10-Q: Ocean Thermal Energy Reports Massive Q3 Loss, Going Concern Doubt

Ocean Thermal Energy Corporation reported a net loss of $168 million for the nine months ended September 30, 2025, raising substantial doubt about its ability to continue as a going concern despite initial revenue generation.

Summary

• Reported a net loss of $168,081,522 for the nine months ended September 30, 2025, a significant increase from a $907,550 net loss in the prior year period.
• Generated revenue of $1,432,986 for the nine months ended September 30, 2025, compared to $0 in the same period of 2024, primarily from a U.S. Army contract.
• Experienced a substantial increase in derivative liability to $174,819,690 as of September 30, 2025, from $9,423,915 at December 31, 2024, resulting in a $165,340,795 loss from the change in fair value.
• Had a working capital deficiency of approximately $212 million and a stockholders' deficiency of approximately $212 million as of September 30, 2025.
• Cash at the end of the period was $56,111, with $321,721 used in operating activities for the nine months ended September 30, 2025.
• Management identified material weaknesses in disclosure controls and procedures due to limited personnel and lack of segregation of duties.
• The company is in default on numerous loans totaling $20 million in combined principal and interest, including $3.5 million owed to related parties.

Sentiment

Score: 1

Explanation: Despite generating initial revenue, the company faces severe financial distress, including a massive net loss, substantial working capital and stockholders' deficits, a significant increase in derivative liability, and numerous loan defaults. The going concern warning and ineffective internal controls highlight critical operational and financial risks.

Positives

• Generated first-time revenue of $1,432,986 for the nine months ended September 30, 2025, compared to $0 in the prior year, driven by a U.S. Army contract.
• Secured a professional services agreement with Johnson Controls Government Systems, LLC for $3,504,796 for OTEC and desalinization design on Kwajalein.
• Reduced net cash used in operating activities to $321,721 for the nine months ended September 30, 2025, from $459,934 in the prior year period.
• Decreased salaries and compensation by 15% and general and administrative expenses by 66% for the nine months ended September 30, 2025, due to cost-cutting efforts and cost allocation to contracts.

Negatives

• Reported a significant net loss of $168,081,522 for the nine months ended September 30, 2025, compared to a net loss of $907,550 in the prior year.
• Experienced a massive increase in derivative liability to $174,819,690 as of September 30, 2025, from $9,423,915 at December 31, 2024, primarily due to a reduction in the market value of common stock.
• Had a substantial working capital deficiency of approximately $212 million and a stockholders' deficiency of approximately $212 million as of September 30, 2025.
• Current cash of $56,111 is insufficient to fund operations for the next 12 months.
• In default on numerous loans totaling $20 million in combined principal and interest, with $3.5 million owed to related parties.
• Accrued $6,892,509 in unpaid payroll attributable to previous periods due to cash flow constraints.
• Interest expense increased by 11% to $2,052,536 for the nine months ended September 30, 2025, due to increased debt and higher interest rates on defaulted notes.
• L2 Capital has instructed the transfer agent to reserve all remaining authorized shares, effectively blocking the company from paying other defaulted loans in stock.

