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 the communities served by
its plants for use in agriculture and human consumption. 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” 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 shareholder 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
acquire 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
six months ended June 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 $2,284,439
and used $1,376,867 of cash in operating activities for the six
months ended June 30, 2018. We had a working capital deficiency of
$12,371,700 and a stockholders’ deficiency of $12,618,957 as
of June 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
On December 22, 2017, President Trump signed into law the Tax Cuts
and Jobs Act (the “TCJA”) that significantly reforms
the Internal Revenue Code of 1986, as amended (the
“Code”). The TCJA, among other things, contains
significant changes to corporate taxation, including reduction of
the corporate tax rate from a top marginal rate of 35% to a flat
rate of 21%, effective as of January 1, 2018; limitation of the tax
deduction for interest expense; limitation of the deduction for net
operating losses to 80% of current year taxable income and
elimination of 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);
modifying or repealing 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 repeal of 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. The accounting is expected to be
complete when our 2017 U.S. corporate income tax return is filed in
2018.
No
income tax expense was recognized for the six-month periods ended
June 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 six months ended June 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 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 June 30,
2018, and December 31, 2017, due to the relatively short-term
nature of these instruments.
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 284,073 and 0 shares issuable upon the exercise of
warrants and options and 9,697,398 and 10,868,981 shares issuable
upon the conversion of the green energy bonds and convertible notes
that were not included in the computation of dilutive loss per
share because their inclusion is antidilutive for the interim
periods ended June 30, 2018 and 2017, respectively.
Note 6: Recent Accounting Pronouncements
The
amendments in Accounting Standards Updates (“ASU”)
2017-11 change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. As a result, a freestanding equity-linked financial
instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result
of the existence of a down round feature. ASU 2017-11 defines Down
Round Feature as: “A feature in a financial instrument that
reduces the strike price of an issued financial instrument if the
issuer sells shares of its stock for an amount less than the
currently stated strike price of the issued financial instrument or
issues an equity-linked financial instrument with a strike price
below the currently stated strike price of the issued financial
instrument. A down round feature may reduce the strike price of a
financial instrument to the current issuance price, or the
reduction may be limited by a floor or on the basis of a formula
that results in a price that is at a discount to the original
exercise price but above the new issuance price of the shares, or
may reduce the strike price to below the current issuance price. A
standard antidilution provision is not considered a down round
feature.” For public business entities, the amendments in
Part I of this update are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. For all other entities, the amendments in Part I of this
update 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 for all entities,
including adoption in an interim period. If an entity early adopts
the amendments in an interim period, any adjustments should be
reflected as of the beginning of the fiscal year that includes that
interim period prior to ASU 2017-11. We have elected to early adopt
this standard and have no other instruments from prior periods that
are affected by this adoption.
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; the
Bahamas segment consists of projects specific to the Bahamas; 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
(“G&A”), 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
|
$
102,480
|
$
757,738
|
$
-
|
$
164,901
|
$
1,025,119
|
|
Net Loss
|
$
(2,284,439
)
|
$
-
|
$
-
|
$
-
|
$
(2,284,439
)
|
|
Property and equipment
|
$
1,013
|
$
-
|
$
-
|
$
-
|
$
1,013
|
|
Capitalized construction in process
|
$
-
|
$
757,738
|
$
-
|
$
164,901
|
$
922,639
|
|
Depreciation
|
$
339
|
$
-
|
$
-
|
$
-
|
$
339
|
|
Addtions to Property and equipment
|
$
-
|
$
30,000
|
$
-
|
$
-
|
$
30,000
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Assets
|
$
28,276
|
$
840,140
|
$
-
|
$
48,998
|
$
917,414
|
|
Net Loss
|
$
(8,363,177
)
|
$
-
|
$
-
|
$
-
|
$
(8,363,177
)
|
|
Property and equipment
|
$
1,693
|
$
-
|
$
-
|
$
-
|
$
1,693
|
|
Capitalized construction in process
|
$
-
|
$
840,140
|
$
-
|
$
48,998
|
$
889,138
|
|
Depreciation
|
$
673
|
$
-
|
$
-
|
$
-
|
$
673
|
|
Addtions to Property and equipment
|
$
-
|
$
42,853
|
$
-
|
$
-
|
$
42,853
|
|
|
|
|
|
|
|
For the
period ended June 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 first six 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 $9,556 with accrued
interest of $0 as of June 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 $21,148 as of June 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 $23,620
with accrued interest of $4,955 as of June 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 $23,619. The interest rate is 7%, and the
maturity date was December 23, 2014. The loan principal was $23,619
with accrued interest of $5,896 as of June 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 $36,344 as of June 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 $19,463 as of June 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 June 30, 2018, the outstanding loan
balance was $394,380 and the accrued but unpaid interest was
$82,917 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
the remaining $12,500 was received 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 June 30, 2018, the outstanding
balance was $50,000, plus accrued interest of $7,557.
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 June 30, 2018, the
outstanding balance was $50,000, plus accrued interest of
$7,145.
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 June 30, 2018, the outstanding
balance was $50,000, plus accrued interest of $6,297.
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 June 30, 2018,
the outstanding balance was $12,500, plus accrued interest of
$1,305.
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 June 30, 2018, the
outstanding balance was $12,500, plus accrued interest of
$1,371.
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 June 5, 2017, the note holder converted the
note principal of $25,000 into 1,806,298 shares common stock. As of
June 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 June 30, 2018, the outstanding balance was
$25,000, plus accrued interest of $2,317.
