Note 1: Source of Business and Basis of Presentation
Ocean
Thermal Energy Corporation is currently in the businesses
of:
●
OTEC and
SWAC
—designing Ocean Thermal Energy Conversion
(“OTEC”) power plants and Seawater Air Conditioning
(“SWAC”) 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) 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
25, 2017, we received approval from the Financial Industry
Regulatory Authority (“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.
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.
The
condensed consolidated financial statements include the accounts of
the company and our wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. In
the opinion of management, our financial statements reflect all
adjustments that are of a normal recurring nature necessary for
presentation of financial statements for interim periods in
accordance with U.S. generally accepted accounting principles
(GAAP) and with the instructions to Form 10-Q in Article 10 of SEC
Regulation S-X. The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
We
condensed or omitted certain information and footnote disclosures
normally included in our annual audited financial statements, which
we prepared in accordance with GAAP. The operating results for the
three and nine months ended September 30, 2018, are not necessarily
indicative of the results to be expected for the year. Our interim
financial statements should be read in conjunction with our annual
report on Form 10-K for the year ended December 31, 2017, including
the financial statements and notes.
Note 2: Going Concern
The
accompanying unaudited condensed consolidated financial statements
have been prepared on the assumption that we will continue as a
going concern. As reflected in the accompanying condensed
consolidated financial statements, we had a net loss of $3,285,410
and used $1,553,488 of cash in operating activities for the nine
months ended September 30, 2018. We had a working capital
deficiency of $14,213,930 and a stockholders’ deficiency of
$13,458,783 as of September 30, 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: Income Taxes
The Tax Cuts and Jobs Act (the “TCJA”) significantly
reforms the Internal Revenue Code of 1986, as amended (the
“Code”). The TCJA, among other things, reduced the
corporate tax rate from a top marginal rate of 35% to a flat rate
of 21%, effective as of January 1, 2018; limited the tax deduction
for interest expense; limited the deduction for net operating
losses to 80% of current year taxable income and eliminated net
operating loss carrybacks, in each case, for losses arising in
taxable years beginning after December 31, 2017 (though any such
tax losses may be carried forward indefinitely); modified or
repealed many business deductions and credits, including reducing
the business tax credit for certain clinical testing expenses
incurred in the testing of certain drugs for rare diseases or
conditions generally referred to as “orphan drugs”; and
repealed the federal alternative minimum tax.
The staff of the U.S. Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin No. 118 to
address the application of GAAP in situations when a registrant
does not have the necessary information available, prepared, or
analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the TCJA. In
connection with the initial analysis of the impact of the TCJA, we
remeasured our deferred tax assets and liabilities based on the
rates at which they are expected to reverse in the future, which is
generally 21%. The remeasurement of our deferred tax assets and
liabilities was offset by a change in the valuation
allowance.
We are still in the process of analyzing the impact of the TCJA to
us. Where we have been able to make reasonable estimates of the
effects of the TCJA, we have recorded provisional amounts. However,
our analysis is not yet complete. The ultimate impact of the TCJA
to our consolidated financial statements may differ from the
provisional amounts due to, among other things, additional
analysis, changes in interpretations and assumptions we have made,
additional regulatory guidance that may be issued, and actions we
may take as a result of the TCJA.
No
income tax expense was recognized for the nine months ended
September 30, 2018 and 2017, due to the net losses incurred in
these periods. We are subject to audit by the Internal Revenue
Service, various states, and foreign jurisdictions for the prior
three years. There has not been a change in our unrecognized tax
positions since December 31, 2017, and we do not believe there
will be any material changes in our unrecognized tax positions over
the next 12 months. Our policy is to recognize interest and
penalties accrued on any unrecognized tax benefits as a component
of income tax expense. We do not have any accrued interest or
penalties associated with any unrecognized tax benefits, and no
interest expense related to unrecognized tax benefits was
recognized during the nine months ended September 30,
2018.
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.
Note 4: Fair Value of Financial Instruments
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 September
30, 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
September 30, 2018 (See Note 9).
