10-Q: OTEC Q3 2024: Army Contract Boosts Outlook Amid Financial Woes

Sentiment:

Quarterly Report 2 October 2025 12:41 PM

📋All filings for Ocean Thermal Energy CORP

Ocean Thermal Energy Corporation reports a Q3 net income driven by derivative liability changes, securing a $3.6M U.S. Army contract, yet faces significant going concern doubts and widespread debt defaults.

Capital raiseIssued 198 shares of Series D Preferred Stock for cash proceeds of $396,000 during the nine months ended September 30, 2024.Sold an aggregate of $70,000 of convertible note units in November and December 2024.Sold an additional $55,000 of convertible note units in January and February 2025.Entered into stock purchase agreements in 2025 with investors to purchase 16,375,000 shares of common stock for aggregate proceeds of $242,500.Mentions reliance on external funding and a planned NYSE uplisting, which often involves capital raising.

Better than expectedThe company reported a net income of $4,257,443 for the three months ended September 30, 2024, a significant improvement compared to a net loss of $(335,767,248) for the same period in 2023.The net loss for the nine months ended September 30, 2024, was $(907,550), substantially reduced from a net loss of $(339,033,084) for the nine months ended September 30, 2023.The improvement in net income/loss is primarily attributable to a $2,091,934 decrease in the fair value of derivative liability for the nine months ended September 30, 2024, compared to a $336,141,902 increase in the prior year.

Summary

The company reported a net income of $4,257,443 for the three months ended September 30, 2024, a substantial improvement from a net loss of $(335,767,248) for the same period in 2023.
The net loss for the nine months ended September 30, 2024, was $(907,550), significantly reduced from $(339,033,084) for the nine months ended September 30, 2023.
A $3.6 million contract award was secured from the U.S. Army for OTEC power system engineering designs and feasibility analysis at U.S. Army Garrison Kwajalein Atoll.
Cash balance decreased to $49,105 as of September 30, 2024, from $115,149 at December 31, 2023.
The company had a working capital deficiency of $44,274,291 and a stockholders' deficiency of $44,274,291 as of September 30, 2024.
All notes payable and convertible notes payable were in default as of September 30, 2024.
Operating expenses for the nine months ended September 30, 2024, increased to $1,173,257 from $1,136,975 in the prior year.
Interest expense for the nine months ended September 30, 2024, increased to $1,856,530 from $1,677,928 in the prior year.
A decrease in the fair value of derivative liability by $2,091,934 for the nine months ended September 30, 2024, significantly impacted the net income/loss.
The company issued 5,641,655 shares of common stock upon conversion of $30,747 of convertible notes payable.
198 shares of Series D Preferred Stock were issued for cash proceeds of $396,000.
Subsequent to the reporting period, the company sold an aggregate of $70,000 of convertible note units in November and December 2024, and an additional $55,000 in January and February 2025.
In 2025, the company entered into stock purchase agreements for 16,375,000 common shares, receiving aggregate proceeds of $242,500.

Sentiment

Score: 3

Explanation: While the U.S. Army contract is a significant positive development and the quarterly net income is numerically high, the underlying financial health remains extremely precarious with a going concern warning, no revenue, and all debt in default. The net income is primarily an accounting adjustment, not operational profit. The company is heavily reliant on future funding, indicating high risk.

Positives

Secured a significant $3.6 million contract award from the U.S. Army for OTEC power system engineering designs and feasibility analysis, representing a key milestone in commercialization.
Reported a net income of $4,257,443 for the three months ended September 30, 2024, a substantial improvement from a net loss of $(335,767,248) in the prior year's comparable quarter.
The net loss for the nine months ended September 30, 2024, significantly reduced to $(907,550) from $(339,033,084) in the prior year.
A decrease in the fair value of derivative liability by $2,091,934 for the nine months ended September 30, 2024, positively impacted the income statement.
Management is actively pursuing grant funding from the U.S. Department of Energy for desalinated water, ammonia, and hydrogen production from OTEC facilities.
Cost-cutting efforts by management led to a 27.20% decrease in general and administrative expenses for the nine months ended September 30, 2024.

Negatives

Substantial doubt exists about the company's ability to continue as a going concern due to recurring operating losses, a significant working capital deficiency, and a stockholders' deficiency.
All notes payable and convertible notes payable were in default as of September 30, 2024.
Cash balance significantly decreased to $49,105 as of September 30, 2024, from $115,149 at December 31, 2023.
Working capital deficiency increased to $44,274,291 as of September 30, 2024, from $44,052,140 at December 31, 2023.
Stockholders' deficiency increased to $44,274,291 as of September 30, 2024, from $43,931,991 at December 31, 2023.
The company has not generated any revenue since inception.
Reliance on external funding to support operations and project development, with no assurance that such funding will be available on acceptable terms.
Interest expense increased by 10.64% for the nine months ended September 30, 2024, due to increased debt and higher interest rates on defaulted notes.
Disclosure controls and procedures were not effective as of September 30, 2024, due to material weaknesses in internal controls.

