Note 1: Nature of Business and Business Presentation
Ocean
Thermal Energy Corporation is currently in the businesses
of:
●
OTEC and SWAC/LWAC
—designing ocean thermal energy conversion
(“OTEC”) power plants and seawater air conditioning and
lake water air conditioning (“SWAC/LWAC”) plants for
large commercial properties, utilities, and municipalities. These
technologies provide practical solutions to 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
.
The condensed consolidated financial statements include the
accounts of the company and our wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, our financial
statements reflect all adjustments that are of a normal recurring
nature necessary for presentation of financial statements in
accordance with U.S. generally accepted accounting principles
(GAAP).
We
condensed or omitted certain information and footnote disclosures
normally included in our annual audited financial statements, which
we prepared in accordance with GAAP. The operating results for the
three months ended March 31, 2019, 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, 2018, including the
financial statements and notes.
Note 2: Summary of Significant Accounting Policies
Principal Subsidiary Undertakings
Our condensed consolidated financial statements include the
following subsidiaries:
|
Name
|
Place of Incorporation / Establishment
|
Principal Activities
|
Date Formed
|
|
Ocean
Thermal Energy Bahamas Ltd.
|
Bahamas
|
Intermediate
holding company of OTE BM Ltd. and OTE Bahamas O&M
Ltd.
|
07/04/2011
|
|
|
|
|
|
|
OTE BM
Ltd.
|
Bahamas
|
OTEC/SDC
development in the Bahamas
|
09/07/2011
|
|
|
|
|
|
|
OCEES
International Inc.
|
Hawaii,
USA
|
Research and
development for the Pacific Rim
|
01/21/1998
|
We have
an effective interest of 100% in each of our
subsidiaries.
Use of Estimates
In
preparing financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reported period.
Actual results could differ from those estimates. Significant
estimates include the assumptions used in 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 March 31, 2019 and December 31, 2018, 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%.
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:
|
|
|
|
|
|
|
|
|
Revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Assets
|
$
87,544
|
$
-
|
$
-
|
$
87,544
|
|
Net
loss
|
$
(232,291
)
|
$
-
|
$
-
|
$
(232,291
)
|
|
Property
and equipment
|
$
500
|
$
-
|
$
-
|
$
500
|
|
Assets
under construction
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Depreciation
|
$
172
|
$
-
|
$
-
|
$
172
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Assets
|
$
168,123
|
$
750,237
|
$
164,902
|
$
1,083,262
|
|
Net
loss
|
$
(951,810
)
|
$
-
|
$
-
|
$
(951,810
)
|
|
Property
and equipment
|
$
1,183
|
$
-
|
$
-
|
$
1,183
|
|
Assets
under construction
|
$
-
|
$
750,237
|
$
164,902
|
$
915,139
|
|
Depreciation
|
$
169
|
$
-
|
$
-
|
$
169
|
|
Additions to assets
under construction
|
$
-
|
$
22,500
|
$
-
|
$
22,500
|
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;
consequently, there were no assets under construction as of March
31, 2019.
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
capitalize direct interest costs associated with the projects. As
of March 31, 2019 and 2018, 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.
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:
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 March 31,
2019 and December 31, 2018, 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 March 31, 2019 and 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.
Management believes the risk in these situations to be minimal. As
of March 31, 2019 and December 31, 2018, $0 and $0, respectively,
were deposited in excess of FDIC-insured limits.
Loss per Share
The
basic loss per share is calculated by dividing our net loss
available to common shareholders by the weighted average number of
common shares during the period. The diluted loss per share is
calculated by dividing our net loss by the diluted weighted average
number of shares outstanding during the period. The diluted
weighted average number of shares outstanding is the basic weighted
number of shares adjusted for any potentially dilutive debt or
equity. We have 350,073 and 220,500 shares issuable upon the
exercise of warrants and 51,353,422 and 7,567,438 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 three months ended March 31, 2019 and 2018,
respectively.
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 condensed
consolidated financial statements during the three months ended
March 31, 2018.
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. We adopted the provisions of this ASU on January 1,
2019. The adoption had no 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 3: Going Concern
The
accompanying unaudited condensed consolidated financial statements
have been prepared on the assumption that we will continue as a
going concern. As reflected in the accompanying condensed
consolidated financial statements, we had a net loss of $232,291
and used $235,190 of cash in operating activities for the three
months ended March 31, 2019. We had a working capital deficiency of
$17,718,254 and a stockholders’ deficiency of $17,886,088 as
of March 31, 2019. These factors raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as
a going concern is dependent on our ability to increase sales and
obtain external funding for our projects under development. The
financial statements do not include any adjustments that may result
from the outcome of this uncertainty.