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 June 30,
2018, the outstanding balance was $1,000,000, plus accrued interest
of $585,837.
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. During 2013, we issued $525,000 of
10% promissory notes and warrants to purchase 105,000 shares of
common stock. The warrants have an expiration date of September 30,
2023. 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 December 31, 2016, the accrued interest was
$168,934. During 2015, one of the original note holders transferred
its ownership of the note in the amount of $50,000 to Jeremy P.
Feakins & Associates LLC through the JPF Venture Fund 1, LP. On
August 15, 2017, loans in the amount of $316,666 and accrued
interest of $120,898 were converted to 437,564 shares at $1.00 per
share, which was ratified by the board of directors. The shares
were recorded at fair value of $1,165,892. We recorded a loss on
settlement of debt of $728,328 on conversion date. As of June 30,
2018, the loan balance was $158,334 and the accrued interest was
$76,845.
During
2013, we paid cash of $10,000 and issued a note payable for
$290,000 in connection with the reverse merger transaction. We
repurchased and retired 7,546,464 shares of common stock
simultaneously with the closing of the merger with Broad Band
Network Associates. The note is unsecured and due the earlier of
December 31, 2015, or upon our receiving $50,000 of proceeds from
the exercise of the Class A warrants, $50,000 from the exercise of
the Class B warrants, $60,000 from the exercise of the Class C
warrants, $60,000 from the exercise of Class D warrants, and
$70,000 from the exercise of the Class E warrants. During 2014, we
paid $100,000 and during 2015, we paid $60,000, leaving a balance
of $130,000. Accrued interest totaled $45,542 at June 30, 2018. 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.
During
2014, we issued a note payable for $2,265,000 and warrants to
purchase 12,912,500 shares of common stock, with an exercise price
equal to the greater of a 50% discount of the stock price when our
shares are listed on a public exchange or $0.425 per share, to an
entity owned by our chief executive officer, our principal
stockholder. The warrants expire one year after our shares are
listed on a recognized public exchange. The unsecured note has an
interest rate of 10% per annum and the balance was due on January
31, 2015. We determined the warrants had a fair value of $2,265,000
based on the Black-Scholes option-pricing model. The fair value was
recorded as a discount on the note payable and is being amortized
over the life of the note. 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.
As of December 31, 2015, principal of $152,500 has been repaid and
principal of $351,500 has been converted into 468,667 shares of
common stock, leaving a note balance of $1,761,000. During 2016, a
principal payment of $5,000 was made leaving a note balance of
$1,756,000 at December 31, 2016. On December 31, 2016, the accrued
interest was $453,093. On January 18, 2018, the note holder agreed
to extend the due date for the repayment of the loan and interest
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, loans
in the amount of $618,500 and accrued interest of $207,731 were
converted to 826,231 shares at $1.00 per share, which was ratified
by the board of directors. The conversion was recorded at
historical cost due to the related-party nature of the transaction.
For the six months ended June 30, 2018, we made a repayment of note
payable in the amount of $35,000. As of June 30, 2018, the loan
balance was $1,102,500 and the accrued interest was
$455,467.
During
2014, we issued a note payable of $100,000 to a related party and
$200,000 to a third party, for a total of $300,000, and warrants to
purchase 300,000 shares of common stock with an exercise price of
$1.00 per share. 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. These
unsecured notes have an interest rate of 12% per annum. The
$100,000 note with a related party was due the earlier of December
26, 2015; the completion by us of an equity financing resulting in
our receipt of gross proceeds of at least $2,000,000; or the
financial close of the Baha Mar project and release of funds by the
bank. The balance on the $200,000 note was due the earlier of March
31, 2015; the completion by us of an equity financing resulting in
our receipt of gross proceeds of at least $2,000,000; or the
financial close of the Baha Mar project and release of project
financing funds by the bank. As of December 31, 2016, the notes
were in default. Due to the delay in opening of the Baha Mar
Resort, our Baha Mar SWAC Project’s financial closing was
delayed causing us to default on the notes. We have accrued the
interest at a default rate of 22%. We intend to repay the notes and
accrued interest upon the project’s financial closing.
Accrued interest totaled $213,312 as of June 30, 2018.
On
April 7, 2015, we issued an unsecured convertible promissory note
in the principal amount of $50,000 to an unrelated party. The note
bears interest of 10% and was due on April 17, 2017. On April 6,
2018, the note holder agreed to extend the maturity date 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. We
recorded a debt discount of $6,667 for the fair value of the
beneficial conversion feature. During the six months ended June 30,
2018, we amortized $871 of debt discount. Accrued interest totaled
$16,361 as of June 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 with
90 days of demand. On June 30, 2018, the balance of the loan
outstanding was $177,000, and the accrued interest as of that date
was $23,804.
During
the third quarter of 2017, we commenced 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
June 30, 2018, the outstanding balance for all four notes was
$80,000, plus accrued interest of $4,567.
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; June 30, 2018; or when we are otherwise able to pay.