Note 5: Net Loss per Common 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 333,573 and 0 shares issuable upon the exercise of
warrants and options and 20,798,618 and 7,576,778 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 interim periods ended September 30, 2018
and 2017, respectively.
Note 6: Recent Accounting Pronouncements
In June
2018, the FASB issued Accounting Standard Update
(“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 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 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 7: Business Segments
We
conduct operations in various foreign jurisdictions where we are
developing projects to use our technology. Our segments are 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:
|
|
|
|
|
|
|
Revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
Assets
|
$
39,016
|
$
757,738
|
$
164,901
|
$
961,655
|
Net
Loss
|
$
(3,285,410
)
|
$
-
|
$
-
|
$
(3,285,410
)
|
Property
and equipment
|
$
842
|
$
-
|
$
-
|
$
842
|
Capitalized
construction in process
|
$
-
|
$
757,738
|
$
164,901
|
$
922,639
|
Depreciation
|
$
510
|
$
-
|
$
-
|
$
510
|
Addtions
to capitalized construction in process
|
$
-
|
$
30,000
|
$
-
|
$
30,000
|
|
|
|
|
|
|
|
Revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
Assets
|
$
24,701
|
$
870,140
|
$
48,998
|
$
943,839
|
Net loss
|
$
(10,614,118
)
|
$
-
|
$
-
|
$
(10,614,118
)
|
Property and equipment
|
$
1,522
|
$
-
|
$
-
|
$
1,522
|
Capitalized
construction in process
|
$
-
|
$
870,140
|
$
48,998
|
$
919,138
|
Depreciation
|
$
844
|
$
-
|
$
-
|
$
844
|
Additions to capitalized construction in process
|
$
-
|
$
72,853
|
$
-
|
$
72,853
|
For the
period ended September 30, 2018, the U.S. territories are comprised
of the U.S. Virgin Islands project (approx. $750,000) and the Guam
project (approx. $165,000). Other territories are comprised of the
Cayman Islands project; however
during
the year ended December 31, 2017, $48,998 of Cayman Islands assets
under construction were considered to be impaired due to the
uncertainty of the project and were written off
. There were
$30,000 additions and no write offs to assets under construction in
the nine months of 2018.
Note 8: 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 remaining balance on the loan at the date of the Merger was
$14,974. The interest rate is 6.25%, and the maturity date was
January 5, 2013. The loan principal was $8,392 with accrued
interest of $0 as of September 30, 2018. This note is in
default.
On
December 23, 2009, we borrowed funds from SICOG (the
“EDA-#273 loan”). The remaining balance on the loan at
the date of the Merger was $94,480. The interest rate is 7%, and
the maturity date was December 23, 2014. The loan principal was
$94,480 with accrued interest of $21,174 as of September 30, 2018.
This note is in default.
On
December 23, 2009, we borrowed funds from SICOG (the “MICRO
I-#274 loan”). The remaining balance on the loan at the date
of the Merger was $23,619. The interest rate is 7%, and the
maturity date was December 23, 2014. The loan principal was $23,619
with accrued interest of $4,601 as of September 30, 2018. This note
is in default.
On
December 23, 2009, we borrowed funds from SICOG (the “MICRO
II-#275 loan”). The remaining balance on the loan at the date
of the Merger was $23,620. The interest rate is 7%, and the
maturity date was December 23, 2014. The loan principal was $23,620
with accrued interest of $5,903 as of September 30, 2018. This note
is in default.
On
December 1, 2007, we borrowed funds from the Eastern Idaho
Development Corporation (the “EIDC loan”). The
remaining balance on the loan at the date of the Merger was
$85,821. The interest rate is 7%, and the maturity date was
September 1, 2015. The loan principal was $85,821 with accrued
interest of $37,879 as of September 30, 2018. This note is in
default.