Risks

• **Going Concern Doubt:** Substantial doubt exists about the ability to continue as a going concern due to a net loss of approximately $168 million, $322,000 cash used in operating activities, a working capital deficiency of approximately $212 million, and a stockholders' deficiency of approximately $212 million as of September 30, 2025.
• **Liquidity Risk:** The ability to continue as a going concern is dependent on increasing sales and obtaining external funding for projects, with no assurance that such funding will be available on acceptable terms.
• **Default on Debt Obligations:** The company is in default under and has failed to pay timely numerous loans, totaling $20 million in combined principal and interest, including $3.5 million owed to related parties.
• **Share Issuance Blockage:** L2 Capital has instructed the transfer agent to reserve all remaining authorized shares, effectively blocking the company from paying other defaulted loans in stock, and there is no guarantee when or if authorized shares can be increased.
• **Derivative Liability Volatility:** The fair value of derivative liabilities is highly sensitive to changes in the market value of common stock, leading to significant non-cash losses or gains.
• **Internal Control Weaknesses:** Material weaknesses in disclosure controls and procedures exist due to limited personnel and lack of segregation of duties, which could adversely affect the ability to record, process, summarize, and report financial information.
• **Litigation Risk:** While management does not believe current legal proceedings will have a material adverse effect on financial condition or liquidity, resolution of one or more matters could materially affect results of operations for a period.
• **Unpaid Accrued Salaries:** A significant amount of accrued payroll ($6,892,509) remains unpaid due to cash flow constraints, which could lead to employee dissatisfaction or legal claims.
• **Dependence on External Funding:** Continued reliance on external funding for operations, project development, and corporate initiatives, including a planned NYSE uplisting, with no assurance of availability or acceptable terms.

Future Outlook

The company is transitioning from research and development to contract execution and revenue-generating power purchase agreements. It plans to expand into additional Indo-Pacific markets such as Guam, Diego Garcia, and the Northern Marianas, and pursue commercial engagements in the Caribbean and Southeast Asia, including India and Indonesia. The company continues to apply for grant funding from the U.S. Department of Energy for desalinated water, ammonia, and hydrogen production from OTEC facilities and plans to apply for funding for other applicable projects. A planned NYSE uplisting is also mentioned, though there is no assurance it will be available or on acceptable terms.

Management Comments

• "We believe these technologies provide practical solutions to mankinds three oldest and most fundamental needs: clean drinking water, plentiful food, and sustainable, affordable energy without the use of fossil fuels."
• "Our solutions are particularly well suited for tropical island communities, coastal military installations, and developing nations where access to reliable energy and freshwater is limited."
• "Although we have generated only limited revenue since inception, we are transitioning from research and development to contract execution and revenue-generating power purchase agreements."
• "We continue to rely on external funding to support operations, project development, and corporate initiatives, including a planned NYSE uplisting."
• "There can be no assurance that such uplisting or funding will be available or that it can be obtained on acceptable terms."
• "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."
• "We continue to apply for grant funding from the U.S. Department of Energy. Our applications focus on desalinated water, ammonia, and hydrogen production from an OTEC facility."
• "We plan to apply for funding to support projects where our technology would apply."
• "We intend to increase our authorized shares to complete the conversion of these defaulted loans, but cannot guarantee when or if we will be able to do that."
• "Management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Companys financial condition or operation, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Companys results of operations for that period."
• "Our controls were not effective due to the size of the company and available resources. There are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties and (ii) controls that may not be adequately designed or operating effectively."
• "The Company is in the process of seeking additional skilled financial employees to improve its internal controls and financial reporting."

Industry Context

The company operates in the niche but growing renewable energy and clean technology sector, specifically focusing on Ocean Thermal Energy Conversion (OTEC) and Seawater Air Conditioning (SWAC). These technologies address critical global needs for sustainable energy, fresh water, and cooling, particularly relevant for island nations, coastal military bases, and developing regions. The U.S. Army contract for Kwajalein Atoll highlights a potential strategic market in government and defense applications, aligning with broader trends of energy independence and climate resilience. However, the capital-intensive nature of OTEC projects and the company's significant financial distress suggest challenges in scaling within this emerging industry without substantial, reliable funding.

Comparison to Industry Standards

• The company's transition from R&D to revenue generation with a $3.5 million U.S. Army contract for OTEC/desalinization design on Kwajalein Atoll is a positive step, as OTEC projects are typically large-scale and require significant initial investment and government support. Comparable projects, such as the OTEC plant in Hawaii (NELHA) or past proposals for larger commercial OTEC facilities, often face high capital costs and long development timelines.
• The reported net loss of $168 million and a working capital deficiency of $212 million for a company with only $1.4 million in revenue are significantly worse than typical industry benchmarks for established renewable energy companies, which often demonstrate positive cash flow or clear paths to profitability once projects are operational.
• The substantial increase in derivative liability due to a reduction in common stock market value indicates high financial risk and volatility, which is not standard for mature, stable companies in the energy sector.
• The numerous defaults on loans totaling $20 million, including related-party debt, are indicative of severe financial distress, far below the solvency standards expected in the broader energy and infrastructure development industry.
• The identified material weaknesses in internal controls are a significant governance concern, contrasting with the robust control environments typically maintained by publicly traded companies, especially those seeking to uplist to major exchanges like the NYSE.