For the six months ended June 30, 2018, we made a repayment of this
note in the amount of $18,500. As of June 30, 2018, the outstanding
balance was $623,067 and the accrued interest was $49,154. On June
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 June 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 funds
from L2 Capital, LLC, an unaffiliated Kansas limited liability
company (“L2 Capital”), under the equity purchase
agreement equal to 20% of the total funds received by us from L2
Capital payable on a pro-rata basis to all holders of the notes. 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 noteholder 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 June 30,
2018, and December 31, 2017, the balance outstanding was $979,156
and $490,000, respectively. As of June 30, 2018, and December 31,
2017, the accrued interest was $24,291 and $613, respectively. On
April 15, 2018, we paid $20,340, which was all of the interest
accrued as of March 31, 2018, to the note holders. As of June 30,
2018, and December 31, 2017, we had issued warrants to purchase
262,000 and 134,000 shares of common stock, respectively. As of
June 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 June 30, 2018, warrants
to purchase 34,000 shares have been exercised (see Note 9) and the
debt discount related to the exercised warrants has been fully
expensed. For the six months ended June 30, 2018, we amortized
$29,438 of debt discount.
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 (with the understanding that the initial six months of
such interest of each tranche funded would be guaranteed), at
maturity or upon acceleration or otherwise, as set forth therein
(the “L2 Note”). L2 Capital has the right at any time
to convert all or any part of the L2 Note into fully paid and
nonassessable shares of our common stock at the fixed conversion
price, which is equal to $0.50 per share;
provided
,
however
, that at any time on or after
the occurrence of any event of default under the L2 Note, the
conversion price will mean the lesser of the fixed conversion price
and 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. The consideration to us for the L2 Note is up to
$500,000 due to the prorated original issuance discount of up to
$55,555 and a $10,000 credit for L2 Capital’s transactional
expenses. As of the June 30, 2018, we have received five tranches
totaling $482,222, which were allocated as follows: original
issuance discount-$47,222; L2 Capital’s transaction
fee-$10,000; broker-dealer’s fee-$34,000; net proceeds to
us-$391,000. The debt discount is amortized over the life of the L2
Note. In addition, we also issued warrants to purchase 56,073
shares of common stock in accordance with a nonexclusive
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.
For the six months ended June 30, 2018, we amortized $50,218 of
original issuance discount and transaction fees. The accrued
interest as of June 30, 2018, was $10,412.
On May
22, 2018, we executed a convertible note with Collier Investments,
LLC, an unaffiliated California company, for a loan 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 in the amount of $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 will have the
option to prepay 145% of the outstanding balance. There was an
original issue discount fee of $31,250 and a transaction fee of
$5,000, yielding net proceeds of $245,000 to us. In addition, we
paid a finder’s fee of $20,914. For the six months ended June
30, 2018, we amortized $9,883 of original issuance discount and
transaction fees. The accrued interest as of June 30, 2018, was
$3,469.
The
following convertible notes and notes payable were outstanding at
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Date of Issuance
|
Maturity Date
|
|
In Default
|
|
Principal at June 30, 2018
|
Discount at June 30, 2018
|
Carrying Amount at June 30, 2018
|
|
|
|
|
|
12/12/2006
|
1/5/2013
|
6.25
%
|
Yes
|
58,670
|
9,557
|
-
|
9,557
|
-
|
-
|
9,557
|
-
|
|
12/1/2007
|
9/1/2015
|
7.00
%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
9/25/2009
|
10/25/2011
|
5.00
%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/2009
|
12/23/2014
|
7.00
%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/2009
|
12/23/2014
|
7.00
%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/2009
|
12/23/2014
|
7.00
%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
12/31/18
|
10.00
%
|
No
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
1,000,000
|
-
|
-
|
-
|
|
08/15/13
|
10/31/23
|
10.00
%
|
No
|
525,000
|
158,334
|
-
|
158,334
|
-
|
|
-
|
158,334
|
|
12/31/13
|
12/31/15
|
8.00
%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
130,000
|
-
|
-
|
-
|
|
04/01/14
|
12/31/18
|
10.00
%
|
No
|
2,265,000
|
1,102,500
|
-
|
1,102,500
|
1,102,500
|
-
|
-
|
-
|
|
12/22/14
|
03/31/15
|