On
September 25, 2009, we borrowed funds from the Pocatello
Development Authority. The remaining balance on the loan at the
date of the Merger was $50,000. The interest rate is 5%, and the
maturity date was October 25, 2011. The loan principal was $50,000
with accrued interest of $20,101 as of September 30, 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. (“JPF”), an
investment entity that is majority-owned by Jeremy Feakins, our
director, chief executive officer, and chief financial officer. The
Consolidated Note was convertible to common stock at $0.025 per
share, the approximate market price of our common stock as of the
date of the issuance. On February 24, 2017, the Consolidated Note
was amended to eliminate the conversion feature. The Consolidated
Note bears interest at 6% per annum and is due and payable within
90 days after demand. As of September 30, 2018, the outstanding
loan balance was $394,380 and the accrued but unpaid interest was
$88,964 on the Consolidated Note.
On
November 23, 2015, we borrowed $50,000 from JPF pursuant to a
promissory note. We received $37,500 before December 31, 2015, and
$12,500 after the year-end. 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) 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
September 30, 2018, the outstanding balance was $50,000, plus
accrued interest of $8,323. We have recorded a debt discount of
$50,000 for the fair value of derivative liability and amortized
$23,333 of debt discount as of September 30, 2018 (see Note
9).
On
February 25, 2016, we borrowed $50,000 from JPF 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) 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 note was amended to
eliminate the conversion feature. As of September 30, 2018, the
outstanding balance was $50,000, plus accrued interest of
$7,911.
On May
20, 2016, we borrowed $50,000 from JPF 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 price is not
required to adjust for the reverse stock split as per the note
agreement. On February 24, 2017, the note was amended to eliminate
the conversion feature. As of September 30, 2018, the outstanding
balance was $50,000, plus accrued interest of $7,063.
On
October 20, 2016, we borrowed $12,500 from JPF 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 price is not required to adjust for the reverse stock
split as per the note agreement. On February 24, 2017, the note was
amended to eliminate the conversion feature. As of September 30,
2018, the outstanding balance was $12,500, plus accrued interest of
$1,497.
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 September 30, 2018,
the outstanding balance was $12,500, plus accrued interest of
$1,563. We have recorded a debt discount of $12,500 for the fair
value of derivative liability and amortized $5,833 of debt discount
as of September 30, 2018 (see Note 9).
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 September 30, 2018, there was an outstanding balance of
accrued interest of $904.
On
December 21, 2016, we borrowed $25,000 from JPF 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 30, 2018, the outstanding balance was
$25,000, plus accrued interest of $2,700. We have recorded a debt
discount of $25,000 for the fair value of derivative liability and
amortized $11,667 of debt discount as of September 30, 2018 (see
Note 9).
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
September 30, 2018, the outstanding balance was $1,000,000, plus
accrued interest of $611,393.
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 September 30, 2018, the loan balance was
$158,334 and the accrued interest was $80,901.
During
2013, we issued a note payable for $290,000 in connection with the
reverse merger transaction. 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 September 30, 2018, the
balance outstanding was $130,000, and the accrued interest as of
that date was $48,200.
On
January 18, 2018, the holder of a $2,265,000 note issued in 2014
agreed to extend the due date for repayment 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 nine months ended September 30, 2018, we repaid $35,000. As
of September 30, 2018, the note balance was $1,102,500 and the
accrued interest was $483,642.
We have
$300,000 in principal amount of outstanding notes, including
$100,000 due to a related party, 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
project’s financial closing. Accrued interest totaled
$230,179 as of September 30, 2018.
The due
date of April 17, 2017, on a $50,000 promissory note, 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 $17,639 as of September 30,
2018. We have recorded $149 of debt discount for the fair value
derivative liability and fully amortized $149 of the debt discount
as of September 30, 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. As of September 30, 2018, the balance
outstanding was $177,000, plus accrued interest of
$28,328.
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
September 30, 2018, the outstanding balance for all four notes
was $80,000, plus accrued interest of $5,793.
On
November 6, 2017, we entered into an agreement and promissory note
with JPF 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 nine months ended September 30, 2018, we repaid
$18,500. As of September 30, 2018, the outstanding balance was
$612,193 and the accrued interest was $64,926. 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.