Note
4: Convertible Notes and Notes Payable
On
December 12, 2006, we borrowed funds from the Southeast Idaho
Council of Governments (SICOG), the EDA-#180 loan. The interest
rate is 6.25%, and the maturity date was January 5, 2013. During
the three months ended March 31, 2019, we made a repayment of
$1,164. The loan principal was $8,215 with accrued interest of $0
as of March 31, 2019. This note is in default.
On
December 23, 2009, we borrowed funds from SICOG, the EDA-#273 loan.
The interest rate is 7%, and the maturity date was December 23,
2014. The loan principal was $94,480 with accrued interest of
$21,164 as of March 31, 2019. 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 $10,498 as of March 31, 2019. 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
$40,916 as of March 31, 2019. 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 $21,365 as of March 31, 2019. 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
March 31, 2019, the outstanding loan balance was $394,380 and the
accrued but unpaid interest was $100,927 on the Consolidated
Note.
During
2016 and 2015, we borrowed $75,000 from JPF Venture Group, Inc.
pursuant to promissory notes. The terms of the notes are as
follows: (i) interest is payable at 6% per annum;
(ii) the notes are payable 90 days after demand; and
(iii) payee is authorized to convert part or all of the note
balance and accrued interest, if any, into shares of our common
stock at the rate of one share each for $0.03 of principal amount
of the note. This conversion share price was adjusted to $0.01384
for the reverse stock splits. As of December 31, 2018, we have
recorded a debt discount of $75,000 for the fair value derivative
liability and fully amortized the debt discount. As of March 31,
2019, the outstanding balance was $75,000, plus accrued interest of
$13,299.
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 March 31,
2019, the outstanding balance was $112,500, plus accrued interest
of $20,071.
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, we
have recorded a debt discount of $12,500 for the fair value of
derivative liability and fully amortized the debt discount. As of
March 31, 2019, the outstanding balance was $12,500, plus accrued
interest of $1,942.
During
2012, we issued a note payable for $1,000,000. The note had an
interest rate of 10% per annum, was secured by a first lien in all
of our assets, and was due on February 3, 2015. On March 6, 2018,
the note was amended to extend the due date to December 31, 2018,
On March 29, 2019, the maturity date of the note was extended to
December 31, 2019. As of March 31, 2019, the outstanding balance
was $1,000,000, plus accrued interest of $661,948.
During
2013, we issued Series B units. Each unit is comprised of a note
agreement, a $50,000 promissory note that matures on September 30,
2023, and bears interest at 10% per annum payable annually in
arrears and a security agreement. During 2013, we issued $525,000
of 10% promissory notes. As of March 31, 2019, the loan balance was
$158,334 and the accrued interest was $88,905.
During
2013, we issued a note payable for $290,000 in connection with the
reverse merger transaction with Broadband Network Affiliates, Inc.
We have determined that no further payment of principal or interest
on this note should be made because the note holder failed to
perform his underlying obligations giving rise to this note. As
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
March 31, 2019, the balance outstanding was $130,000, and the
accrued interest as of that date was $53,457. This note is in
default.
On
January 18, 2018, Jeremy P. Feakins & Associates, LLC, an
investment entity owned by our chief executive, chief financial
officer, and a director, agreed to extend the due date for
repayment of a $2,265,000 note issued in 2014 to the earlier of
December 31, 2018, or the date of the financial closings of our
Baha Mar project (or any other project of $25 million or more),
whichever occurs first. As of March 31, 2019, the note balance was
$1,102,500 and the accrued interest was $540,255. 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 $263,545 as of March 31,
2019.
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 $20,167 as of March 31, 2019. As of the date of this
report, the note is in default.
On
March 9, 2017, an entity owned and controlled by our chief
executive officer agreed to provide up to $200,000 in working
capital. The note bears interest of 10% and is due and payable
within 90 days of demand. During the year ended December 31, 2017,
we received an additional $2,000 and repaid $25,000. As of March
31, 2019, the balance outstanding was $177,000, plus accrued
interest of $37,226.
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
March 31, 2019, the outstanding balance for all four notes was
$80,000, plus accrued interest of $8,186.