12.00
%
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
12/26/15
|
12.00
%
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
|
3/12/2015
|
* See note
below
|
6.00
%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
|
4/7/15
|
04/17/18
|
10.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
|
|
11/23/2015
|
* See note
below
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
2/25/2016
|
* See note
below
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
5/20/2016
|
* See note
below
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
10/20/2016
|
* See note
below
|
6.00
%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
10/20/2016
|
* See note
below
|
6.00
%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
12/21/2016
|
* See note
below
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
|
3/9/2017
|
* See note
below
|
10.00
%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
|
7/13/2017
|
7/13/2019
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
|
7/18/2017
|
7/18/2019
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
|
7/26/2017
|
7/26/2019
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
|
7/27/2017
|
7/27/2019
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
|
12/20/2017
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
2,919
|
47,081
|
-
|
-
|
-
|
47,081
|
|
12/20/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
417
|
9,583
|
-
|
-
|
-
|
9,583
|
|
12/21/2017
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
2,901
|
47,099
|
-
|
-
|
-
|
47,099
|
|
12/27/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
409
|
9,591
|
-
|
-
|
-
|
9,591
|
|
12/27/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
-
|
10,000
|
|
12/28/2017
|
7/30/2019
|
10.00
%
|
No
|
250,000
|
250,000
|
14,325
|
235,675
|
-
|
-
|
-
|
235,675
|
|
12/29/2017
|
7/30/2019
|
10.00
%
|
No
|
100,000
|
100,000
|
6,123
|
93,877
|
-
|
-
|
-
|
93,877
|
|
12/29/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
437
|
9,563
|
-
|
-
|
-
|
9,563
|
|
11/6/2017
|
** See
note below
|
10.00
%
|
No
|
646,568
|
623,068
|
-
|
623,068
|
623,068
|
-
|
-
|
-
|
|
1/2/2018
|
7/30/2019
|
10.00
%
|
No
|
25,000
|
25,000
|
1,211
|
23,789
|
-
|
-
|
-
|
23,789
|
|
1/2/2018
|
7/30/2019
|
10.00
%
|
No
|
20,000
|
20,000
|
929
|
19,071
|
-
|
-
|
-
|
19,071
|
|
1/9/2018
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
-
|
50,000
|
|
1/9/2018
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
-
|
50,000
|
|
1/11/2018
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
378
|
9,622
|
-
|
-
|
-
|
9,622
|
|
1/12/2018
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
378
|
9,622
|
-
|
-
|
-
|
9,622
|
|
1/16/2018
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
2,669
|
47,331
|
-
|
-
|
-
|
47,331
|
|
1/16/2018
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
377
|
9,623
|
-
|
-
|
-
|
9,623
|
|
1/16/2018
|
7/30/2019
|
10.00
%
|
No
|
20,000
|
20,000
|
1,129
|
18,871
|
-
|
-
|
-
|
18,871
|
|
1/30/2018
|
7/30/2019
|
10.00
%
|
No
|
25,000
|
25,000
|
2,438
|
22,562
|
-
|
-
|
-
|
22,562
|
|
2/14/2018
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
2,671
|
47,329
|
-
|
-
|
-
|
47,329
|
|
2/16/2018
|
7/30/2019
|
10.00
%
|
No
|
19,156
|
19,156
|
986
|
18,170
|
-
|
-
|
-
|
18,170
|
|
2/19/2018
|
8/19/2018
|
8.00
%
|
No
|
121,111
|
121,111
|
8,042
|
113,069
|
-
|
-
|
113,069
|
-
|
|
2/23/2018
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
348
|
9,652
|
-
|
-
|
-
|
9,652
|
|
2/27/2018
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
-
|
10,000
|
|
2/28/2018
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
2,376
|
47,624
|
-
|
-
|
-
|
47,624
|
|
3/7/2018
|
9/7/2018
|
8.00
%
|
No
|
83,333
|
83,333
|
5,375
|
77,958
|
-
|
-
|
77,958
|
-
|
|
3/9/2018
|
7/30/2019
|
10.00
%
|
No
|
25,000
|
25,000
|
949
|
24,051
|
-
|
-
|
-
|
24,051
|
|
3/30/2018
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
-
|
10,000
|
-
|
-
|
-
|
10,000
|
|
4/2/2018
|
10/2/2018
|
8.00
%
|
No
|
111,111
|
111,111
|
9,817
|
101,294
|
|
|
101,294
|
|
|
4/16/2018
|
10/16/2018
|
8.00
%
|
No
|
111,111
|
111,111
|
11,279
|
99,832
|
|
|
99,832
|
|
|
4/23/2018
|
7/30/2019
|
10.00
%
|
No
|
25,000
|
25,000
|
1,386
|
23,614
|
|
|
|
23,614
|
|
5/2/2018
|
11/2/2018
|
8.00
%
|
No
|
55,556
|
55,556
|
6,492
|
49,064
|
|
|
49,064
|
|
|
5/24/2018
|
7/30/2019
|
10.00
%
|
No
|
20,000
|
20,000
|
823
|
19,177
|
|
|
|
19,177
|
|
5/24/2018
|
12/24/2018
|
12.00
%
|
No
|
281,250
|
281,250
|
47,280
|
233,970
|
|
|
233,970
|
|
|
Totals
|
|
|
$
8,114,746
|
$
6,245,006
|
$
134,864
|
$
6,110,142
|
$
3,626,948
|
$
-
|
$
1,312,285
|
$
1,170,909
|
|
|
|
|
|
|
|
|
|
|
|
|
* Note - Maturity date - 90 days after
demand
** Note - Principle and accrued interest will be due and payable at
the earliest of A). resolution of Memphsis litigation; B). December
31, 2018, or C). when OTE is able to pay