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 September 30, 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
The
exercise price per share of the warrants is equal to 85% of the
closing price of our common stock on the day immediately preceding
the exercise of the relevant warrant, subject to adjustment as
provided in the warrant. The warrant includes a cashless net
exercise provision whereby the holder can elect to receive shares
equal to the value of the warrant minus the fair market value of
shares being surrendered to pay the exercise price. As of September
30, 2018, and December 31, 2017, the balance outstanding was
$979,156 and $490,000, respectively. As of September 30, 2018, and
December 31, 2017, the accrued interest was $47,798 and $613,
respectively. As of September 30, 2018, and December 31, 2017, we
had issued warrants to purchase 262,000 and 134,000 shares of
common stock, respectively. As of September 30, 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 September 30, 2018, we have amortized $41,153 of
debt discount. As of September 30, 2018, warrants to purchase
39,000 shares have been exercised (see Note 9) and the debt
discount related to the exercised warrants has been fully expensed.
As of September 30, 2018, we have recorded a debt discount of
$13,514 for the fair value of derivative liability and amortized
$1,645 of debt discount. As of September 30, 2018, $21,367 of the
principal payments of two notes is 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 the September
30, 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 10). 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 September 30, 2018, we have amortized $87,628 of the
debt issuance cost. During the quarter ended September 30, 2018, L2
Capital converted $18,190 of the note into 400,000 shares of common
stock at an average conversion price of $0.045 per share. As of
September 30, 2018, we have recorded a debt discount of $475,503
for the fair value of derivative liability and amortized $114,388
of debt discount. As of September 30, 2018, the outstanding balance
was $464,032 and the accrued interest was $19,319. A total of
$186,254 of the notes is in default as of September 30,
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 was 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 and finder
fees are being amortized over the life of the notes payable as debt
issuance cost. For the nine months ended September 30, 2018, we
amortized $34,459 of debt issuance cost. The accrued interest as of
September 30, 2018, was $12,094. We have recorded a debt discount
of $69,941 for the fair value of derivative liability and amortized
$23,500 of debt discount as of September 30, 2018.
On
September 19, 2018, we executed a note payable for $10,000 with an
unrelated party that bears interest at 6% per annum, which is due
quarterly beginning as of September 30, 2018. The maturity date for
the note is three years after date of issuance. In addition, the
lender received warrants to purchase 2,000 shares of common stock
upon signing the promissory note. The warrant can be exercised at a
price per share equal to a 15% discount from the price of common
stock on the last trading day before such purchase. As of September
30, 2018, we have recorded $125 of debt discount for the fair value
derivative liability and fully amortized $125 of the debt discount.
As of September 30, 2018 the balance outstanding was $10,000 and
the accrued interest was $18.