Risks

The ability to continue as a going concern is dependent on increasing sales and obtaining external funding for projects under development.
Reliance on grant funding from the U.S. Department of Energy, with no guarantee of successful applications or awards.
Availability and cost of substantial amounts of project capital are uncertain.
Significant leverage and debt service obligations, including sensitivity to fluctuations in interest rates, pose financial risks.
Inherent uncertainty and costs associated with prolonged arbitration or litigation.
Changes in federal or state tax laws or their administration could adversely affect financial results.
Fluctuations in the market value of common stock can significantly impact the fair value of derivative liabilities.
Material weaknesses in disclosure controls and procedures could lead to financial reporting inaccuracies.
All notes payable and convertible notes payable being in default poses significant financial and legal risks, including potential acceleration of debt and legal actions by creditors.

Future Outlook

The company is transitioning from research and development to contract execution and revenue-generating power purchase agreements. It is actively expanding into additional Indo-Pacific markets such as Guam, Diego Garcia, and the Northern Marianas, and has a project pipeline in the Caribbean and Southeast Asia, including India and Indonesia. Following the U.S. Army contract, the company anticipates discussions regarding a potential long-term Power Purchase Agreement for system deployment. A planned NYSE uplisting is also mentioned as a corporate initiative.

Management Comments

"We believe 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."
"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 not generated any revenue since inception, we are transitioning from research and development to contract execution and revenue-generating power purchase agreements."
"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."

Industry Context

The company operates in the renewable energy and clean technology sector, specifically focusing on Ocean Thermal Energy Conversion (OTEC) and Seawater Air Conditioning (SWAC). These technologies address global needs for sustainable energy, fresh water, and cooling, particularly relevant for island nations and coastal regions. The mention of U.S. Department of Energy grants and a U.S. Army contract indicates government interest and investment in such clean energy solutions, aligning with broader trends towards decarbonization and energy independence. The focus on military installations highlights a niche market for reliable, off-grid power and water solutions.

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Disclosure Controls and Procedures Effectiveness	Disclosure controls and procedures were not effective as of September 30, 2024, due to certain deficiencies involving internal controls constituting material weaknesses.	2024-09-30	Indicates potential for inaccuracies in financial reporting and requires remediation to ensure compliance and investor confidence.

Legal Proceedings

The company is involved in legal proceedings and regulatory matters arising from its operations, with reserves established for specific liabilities.
A lawsuit was filed on May 21, 2019, by a note holder related to a $290,000 note payable, where management believes the note holder failed to perform underlying obligations and is confident the court will decide in their favor.

Related Party Transactions

Monthly rent of $10,000 was incurred to a company controlled by the chief executive officer under an operating lease agreement until its termination on May 31, 2023.
A month-to-month agreement for shared office use at $1,000 per month was entered into with a company controlled by the chief executive officer starting May 2023.
Charges for reimbursement of accounting and administrative services from a company controlled by the chief executive officer totaled $102,207 for the nine months ended September 30, 2024.
Loans and notes payable exist with related parties, including a $2,265,000 note issued in 2014 to Jeremy P. Feakins & Associates, LLC (an investment entity owned by the CEO, CFO, and a director), which is in default.
Accrued interest on related-party notes was $1,086,710 at September 30, 2024.
Repaid $810 of net working capital advances from related parties during the nine months ended September 30, 2024.
Issued 500 shares of Series D Preferred Stock to a related party in 2023 upon conversion of $35,303 of notes and $964,697 of related accrued interest.
847,262 shares of common stock were borrowed from the chief executive officer in 2022 to enable conversions, with a liability of $11,014 accrued for replacement shares not yet issued.
Convertible promissory notes totaling $10,000 issued in 2019 were from the chief executive officer and an independent director, and are now in default.
Convertible promissory notes totaling $20,000 issued in 2019 and 2020 were from the chief executive officer and an independent director, and are now in default.
A $5,000 convertible promissory note issued in 2021 to a related party is in default.

Stakeholder Impact

Shareholders face potential dilution from common stock issuance for debt conversion and future capital raises, alongside significant value fluctuations due to going concern issues and derivative liability changes. The U.S. Army contract offers long-term potential if successfully executed.
Creditors are at high risk, as all notes payable are in default, indicating a high likelihood of non-payment or restructuring.
Employees may face uncertainty regarding long-term employment stability due to the company's going concern issues, despite recent increases in salaries and compensation.
Customers, particularly the U.S. Army, rely on the company's ability to execute the $3.6 million contract, and the company's financial instability could pose risks to project delivery if not adequately funded.
Suppliers may experience delayed payments due to the company's liquidity challenges and overall financial distress.