The
following convertible notes and notes payable were outstanding at
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Date of Issuance
|
Maturity Date
|
|
In Default
|
|
Principal at December 31, 2017
|
Discount at December 31 2017
|
Carrying Amount at December 31, 2017
|
|
|
|
|
|
12/12/2006
|
1/5/2013
|
6.25
%
|
Yes
|
58,670
|
12,272
|
-
|
12,272
|
-
|
-
|
12,272
|
-
|
|
12/1/2007
|
9/1/2015
|
7.00
%
|
Yes
|
125,000
|
85,821
|
-
|
85,821
|
-
|
-
|
85,821
|
-
|
|
9/25/2009
|
10/25/2011
|
5.00
%
|
Yes
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
-
|
|
12/23/2009
|
12/23/2014
|
7.00
%
|
Yes
|
100,000
|
94,480
|
-
|
94,480
|
-
|
-
|
94,480
|
-
|
|
12/23/2009
|
12/23/2014
|
7.00
%
|
Yes
|
25,000
|
23,619
|
-
|
23,619
|
-
|
-
|
23,619
|
-
|
|
12/23/2009
|
12/23/2014
|
7.00
%
|
Yes
|
25,000
|
23,620
|
-
|
23,620
|
-
|
-
|
23,620
|
-
|
|
02/03/12
|
12/31/18
|
10.00
%
|
No
|
1,000,000
|
1,000,000
|
-
|
1,000,000
|
1,000,000
|
-
|
-
|
-
|
|
08/15/13
|
10/31/23
|
10.00
%
|
No
|
525,000
|
158,334
|
-
|
158,334
|
-
|
|
-
|
158,334
|
|
12/31/13
|
12/31/15
|
8.00
%
|
Yes
|
290,000
|
130,000
|
-
|
130,000
|
130,000
|
-
|
-
|
-
|
|
04/01/14
|
12/31/18
|
10.00
%
|
No
|
2,265,000
|
1,137,500
|
-
|
1,137,500
|
1,137,500
|
-
|
-
|
-
|
|
12/22/14
|
03/31/15
|
12.00
%
|
Yes
|
200,000
|
200,000
|
-
|
200,000
|
-
|
-
|
200,000
|
-
|
|
12/26/14
|
12/26/15
|
12.00
%
|
Yes
|
100,000
|
100,000
|
-
|
100,000
|
-
|
-
|
100,000
|
-
|
|
3/12/2015
|
* See note
below
|
6.00
%
|
No
|
394,380
|
394,380
|
-
|
394,380
|
394,380
|
-
|
-
|
-
|
|
4/7/15
|
04/17/18
|
10.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
-
|
-
|
50,000
|
|
|
11/23/2015
|
* See note
below
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
2/25/2016
|
* See note
below
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
5/20/2016
|
* See note
below
|
6.00
%
|
No
|
50,000
|
50,000
|
-
|
50,000
|
50,000
|
-
|
-
|
-
|
|
10/20/2016
|
* See note
below
|
6.00
%
|
No
|
50,000
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
10/20/2016
|
* See note
below
|
6.00
%
|
No
|
12,500
|
12,500
|
-
|
12,500
|
12,500
|
-
|
-
|
-
|
|
12/21/2016
|
* See note
below
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
25,000
|
-
|
-
|
-
|
|
3/9/2017
|
* See note
below
|
10.00
%
|
No
|
200,000
|
177,000
|
-
|
177,000
|
177,000
|
-
|
-
|
-
|
|
7/13/2017
|
7/13/2019
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
|
7/18/2017
|
7/18/2019
|
6.00
%
|
No
|
25,000
|
25,000
|
-
|
25,000
|
-
|
-
|
-
|
25,000
|
|
7/26/2017
|
7/26/2019
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
|
7/27/2017
|
7/27/2019
|
6.00
%
|
No
|
15,000
|
15,000
|
-
|
15,000
|
-
|
-
|
-
|
15,000
|
|
12/20/2017
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
4,340
|
45,660
|
-
|
-
|
-
|
45,660
|
|
12/20/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
620
|
9,380
|
-
|
-
|
-
|
9,380
|
|
12/21/2017
|
7/30/2019
|
10.00
%
|
No
|
50,000
|
50,000
|
4,284
|
45,716
|
-
|
-
|
-
|
45,716
|
|
12/27/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
600
|
9,400
|
-
|
-
|
-
|
9,400
|
|
12/27/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
600
|
9,400
|
-
|
-
|
-
|
9,400
|
|
12/28/2017
|
7/30/2019
|
10.00
%
|
No
|
250,000
|
250,000
|
21,000
|
229,000
|
-
|
-
|
-
|
229,000
|
|
12/29/2017
|
7/30/2019
|
10.00
%
|
No
|
100,000
|
100,000
|
8,960
|
91,040
|
-
|
-
|
-
|
91,040
|
|
12/29/2017
|
7/30/2019
|
10.00
%
|
No
|
10,000
|
10,000
|
640
|
9,360
|
-
|
-
|
-
|
9,360
|
|
11/6/2017
|
* See
note below
|
10.00
%
|
No
|
646,568
|
641,568
|
-
|
641,568
|
641,568
|
-
|
-
|
-
|
|
Totals
|
|
|
|
$
5,048,594
|
$
41,044
|
$
5,007,550
|
$
3,680,448
|
|
$
639,812
|
$
687,290
|
|
|
|
|
|
|
|
|
|
|
|
|
* Note - Maturity date - 90 days after demand
|
|
|
|
|
|
|
|
|
** Note - Principle and accrued interest will be due and payable at
the earliest of A). resolution of Memphsis litigation; B). December
31, 2018, or C). when OTE is able to pay
|
Note 9: Stockholders’ Equity
Common Stock
For the
six months ended June 30, 2018, we issued 630,657 shares of common
stock for services performed with a fair value of
$130,966.
On
January 19, 2018, two note holders elected to exercise warrants to
purchase 28,000 shares of common stock for a value of $7,854
($0.2805 per share). We received this value in cash.
On
February 26, 2018, a note holder elected to exercise warrants to
purchase 2,000 shares of common stock for a value of $357 ($0.1785
per share). We received this value in cash.
On
April 13, 2018, 2018, a note holder elected to exercise warrants to
purchase 2,000 shares of common stock for a value of $595 ($0.2975
per share). We received this value in cash.
On May
4, 2018, a note holder elected to exercise warrants to purchase
2,000 shares of common stock for a value of $289 ($0.1447 per
share). We received this value in cash.