The
following convertible notes and notes payable were outstanding at
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
In Default
|
|
Principal at September 30, 2018
|
Debt Discount at September 30, 2018
|
Carrying Amount at September 30, 2018
|
|
|
|
|
12/12/2006
|
|
6.25
%
|
Yes
|
58,670
|
8,392
|
-
|
8,392
|
-
|
-
|
8,392
|
-
|
12/1/2007
|
|
7.00
%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
9/25/2009
|
|
5.00
%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
12/23/2009
|
|
7.00
%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
12/23/2009
|
|
7.00
%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
12/23/2009
|
|
7.00
%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
02/03/12
|
|
10.00
%
|
No
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
1,000,000
|
-
|
-
|
-
|
08/15/13
|
|
10.00
%
|
No
|
525,000
|
158,334
|
-
|
158,334
|
-
|
-
|
-
|
158,334
|
12/31/13
|
|
8.00
%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
130,000
|
-
|
-
|
-
|
04/01/14
|
|
10.00
%
|
No
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
12/22/14
|
|
12.00
%
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
12/26/14
|
|
12.00
%
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
3/12/2015
|
(1
)
|
6.00
%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
4/7/15
|
|
10.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
11/23/2015
|
(1
)
|
6.00
%
|
No
|
50,000
|
50,000
|
26,667
|
23,333
|
23,333
|
-
|
-
|
-
|
2/25/2016
|
(1
)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
5/20/2016
|
(1
)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
10/20/2016
|
(1
)
|
6.00
%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
10/20/2016
|
(1
)
|
6.00
%
|
No
|
12,500
|
12,500
|
6,667
|
5,833
|
5,833
|
-
|
-
|
-
|
12/21/2016
|
(1
)
|
6.00
%
|
No
|
25,000
|
25,000
|
13,333
|
11,667
|
11,667
|
-
|
-
|
-
|
3/9/2017
|
(1
)
|
10.00
%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
7/13/2017
|
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
|
-
|
25,000
|
|
7/18/2017
|
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
|
-
|
25,000
|
|
7/26/2017
|
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
|
-
|
15,000
|
|
7/27/2017
|
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
|
-
|
15,000
|
|
12/20/2017
|
(2
)
|
10.00
%
|
Yes**
|
979,156
|
979,156
|
46,735
|
932,421
|
|
-
|
932,421
|
|
11/6/2017
|
(3
)
|
10.00
%
|
No
|
646,568
|
612,193
|
-
|
612,193
|
612,193
|
-
|
-
|
-
|
2/19/2018
|
(4
)
|
8.00
%
|
Yes**
|
464,032
|
464,032
|
364,709
|
99,323
|
|
-
|
99,323
|
-
|
5/24/2018
|
|
12.00
%
|
No
|
281,250
|
281,250
|
69,146
|
212,104
|
|
-
|
212,104
|
-
|
9/19/2018
|
|
6.00
%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
|
|
|
10,000
|
|
|
|
|
$
6,224,777
|
$
527,257
|
$
5,697,520
|
$
3,569,406
|
$
-
|
$
1,959,780
|
$
168,334
|
(1)
Maturity date is 90 days after demand.
(2)
Note payables were issued on various 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.
(4)
Note payables were issued on various dates between February and May
2018 and are due in 6 months from issuance date.
**
Partially in default as of September 30, 2018
The
following convertible notes and notes payable were outstanding at
December 31, 2017:
Issuance
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
In Default
|
|
|
|
|
|
|
|
|
12/12/2006
|
|
6.25
%
|
Yes
|
58,670
|
12,272
|
-
|
12,272
|
-
|
-
|
12,272
|
-
|
12/1/2007
|
|
7.00
%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
9/25/2009
|
|
5.00
%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
12/23/2009
|
|
7.00
%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
12/23/2009
|
|
7.00
%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
12/23/2009
|
|
7.00
%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
02/03/12
|
|
10.00
%
|
No
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
1,000,000
|
-
|
-
|
-
|
08/15/13
|
|
10.00
%
|
No
|
525,000
|
158,334
|
-
|
158,334
|
-
|
|
-
|
158,334
|
12/31/13
|
|
8.00
%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
130,000
|
-
|
-
|
-
|
04/01/14
|
|
10.00
%
|
No
|
2,265,000
|
1,137,500
|
-
|
1,137,500
|
1,137,500
|
-
|
-
|
-
|
12/22/14
|
|
12.00
%
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
12/26/14
|
|
12.00
%
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
3/12/2015
|
(1
)
|
6.00
%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
4/7/15
|
|
10.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
|
11/23/2015
|
(1
)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
2/25/2016
|
(1
)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
5/20/2016
|
(1
)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
10/20/2016
|
(1
)
|
6.00
%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
10/20/2016
|
(1
)
|
6.00
%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
12/21/2016
|
(1
)
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
3/9/2017
|
(1
)
|
10.00
%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
7/13/2017
|
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
7/18/2017
|
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
7/26/2017
|
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
7/27/2017
|
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
12/20/2017
|
(2
)
|
10.00
%
|
No
|
490,000
|
490,000
|
41,044
|
448,956
|
-
|
-
|
-
|
448,956
|
11/6/2017
|
|
10.00
%
|
No
|
646,568
|
641,568
|
-
|
641,568
|
641,568
|
-
|
-
|
-
|
|
|
|
|
$
5,048,594
|
$
41,044
|
$
5,007,550
|
$
3,680,448
|
$
-
|
$
639,812
|
$
687,290
|
(1)
Maturity date is 90 days after demand.