On
November 6, 2017, we entered into an agreement and promissory note
with JPF Venture Group, Inc. to loan up to $2,000,000 to us. The
terms of the note are as follows: (i) interest is payable at
10% per annum; (ii) all unpaid principal and all accrued and
unpaid interest is due and payable at the earliest of a resolution
of the Memphis litigation (as defined herein), December 31, 2018,
or when we are otherwise able to pay. During the first quarter of
2019, we repaid $5,000. As of March 31, 2019, the outstanding
balance was $607,093 and the accrued interest was $95,862. 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. These notes accrue
interest at a rate of 10% per annum payable on a quarterly basis
and are not convertible into shares of our capital stock. The notes
are payable within five business days after receipt of gross
proceeds of at least $1,500,000 from L2 Capital, LLC, an
unaffiliated Kansas limited liability company (“L2 Capital).
We may prepay the notes in whole or in part, without penalty or
premium, on or before the maturity date of July 30, 2019. In
connection with the issuance of the notes, for each note purchased,
the note holder received a warrant as follows:
●
$10,000
note with a warrant to purchase 2,000 shares
●
$20,000
note with a warrant to purchase 5,000 shares
●
$25,000
note with a warrant to purchase 6,500 shares
●
$30,000
note with a warrant to purchase 8,000 shares
●
$40,000
note with a warrant to purchase 10,000 shares
●
$50,000
note with a warrant to purchase 14,000 shares
The
exercise price per share of the warrants is equal to 85% of the
closing price of our common stock on the day immediately preceding
the exercise of the relevant warrant, subject to adjustment as
provided in the warrant. The warrant includes a cashless net
exercise provision whereby the holder can elect to receive shares
equal to the value of the warrant minus the fair market value of
shares being surrendered to pay the exercise price. As of March 31,
2019, the balance outstanding was $979,156 and the accrued interest
was $94,744. As of March 31, 2019, we have outstanding warrants to
purchase 223,000 shares of common stock. As of March 31, 2019,
$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. During the year
ended December 31, 2018, we received five tranches totaling
$482,222. As of December 31, 2018, we have issued warrants to
purchase 56,073 shares of common stock in accordance with a
non-exclusive finder’s fee arrangement. 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 and have recorded a debt discount of $475,481
for the fair value of derivative liability and fully amortized the
debt discount. As of March 31, 2019, we have outstanding warrants
to purchase 56,073 shares of common stock. As of March 31, 2019,
the outstanding balance of the original loan was $368,145, plus a
default penalty of $261,306, for a total of $629,451, and accrued
interest was $72,527. The note is in default.
On
September 19, 2018, we executed a note payable for $10,000 with an
unrelated party that bears interest at 6% per annum, which is due
quarterly beginning as of September 30, 2018. The maturity date for
the note is three years after date of issuance. In addition, the
lender received warrants to purchase 2,000 shares of common stock
upon signing the promissory note. The warrant can be exercised at a
price per share equal to a 15% discount from the price of common
stock on the last trading day before such purchase. As of March 31,
2019, we have outstanding warrants to purchase 2,000 shares of
common stock. As of March 31, 2019, the balance outstanding was
$10,000 and the accrued interest was $322.
On
December 14, 2018, L2 Capital LLC purchased our note payable from
Collier Investments, LLC. The total consideration was $371,250,
including the outstanding note balance of $281,250, the accrued
interest of $33,750, and liquidated damages of $56,250. There was
also a default penalty of $153,123. In addition, we issued 400,000
shares of common stock to L2 Capital as commitment shares with a
fair value of $21,200 in connection with the purchase of the note.
We executed a replacement convertible note with L2 Capital in the
amount of $371,250 with an interest rate of 12% per annum. The
maturity date of the note is December 22, 2018. The holder of the
note can convert the note, or any portion of it, into shares of
common stock at any time after the issuance date. The conversion
price is 65% of the market price, which is defined as the lowest
trading price for our common stock during the 20-trading-day period
prior to the conversion date. As of December 31, 2018, we have
recorded a debt discount of $665,690 for the fair value of
derivative liability and fully amortized the debt discount. During
the three months ended March 31, 2019, we issued 1,800,000 shares
of common stock to L2 Capital for the conversion of a portion of
our notes payable in the amount of $49,614. As of March 31, 2019,
the outstanding balance was $474,759, which includes a default
penalty, and the accrued interest was $18,944. This note is in
default.
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 (the “Memphis
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 31, 2019, the outstanding balance of these
loans is $310,000 and the accrued interest was
$10,441.