Warrants and Options
The
following table summarizes all warrants outstanding and exercisable
for the six-month period ended June 30, 2018:
|
|
|
|
|
Warrants
|
|
|
|
Balance at December
31, 2017
|
134,000
|
$
0.27
|
|
Granted
|
184,073
|
0.28
|
|
Exercised
|
(34,000
)
|
0.27
|
|
Forfeited
|
-
|
|
|
Balance at June 30,
2018
|
284,073
|
$
0.21
|
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 $0.11 per share on
June 30, 2018. The intrinsic value of warrants to purchase 284,073
shares on that date was $4,687.
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.
Note 10: 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 will have 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 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 approved by the SEC and
effective on January 29, 2018. As of June 30, 2018, no put options
were exercised; however, on July 2, 2018, we executed a put option
for L2 Capital to purchase 100,000 shares of common stock. The
purchase price for these shares was $0.0884 per share. On July 9,
2018, we executed a put option for L2 Capital to purchase 150,000
shares of common stock. The purchase price for these shares was
$0.08925 per share. On July 16, 2018, we executed a put option for
L2 Capital to purchase 100,000 shares of common stock. The purchase
price for these shares was $0.08755 per share. On July 23, 2018, we
executed a put option for L2 Capital to purchase 200,000 shares of
common stock. The purchase price for these shares was $0.08075 per
share. On July 30, 2018, we executed a put option for L2 Capital to
purchase 200,000 shares of common stock. The purchase price for
these shares was $0.0646 per share. On August 7, 2018, we tendered
150,000 shares for issuance under our Equity Purchase Agreement,
subject to payment at a price per share equivalent to 85% of the
lowest daily trading price during the succedding five trading
days.
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 an equity
placement, we will pay 8% in cash of the gross proceeds and 3% for
a debt deal placement to Craft. In addition, we will issue to
Craft, at the time of closing, non-callable 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 exercisable price equal
to $0.25. The warrants are exercisable for a period of five years
after the closing of the placement. If we, at any time while this
warrant is 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, at the option of Craft, and only reduced to equal the
lower share price. 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,
indicating therein the applicable issuance price, or applicable
reset price, exchange price, conversion price, and other pricing
terms. We have elected to early adopt the ASU 2017-11 (see Note 6);
thus, based upon this early adoption, the down-round provision in
the warrants does not create a derivative accounting. As of June
30, 2018, we have issued warrants to purchase 56,073 shares of
common stock, and none has been exercised. These warrants were all
issued as a finder’s fee for debt and equity transactions
between L2 Capital and us (see Note 8).
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. The settlement required the defendants to
pay $3 million by June 4, 2018. The defendants failed to
meet this payment deadline; consequently, on July 6, 2018, we began
an agreed upon process whereby the penalty for defendants would be
an additional $5,000,000 (total of $8,000,000) to be collected in a
manner directed by us. This process is ongoing and proceeding in a
cooperative fashion, and information
will be updated as it
progresses.
Consulting Agreements
For the
six months ended June 30, 2018, we issued 630,657 shares of common
stock for services performed with a fair value of
$130,966.
We have
entered into several consulting and advisory agreements to pay
consultants in shares of common stock over a fixed period. As of
June 30, 2018, we have accrued the share compensation valued at
fair value totaling $7,500. The accrued consulting fees were
settled on July 16, 2018, by issuing 37,688 shares of common
stock.
Employment Agreements
On
January 1, 2011, we entered into a five-year employment agreement
with our chief executive officer. The employment agreement provides
for successive one-year term renewals unless it is expressly
cancelled by either party 100 days prior to the end of the term.
Under the agreement, 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 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.
Note 11: Related-Party Transactions
For the
six months ended June 30, 2018, we paid rent of $60,000 to a
company controlled by our chief executive officer under an
operating lease agreement.
On
January 18, 2018, the due date of the note payable in the amount of
$2,265,000 issued on January 31, 2015, to Jeremy P. Feakins &
Associates, LLC, an investment entity that is majority-owned by our
director, chief executive officer, and chief financial officer, was
extended to the earliest 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,
$618,500 of the note payable was converted into 618,500 shares of
common stock. In addition, accrued interest of $207,731 was
converted into 207,731 shares of common stock. The balance on the
note payable was $1,102,500 and accrued interest was $455,467 as of
June 30, 2018.
On
March 6, 2018, the due date of the related-party note payable in
the amount of $1,000,000 issued on February 3, 2012, was extended
to December 31, 2018. The outstanding balance on June 30, 2018, was
$1,000,000.
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 balance outstanding was $177,000
and accrued interest was $23,804 on June 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: (a) resolution of the
Memphis litigation (as defined therein); (b) June 30, 2018; or (c)
when we are otherwise able to pay. As of June 30, 2018, the
outstanding balance was $623,067 and the accrued interest was
$49,154. For the six months ended June 30, 2018, we made a
repayment in the amount of $18,500. On June 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 June 30, 2018, the outstanding balance of these loans was
$581,880 and the accrued interest was $107,537.