(2)
Note payables were issued on various 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.
Note 9:
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.
On August 19, 2018, the note issued to L2 Capital on February 19,
2018 went into default. In accordance with the terms of
note,
at any time on or after the occurrence of any event of
default, the conversion price per share 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.
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
September 30,
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
|
$
705,278
|
$
-
|
$
-
|
$
705,278
|
The tables below set forth a summary of changes in fair value of
our Level 3 financial liabilities for the nine months ended
September 30, 2018. The tables reflect changes for all financial
liabilities at fair value categorized as Level 3 as of September
30, 2018:
|
|
Derivative
liability as of December 31, 2017
|
$
-
|
Fair
value at the commitment date for convertible
instruments
|
1,093,095
|
Change
in fair value of derivative liability
|
(374,447
)
|
Reclassification
to additional paid-in capital for financial instruments that ceased
to be a derivative liability
|
(13,370
)
|
Derivative
liability as of September 30, 2018
|
$
705,278
|
|
|
|
|
|
|
Change
in fair value of derivative liability at the beginning of
period
|
$
-
|
Day
one gains/(losses) on valuation
|
446,512
|
Gains/(losses)
from the change in fair value of derivative liability
|
(374,447
)
|
Change
in fair value of derivative liability at the end of
period
|
$
72,065
|
_________________
*
Gains/(losses)
related to the revaluation of Level 3 financial liabilities is
included in “Change in fair value of derivative
liability” in the accompanying condensed consolidated
unaudited statement of operations.
The fair value of the derivative liability was estimated using the
income approach and the Black-Scholes option-pricing model. The
fair values at the commitment and remeasurement dates for our
derivative liabilities were based upon the following management
assumptions:
|
Commitment Date
|
|
Remeasurement Date**
|
Expected dividends
|
0%
|
|
0%
|
Expected volatility
|
81% to 499%
|
|
87% to 502%
|
Risk free interest rate
|
2.05% to 2.96%
|
|
2.19% to 2.94%
|
Expected term (in years)
|
0.25 to 5.0
|
|
0.23 to 4.98
|
_________________
**
The
fair value at the remeasurement date is equal to the carrying value
on the balance sheet.
Note 10: Stockholders’ Equity
Common Stock
For the
nine months ended September 30, 2018, we issued 673,345 shares of
common stock for services performed with a fair value of
$138,986.
For the
nine months ended September 30, 2018, we issued 1,500,000 shares of
common stock for financing to L2 Capital with a fair value of
$81,140 in cash, net of offering cost.
For the
nine months ended September 30, 2018, we issued 400,000 shares of
common stock for to L2 Capital for the conversion of a portion of
L2 Capital’s notes payable in the amount of
$18,190.
For
nine months ended September 30, 2018, note holders elected to
exercise warrants to purchase 39,000 shares of common stock for
$9,520 in cash.
For the
nine months ended September 30, 2018, we sold 400,000 shares of
common stock for $40,000 in cash.
Warrants and Options
The
following table summarizes all warrants outstanding and exercisable
for the nine months ended September 30, 2018:
|
|
|
Warrants
|
|
|
Balance at December
31, 2017
|
134,000
|
$
0.27
|
Granted
|
238,573
|
$
0.22
|
Exercised
|
(39,000
)
|
$
0.24
|
Forfeited
|
-
|
|
Balance at
September 30, 2018
|
333,573
|
$
0.19
|
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
September 30, 2018. The intrinsic value of warrants to purchase
333,573 shares on that date was $2,210.