The
following convertible note and notes payable were outstanding at
March 31, 2019:
|
|
|
|
|
|
|
|
|
Related Party
|
Non Related Party
|
|
Date of Issuance
|
|
|
In Default
|
|
Principal at March 31, 2019
|
Discount at March 31, 2019
|
Carrying Amount at March 31, 2019
|
|
|
|
|
|
12/12/06
|
|
6.25
%
|
Yes
|
58,670
|
8,215
|
-
|
8,215
|
-
|
-
|
8,215
|
-
|
|
12/01/07
|
|
7.00
%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
09/25/09
|
|
5.00
%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/09
|
|
7.00
%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/09
|
|
7.00
%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/09
|
|
7.00
%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
|
10.00
%
|
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
%
|
Yes
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
|
12/22/14
|
|
22.00
%*
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
|
22.00
%*
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
|
03/12/15
|
(1)
|
6.00
%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
|
04/07/15
|
|
10.00
%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
11/23/15
|
(1)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
02/25/16
|
(1)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
05/20/16
|
(1)
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00
%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00
%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
12/21/16
|
(1)
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
|
03/09/17
|
(1)
|
10.00
%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
|
07/13/17
|
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/18/17
|
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
25,000
|
-
|
|
07/26/17
|
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
15,000
|
-
|
|
07/27/17
|
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
15,000
|
-
|
|
12/20/17
|
(2)
|
10.00
%
|
Yes**
|
979,156
|
979,156
|
10,594
|
968,562
|
-
|
-
|
968,562
|
-
|
|
11/06/17
|
|
10.00
%
|
Yes
|
646,568
|
607,093
|
-
|
607,093
|
607,093
|
-
|
-
|
-
|
|
02/19/18
|
(3)
|
18.00
%*
|
Yes
|
629,451
|
629,451
|
-
|
629,451
|
-
|
-
|
629,451
|
-
|
|
09/19/18
|
|
6.00
%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
-
|
10,000
|
|
12/14/18
|
|
24.00
%*
|
Yes
|
474,759
|
474,759
|
-
|
474,759
|
-
|
-
|
474,759
|
-
|
|
01/02/19
|
|
17.00
%
|
No
|
310,000
|
310,000
|
|
310,000
|
|
|
310,000
|
|
|
|
Totals
|
|
$
8,775,484
|
$
6,888,428
|
$
10,594
|
$
6,877,834
|
$
2,480,973
|
$
-
|
$
4,228,527
|
$
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.
(4).
Loans were issued from January 2, 2019 to March 23, 2019. Principal
and interest are due when funds are received from the litigation
between Ocean Thermal Energy Corporation vs, Robert Coe el
al.
**
Partially in default as of March 31, 2019
The
following convertible notes 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
|
-
|
|
02/03/12
|
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
|
04/07/18
|
10.00%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
11/23/15
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
02/25/16
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
05/20/16
|
(1)
|
6.00%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
10/20/16
|
(1)
|
6.00%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
12/21/16
|
(1)
|
6.00%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
|
03/09/17
|
(1)
|
10.00%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
|
07/13/17
|
07/13/19
|
6.00%
|
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.
* Default interest rate.
** Partially in default as of December 31, 2018
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.
On August 19, 2018, we defaulted in payment of the note issued to
L2 Capital on February 19, 2018. 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
March 31,
2019
|
Quoted prices
markets for identical assets/liabilities
(Level
1)
|
Significant other
observable inputs
(Level
2)
|
Significant
unobservable inputs (Level 3)
|
|
Derivative
Liability
|
$
1,814,816
|
$
-
|
$
-
|
$
1,814,186
|
The tables below set forth a summary of changes in fair value of
our Level 3 financial liabilities for the three months ended March
31, 2019. The tables reflect changes for all financial liabilities
at fair value categorized as Level 3 as of March 31,
2019:
|
|
|
|
Derivative
liability as of December 31, 2018
|
$
2,292,254
|
|
Fair
value at the commitment date for convertible
instruments
|
-
|
|
Change
in fair value of derivative liability
|
(411,672
)
|
|
Reclassification
to additional paid-in capital for financial
instruments
|
|
|
that
ceased to be a derivative liability
|
(65,766
)
|
|
Derivative
liability as of March 31, 2019
|
$
1,814,816
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative liability at the beginning of
period
|
$
1,206,857
|
|
Day
one gains/(losses) on valuation
|
-
|
|
Gains/(losses)
from the change in fair value of derivative liability
|
(1,618,529
)
|
|
Change
in fair value of derivative liability at the end of
period
|
$
(411,672
)
|
_________________
*
Gains/(losses)
related to the revaluation of Level 3 financial liabilities is
included in “Change in fair value of derivative
liability” in the accompanying condensed consolidated
unaudited statement of operations.
The fair value of the derivative liability was estimated using the
income approach and the Black-Scholes option-pricing model. The
fair values at the commitment and remeasurement dates for our
derivative liabilities were based upon the following management
assumptions:
|
|
|
|
Expected
dividends
|
0
%
|
|
Expected
volatility
|
|
|
Risk
free interest rate
|
|
|
Expected
term (in years)
|
|
_________________
**
The
fair value at the remeasurement date is equal to the carrying value
on the balance sheet.