Note 12: Subsequent Events
On July
2, 2018, pursuant to an equity purchase agreement with L2 Capital
LLC, we executed a put option for L2 Capital to purchase 100,000
shares of common stock at $0.0884 per share. On July 9, 2018, we
executed a put option for L2 Capital to purchase 150,000 shares of
common stock at $0.08925 per share. On July 16, 2018, we executed a
put option for L2 Capital to purchase 100,000 shares of common
stock at $0.08755 per share. On July 23, 2018, we executed a put
option for L2 Capital to purchase 200,000 shares of common stock at
$0.08075 per share. On July 30, 2018, we executed a put option for
L2 Capital to purchase 200,000 shares of common stock at $0.0646
per share. On August 7, 2018, we tendered 150,000 shares for
issuance under our Equity Purchase Agreement, subject to payment at
a price per share equivalent to 85% of the lowest daily trading
price during the succeeding five trading days (see Note
10).
On June 26, 2017, the Company entered a non-exclusive
finder’s arrangement with 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. There is no
obligation to consummate any transaction and the Company can choose
to accept or reject any transaction in its sole and absolute
discretion. Upon the successful completion of an equity placement,
the Company will pay Craft 8% in cash of the gross proceeds and, 3%
for a debt / deal placement. In addition, the company shall pay
Craft non-callable warrants of the Company at the time of closing
equal to 3% warrant coverage of the amount raised. These warrants
have an exercisable price equal to $0.25. The warrants are
exercisable for a period of five years after the closing of the
placement. Subsequent to June 30, 2018, pursuant to a nonexclusive
finder’s arrangement with Craft Capital Management LLC, we
issued warrants to purchase 22,500 shares of our common stock, none
of which has been exercised. These warrants were issued as a
finder’s fee for debt and equity transactions between L2
Capital and us. See Note 10.
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. The settlement required the defendants to pay $3 million
by June 4, 2018. The defendants failed to meet this payment
deadline; consequently, on July 6, 2018, we began an agreed upon
process whereby the penalty for defendants would be an additional
$5,000,000 (total of $8,000,000) to be collected in a manner
directed by us. This process is ongoing and proceeding in a
cooperative fashion, and information will be updated as it
progresses.
Subsequent
to June 30, 2018, we issued 42,688 shares of common stock for
services performed with a fair value of $8,020.
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,
and the satisfaction of agreed conditions.
I
TEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed financial statements and notes to our financial
statements included elsewhere in this report. This discussion
contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors discussed elsewhere in this report.
Certain information included herein contains statements that may be
considered forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), such as statements relating to our
anticipated revenues, gross margins and operating results,
estimates used in the preparation of our financial statements,
future performance and operations, plans for future expansion,
capital spending, sources of liquidity, and financing sources.
Forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results
in the future, and accordingly, such results may differ from those
expressed in any forward-looking statements made herein. These
risks and uncertainties include those relating to our liquidity
requirements; the continued growth of our industry; the success of
marketing and sales activity; the dependence on existing
management; the availability and cost of substantial amounts of
project capital; leverage and debt service (including sensitivity
to fluctuations in interest rates); domestic and global economic
conditions; the inherent uncertainty and costs of prolonged
arbitration or litigation; and changes in federal or state tax laws
or the administration of such laws.
Overview
We
develop projects for renewable power generation, desalinated water
production, and air conditioning using our proprietary technologies
designed to extract energy from the temperature differences between
warm surface water and cold deep water. In addition, our projects
can provide ancillary products such as potable/bottle water and
high-profit aquaculture, mariculture, and agriculture
opportunities.
We
currently have no source of revenue, so as we continue to incur
costs we are dependent on external funding in order to continue. We
cannot assure that such funding will be available or, if available,
can be obtained on acceptable or favorable terms.
Our
operating expenses consist principally of expenses associated with
the development of our projects until we determine that a
particular project is feasible. Salaries and wages consist
primarily of employee salaries and wages, payroll taxes, and health
insurance. Our professional fees are related to consulting,
engineering, legal, investor relations, outside accounting, and
auditing expenses. General and administrative expenses include
travel, insurance, rent, marketing, and miscellaneous office
expenses. The interest expense includes interest and discounts
related to our loans and notes payable.
Results of Operations
Comparison of Three Months Ended June 30, 2018 and
2017
We had
no revenue in the three months ended June 30, 2018 and
2017.
During
the three months ended June 30, 2018, we had salaries and wages of
$288,958, compared to salaries and wages of $296,339 during the
same three-month period for 2017, a decrease of 2.5%, which can be
attributed to decreasing our staff.
During
the three months ended June 30, 2018 and 2017, we recorded
professional fees of $663,731 and $150,977, respectively, an
increase of 340%, due primarily to consulting fees paid to outside
consultants for analyses done for potential
acquisitions.
We
incurred general and administrative expenses of $192,071 during the
three months ended June 30, 2018, compared to $174,609 for the same
three-month period for 2017, a 27.2% increase, due to increased
activities related to review of potential
investigations.
Our
interest expense was $174,610 for the three months ended June 30,
2018, compared to $133,107 for the same period of the previous
year, an increase of 31.2%, due to the increase in outstanding
notes and loans payable.
Our
debt discount amortization was $63,259 for the three months ended
June 30, 2018, compared to $42,436 for the same period of the
previous year, an increase of 49.1%, due to the amortization of
original issue discount fees on two new loans.
Comparison of Six Months Ended June 30, 2018 and 2017
We had
no revenue in the six months ended June 30, 2018 and
2017.
During
the six months ended June 30, 2018, we had salaries and wages of
$618,947, compared to salaries and wages of $553,827 during the
same six-month period for 2017, an increase of 11.8%, which is
attributable to an increase in staff and in an officer’s
salary.
