director, chief executive officer,
and chief financial officer elected to convert $50,000 in notes
payable for 3,612,596 shares of common stock at a conversion rate
of $0.014 per share. In addition, accrued interest in the amount of
$6,342 was converted to 458,198 shares.
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, 2018, or
when we are otherwise able to pay. As of December 31, 2018, the
outstanding balance was $612,093 and the accrued interest was
$80,568. For the year ended December 31, 2018 and 2017, we repaid
$29,474 and $39,432, respectively. On September 30, 2018, the note
was amended to extend the maturity date to the earliest of a
resolution of the Memphis litigation, December 31, 2018, or when we
are otherwise able to pay. This note is in default.
On
November 8, 2017, Jeremy P. Feakins & Associates. LLC, an
investment entity that is majority-owned by Jeremy Feakins, our
director, chief executive officer and chief financial officer, a
Series B note holder, elected to convert $50,000 in notes payable
for 50,000 shares of common stock at a conversion rate of $1.00. In
addition it converted accrued interest in the amount of $16,263 for
16,263 shares.
We
remain liable for the loans made to us by JPF Venture Group, Inc.
before the 2017 Merger. As of December 31, 2018, the outstanding
balance of these loans was $581,880 and the accrued interest was
$125,381. All of these notes are in default.
In
December 2018, Jeremy P. Feakins, our chief executive officer, made
two advances to us totaling $4,600. The total amount was repaid on
January 23, 2019.
For the
year ended December 31, 2018, we sold 240,840 shares of common
stock for $10,000 in cash to our chief executive officer and an
independent director.
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, 2018, the
outstanding balance was $12,500, plus accrued interest of
$1,754.
F-27
NOTE 12 – SUBSEQUENT EVENTS
On
January 2, 2019, we initiated a promissory note agreement pursuant
to which we issued a series of promissory notes in the amount of
$10,000 to accredited investors. Proceeds from these notes will be
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, el 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 March 22, 2019, the outstanding balance
of these loans is $290,000.
Subsequent to
December 31, 2018, L2 Capital LLC exercised four loan conversions
totaling $49,614 and was issued 1,800,000 shares.
On
January 23, 2019, we repaid advances totaling $4,600 to Jeremy P.
Feakins, our chief executive officer.
F-28