Note 6: Stockholders’ Equity
Common Stock
During
the three months ended March 31, 2019, we issued 1,800,000 shares
of common stock to L2 Capital LLC for the conversion of a portion
of our notes payable in the amount of $49,614.
Warrants
The
following table summarizes all warrants outstanding and exercisable
for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
Balance at December
31, 2018
|
350,073
|
$
0.18
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Balance at March
31, 2019
|
350,073
|
$
0.18
|
|
Exercisable at
March 31, 2019
|
350,073
|
$
0.18
|
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 $0.0449 per share on
March 31, 2019. The intrinsic value of warrants to purchase 350,073
shares on that date was $2,358.
Note 7: Commitments and Contingencies
Commitments
On
December 11, 2017, we entered into an equity purchase agreement
with L2 Capital, LLC, for up to $15,000,000. As provided in the
agreement, we may require L2 Capital to purchase shares of common
stock from time to time by delivering a “put” notice to
L2 Capital specifying the total number of shares to be purchased.
L2 Capital will pay a purchase price equal to 85% of the
“market price,” which is defined as the lowest traded
price on the OTCQB marketplace during the five consecutive trading
days following the “put date,” or the date on which the
applicable shares are delivered to L2 Capital. The number of shares
may not exceed 300% of the average daily trading volume for our
common stock during the five trading days preceding the date on
which we deliver the applicable put notice. Additionally, such
amount may not be lower than $10,000 or higher than $1,000,000. L2
Capital has no obligation to purchase shares under this agreement
to the extent that such purchase would cause L2 Capital to own more
than 4.99% of our common stock. Upon the execution of this
agreement, we issued 1,714,285 shares of common stock valued at
$514,286 as a commitment fee in connection with the agreement. The
shares to be issued pursuant to this agreement were covered by a
Registration Statement on Form S-1 effective on January 29, 2018,
with a post-effective amendment effective April 15, 2019. During
the three months ended March 31, 2019, we did not execute any put
options with L2 Capital to purchase any shares of common
stock.
On June
26, 2017, we entered a nonexclusive finder’s arrangement with
Craft Capital Management LLC (“Craft”) in the event
that proceeds with a debt and/or equity transaction or to finance a
merger/acquisition and/or another transaction are arranged by
Craft. We have no obligation to consummate any transaction, and we
can choose to accept or reject any transaction in our sole and
absolute discretion. Upon the successful completion of a placement,
we will pay to Craft 8% of the gross proceeds from an equity
placement and 3% for a debt placement. In addition, we will issue
to Craft, at the time of closing, warrants with an aggregate
exercise price equal to 3% of the amount raised. 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 March 31,
2019, we have outstanding warrants to purchase 56,073 shares of
common stock for L2 Capital equity transactions and 69,000 for L2
Capital debt transactions for a total outstanding of 125,073, none
of which has been exercised.
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.
During 2018, we received three payments totaling $100,000 from the
defendants. We have not received any additional payments during the
first quarter of 2019. The collection process is
ongoing.
Consulting Agreements
On June
4, 2018, we entered into a consulting agreement to pay 20,000
shares of common stock when one of the conditions of the contract
was satisfied. Although this condition was satisfied on August 31,
2018, we have not issued the shares. As of March 31, 2019 and
December 31, 2018, we have accrued the share compensation at fair
value totaling $1,600. Shares have not been issued as of March 31,
2019.
On
August 14, 2018, we entered into a consulting agreement to pay
$40,000 by issuing shares of common stock. As of March 31, 2019 and
December 31, 2018, we have not issued the shares and have accrued
the amount. Shares have not been issued as of March 31,
2019.
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 8: Related-Party Transactions
For the
three months ended March 31, 2019, we paid rent of $30,000 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
$540,255 as of March 31, 2019.
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 $37,226 as of March 31, 2019.
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 March 31, 2019, the
outstanding balance was $607,093 and the accrued interest was
$95,862. For the three months ended March 31, 2019, we repaid
$5,000. This note is in default.
We
remain liable for the loans made to us by JPF Venture Group before
JPF Venture Group was an affiliate. As of March 31, 2019, the
outstanding balance of these loans was $581,880 and the accrued
interest was $134,297.
Note 9: Subsequent Events
Subsequent
to March 31, 2019, we issued 1,000,000 shares of common stock to L2
Capital for the conversion of a portion of L2 Capital’s notes
payable in the amount of $24,733.
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