During
the six months ended June 30, 2018 and 2017, we recorded
professional fees of $870,968 and $503,773, respectively, an
increase of 72.9%, due primarily to consulting fees paid to outside
consultants for analyses done for potential
acquisitions.
General
and administrative expenses were $419,059 during the six months
ended June 30, 2018, and $252,995 for the same six-month period in
2017, a 65.7% increase. This increase is due to travel expenses
incurred for the evaluation of a potential French acquisition and
for marketing expenses incurred in trying to increase the
visibility of the company.
Our
interest expense was $335,925 for the six months ended June 30,
2018, compared to $238,100 for the same period of the previous
year, an increase of 41.1%, due to the increase in outstanding
notes and loans payable.
Our
debt discount expense was $89,540 for the six months ended June 30,
2018, compared to $44,960 for the same period of the previous year,
an increase of 99.2%. Debt discount amortization for the 2018
period increased due to our payments of original discount fees and
transaction fees in the amount of $60,102 to L2 Capital, LLC and
Collier Investments, LLC. The expense also reflects the fair value
of warrants issued with notes payable and recorded as discount. We
amortized $29,438 of debt discount on these warrants.
Liquidity and Capital Resources
At June
30, 2018, our principal source of liquidity consisted of $75,270 of
cash, as compared to $425,015 of cash at December 31, 2017. In
addition, our stockholders’ deficiency was $12,618,957 at
June 30, 2018, compared to stockholders’ deficiency of
$10,509,554 at December 31, 2017, an increase in the deficiency of
$2,109,403.
Our
operations used net cash of $1,376,867 during the six months ended
June 30, 2018, as compared to using net cash of $763,071 during the
six months ended June 30, 2017. The change was primarily due to the
warrant expense that impacted 2017.
Investing
activities for the six months ended June 30, 2018 and 2017, used
cash of $30,000 and $88,114, respectively. All of the cash used in
investing during the first six months of 2018 was an increase in
our assets under construction. Of the amount of cash used in the
second quarter of 2017, $42,853 was an increase in our assets under
construction and the balance represents cash paid in connection
with the Merger.
Financing
activities provided cash of $1,057,122 for our operations during
the six months ended June 30, 2018, due to the proceeds we received
from issuing convertible note and notes payable.
Our Capital Resources and Anticipated Requirements
As
noted above, at June 30, 2018, we had negative working capital
(current assets minus current liabilities) of $12,371,700. We are
now focusing our efforts on promoting and marketing our technology
by developing and executing contracts. We are exploring external
funding alternatives, as our current cash is insufficient to fund
operations for the next 12 months.
On May
4, 2018, we reached a settlement of the claims at issue in
Ocean Thermal Energy Corp. v.
Robert Coe, et al.
, Case No. 2:17-cv-02343SHL-cgc, before
the United States District Court for the Western District of
Tennessee. The settlement required the defendants to pay $3 million
by June 4, 2018. The defendants failed to meet this payment
deadline; consequently, on July 6, 2018, we began an agreed upon
process whereby the penalty for defendants would be an additional
$5,000,000 (total of $8,000,000) to be collected in a manner
directed by us. This process is ongoing and proceeding in a
cooperative fashion, and information will be updated as it
progresses.
Our
consolidated financial statements have been prepared assuming we
will continue as a going concern. We have experienced recurring
losses from operations and have an accumulated deficit. Our ability
to continue our operations as a going concern is dependent on
management’s plans, which include the raising of capital
through debt and/or equity markets, until such time that funds
provided by operations are sufficient to fund working capital
requirements. We will require additional funding to finance the
growth of our current and expected future operations as well as to
achieve our strategic objectives. If we are unable to access the L2
Capital equity line as described above, we believe our current
available cash may be insufficient to meet our cash needs for the
near future. We cannot assure that the L2 Capital equity line or
other financing will be available in amounts or terms acceptable to
us, if at all. Further, we cannot assure that we will be able to
collect all or any portion of our judgment against third parties as
discussed above. The accompanying financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. These financial statements do not
include any adjustments relating to the recovery of the recorded
assets or the classification of the liabilities that might be
necessary should we be unable to continue as a going
concern.
We have
no significant contractual obligations or commercial commitments
not reflected on our balance sheet as of this date.
Recent Accounting Pronouncements
The
amendments in Accounting Standards Updates (“ASU”)
2017-11 change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. As a result, a freestanding equity-linked financial
instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result
of the existence of a down round feature. ASU 2017-11 defines Down
Round Feature as: “A feature in a financial instrument that
reduces the strike price of an issued financial instrument if the
issuer sells shares of its stock for an amount less than the
currently stated strike price of the issued financial instrument or
issues an equity-linked financial instrument with a strike price
below the currently stated strike price of the issued financial
instrument. A down round feature may reduce the strike price of a
financial instrument to the current issuance price, or the
reduction may be limited by a floor or on the basis of a formula
that results in a price that is at a discount to the original
exercise price but above the new issuance price of the shares, or
may reduce the strike price to below the current issuance price. A
standard antidilution provision is not considered a down round
feature.” For public business entities, the amendments in
Part I of this update are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2018. For all other entities, the amendments in Part I of this
update 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 for all entities,
including adoption in an interim period. If an entity early adopts
the amendments in an interim period, any adjustments should be
reflected as of the beginning of the fiscal year that includes that
interim period prior to ASU 2017-11. We have elected to early adopt
this standard and have no other instruments from prior periods that
are affected by this adoption.
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.