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 ranging from 466-509%; risk-free interest rate ranging
from 2.01-2.85%, and an expected life of three years.
During
the quarter ended September 30, 2018, we issued warrants to
purchase 108,573 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.
Note 11: 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 nine months ended September 30, 2018, we executed nine
put options for L2 Capital to purchase 1,500,000 shares of common
stock (see Note 10).
On June
26, 2017, we entered a nonexclusive finder’s arrangement with
Craft Capital Management LLC (“Craft”) in the event
that proceeds with a debt and/or equity transaction or to finance a
merger/acquisition and/or another transaction are arranged by
Craft. We have no obligation to consummate any transaction, and we
can choose to accept or reject any transaction in our sole and
absolute discretion. Upon the successful completion of a placement,
we will pay to Craft 8% of the gross proceeds from an equity
placement and 3% for a debt placement. In addition, we will issue
to Craft, at the time of closing, warrants with an aggregate
exercise price equal to 3% of the amount raised. 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 or grant any option to
purchase or sell or grant any right to reprice, or otherwise
dispose of or issue any common stock or securities entitling any
person or entity to acquire shares of common stock, at an effective
price per share less than the then-exercise price, then the
exercise price will be reduced to equal the lower share price, at
the option of Craft. Such adjustment will be made whenever such
common stock is issued. We will notify Craft in writing, no later
than the trading day following the issuance of any common stock, of
the applicable issuance price or applicable reset price, exchange
price, conversion price, and other pricing terms. As of September
30, 2018, we have issued to Craft warrants to purchase 108,573
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 (see Note 8).
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 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. The collection process is
ongoing and defendants are cooperating in proceeding with
payments.
Consulting Agreements
For the
nine months ended September 30, 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 September 30, 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 September 30,
2018, we have not issued the shares and have accrued the
amount.
Employment Agreements
On
January 1, 2011, we entered into a five-year employment agreement
with our chief executive officer, which provides for successive
one-year term renewals unless it is expressly cancelled by either
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 12: Related-Party Transactions
For the
nine months ended September 30, 2018, we paid rent of $90,000 to a
company controlled by our chief executive officer under an
operating lease agreement.
On
January 18, 2018, the due date of a 2015 related-party note payable
was extended to the earlier of December 31, 2018, or the date of
the financial closings of our Baha Mar Project (or any other
project of $25 million or more), whichever occurs first. The
balance on the note payable was $1,102,500 and accrued interest was
$483,642 as of September 30, 2018.
On
March 6, 2018, the due date of a 2012 related-party note payable
was extended to December 31, 2018. The balance on the note payment
was $1,000,000 and accrued interest was $611,393 as of September
30, 2018.
On
March 9, 2017, we issued a promissory note payable of $200,000 to a
related party in which our chief executive officer is an officer
and director. The note bears interest of 10% and is due and payable
within 90 days after demand. The outstanding balance was $177,000
and accrued interest was $28,328 as of September 30,
2018.
On
November 6, 2017, we entered into an agreement and promissory note
with JPF 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), September 30, 2018, or when we are
otherwise able to pay. As of September 30, 2018, the outstanding
balance was $612,193 and the accrued interest was $64,196. For the
nine months ended September 30, 2018, we repaid $19,374. 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.
We
remain liable for the loans made to TDYS by JPF before the Merger.
As of September 30, 2018, the outstanding balance of these loans
was $581,880 and the accrued interest was $117,363.
Note 13: Subsequent Events
Subsequent
to September 30, 2018, we executed three put options for L2 Capital
to purchase 800,000 shares of common stock for $25,764 in cash, net
of offering cost.
Subsequent
to September 30, 2018, we issued warrants to purchase 16,500 shares
of our common stock to Craft Capital as a finder’s fee for
debt and equity transactions between L2 Capital and us. None of the
warrants been exercised.
Subsequent
to September 30, 2018, we issued 900,000 shares of common stock to
L2 Capital for the conversion of a portion of L2 Capital’s
notes payable in the amount of $25,197.