Management Changes

Corporate Governance

Legal Proceedings

• No material changes during the first quarter of 2025 in the status of legal matters disclosed in the 2024 Annual Report on Form 10-K.
• Management does not believe the disposition of pending matters is likely to have a material adverse effect on financial condition or liquidity, but resolution could affect results of operations for a period.
• A lawsuit was filed on May 21, 2019, by the holder of a $290,000 note, which the company disputes, believing the court will void the note or award offsetting damages.

Related Party Transactions

• Office and facilities agreement with a company controlled by the CEO, with rent increasing to $1,400 per month from May 1, 2025.
• Reimbursement for accounting and administrative services provided by an employee of a CEO-controlled company, totaling $106,099 for the nine months ended September 30, 2025.
• Accrued interest on related-party notes totaled $1,308,203 as of September 30, 2025.
• Repaid $810 of net working capital advances from related parties during the nine months ended September 30, 2025.
• Common stock was borrowed from the CEO to enable conversions of notes and accrued interest in 2022 (847,262 shares) and March 2025 (563,611 shares), with a liability accrued for reissuance.
• Jeremy P. Feakins & Associates, LLC (an investment entity owned by CEO, CFO, and a director) holds a $1,067,197 note with $297,629 accrued interest, which is in default.
• JPF Venture Group, Inc. (an investment entity owned by CEO, CFO, and a director) holds a $543,093 note with $460,888 accrued interest, which is in default.
• The CEO and an independent director were among the accredited investors for convertible promissory notes issued in 2019 ($10,000) and 2019/2020 ($20,000).

Next Steps

• Increase sales and obtain external funding for projects under development to address going concern issues.
• Continue applying for grant funding from the U.S. Department of Energy for desalinated water, ammonia, and hydrogen production from OTEC facilities.
• Apply for funding to support other projects where the company's technology would apply.
• Seek additional skilled financial employees to improve internal controls and financial reporting.
• Address the blockage by L2 Capital and work towards increasing authorized shares to complete the conversion of defaulted loans.
• Complete the Professional Services Agreement with Johnson Controls Government Systems, LLC for the Kwajalein project by September 30, 2026.
• Pursue a planned NYSE uplisting, contingent on funding and acceptable terms.
• Expand into additional Indo-Pacific markets (Guam, Diego Garcia, Northern Marianas) and commercial engagements in the Caribbean and Southeast Asia (India, Indonesia).

Key Dates

Recommendation

The company faces severe financial distress, evidenced by a massive net loss, substantial working capital and stockholders' deficits, and a going concern warning. Numerous loan defaults, including to related parties, and the inability to convert debt into equity due to a third-party block, highlight critical liquidity and solvency issues. Material weaknesses in internal controls further compound governance risks. While initial revenue generation from a government contract is a positive, it is dwarfed by the liabilities and losses. The significant increase in derivative liability due to declining stock value indicates extreme volatility and potential for further shareholder value erosion. The overall financial health and operational risks are exceptionally high, making the stock a strong sell for any investor.

Keywords

Ocean Thermal Energy Conversion, OTEC, Seawater Air Conditioning, SWAC, Renewable Energy, Desalinated Water, Clean Technology, Kwajalein Atoll, Government Contracts, Energy Solutions, Sustainable Cooling, SEC 10-Q, Financial Reporting, Going Concern, Derivative Liability, Debt Default, Corporate Governance