Next Steps

Complete engineering designs and feasibility analysis for the U.S. Army OTEC power system at Kwajalein Atoll.
Anticipate discussions with the U.S. Army regarding a potential long-term Power Purchase Agreement (PPA) for system deployment.
Actively expand into additional Indo-Pacific markets such as Guam, Diego Garcia, and the Northern Marianas.
Pursue commercial engagements in the Caribbean and Southeast Asia, including India and Indonesia.
Continue to apply for grant funding from the U.S. Department of Energy for desalinated water, ammonia, and hydrogen production from OTEC facilities.
Pursue a planned NYSE uplisting.

Key Dates

Date	Description
2007-12-01	Eastern Idaho Development Corporation (EIDC) loan borrowed.
2009-09-25	Pocatello Development Authority loan borrowed.
2009-12-23	SICOG loans borrowed.
2012	$1,000,000 note payable issued.
2013	$290,000 note payable issued in connection with a reverse merger transaction.
2013	Notes payable aggregating $158,334 issued.
2014	Notes payable of $300,000 issued.
2014	$2,265,000 note issued to Jeremy P. Feakins & Associates, LLC.
2017-Q3	$2,000,000 convertible promissory note private placement offering completed.
2017-11-06	Agreement and promissory note entered with JPF Venture Group, Inc. for up to $2,000,000 loan.
2017-12-01	Series of unsecured promissory notes and warrant purchase agreements entered with accredited investors.
2018	Borrowed $482,222 from L2 Capital in five separate tranches.
2018-01-18	Jeremy P. Feakins & Associates, LLC agreed to extend the due date for repayment of a $2,265,000 note.
2018-04-07	$50,000 promissory note with an unaffiliated investor was payable.
2018-09-19	$10,000 note payable executed with an unrelated party.
2018-12-14	L2 Capital LLC purchased the note payable from Collier Investments, LLC.
2019	Series of convertible promissory notes issued to accredited investors totaling $105,000.
2019-08-14	$26,200 note payable executed with an unrelated party.
2019	Series of convertible promissory notes issued to accredited investors aggregating $306,750 (continued into 2020).
2020	Series of convertible promissory notes issued to accredited investors totaling $15,000.
2020	Series of convertible promissory notes issued to accredited investors aggregating $170,000 (continued into 2021).
2021	Series of convertible promissory notes issued to accredited investors aggregating $285,000.
2021	$5,000 convertible promissory note issued to a related party.
2022-03-11	President Biden signed a bill providing $162 million for the Water Power Technologies Office budget, with $112 million slated for marine energy.
2023-01-01	Prior year accrued interest adjustment of $320,498 recorded to accumulated deficit and accounts payable and accrued expenses.
2023-01-01	Issued 500 shares of Series D Preferred Stock upon conversion of $35,303 of notes and $964,697 of accrued interest.
2023-05-01	Entered into a month-to-month agreement with a company controlled by the CEO for shared office use.
2023-05-31	Previous operating lease agreement with a company controlled by the CEO terminated.
2023-12-31	End of prior fiscal year.
2024-07-01	Adopted ASU 2023-07, Segment Reporting.
2024-09-30	End of current quarterly reporting period.
2024-11-01	FASB issued ASU 2024-04 Debt with Conversion and Other Options.
2024-11-01	FASB issued ASU 2024-03 Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures.
2024-11-01	Sold an aggregate of $70,000 of convertible note units during November and December.
2025-01-01	Sold an additional $55,000 of convertible note units during January and February.
2025-01-01	Entered into stock purchase agreements with investors to purchase 16,375,000 shares of common stock for $242,500.
2025-01-01	Received a contract award as a subcontractor to Johnson Controls Government Systems for engineering designs and feasibility analysis for an OTEC power system at U.S. Army Garrison Kwajalein Atoll.
2025-10-02	Date of filing of this Quarterly Report on Form 10-Q; 190,012,124 outstanding shares of common stock.
2025-12-15	Effective date for ASU 2024-04 for annual reporting periods.
2026-12-15	Effective date for ASU 2024-03 for annual reporting periods.
2027-01-04	Maturity Date for convertible note units sold in Nov/Dec 2024 and Jan/Feb 2025.

Recommendation

sell

Despite securing a significant U.S. Army contract, the company's financial position is extremely precarious, with a 'going concern' warning, a substantial working capital and stockholders' deficiency, and all notes payable in default. The reported net income for the quarter is primarily an accounting adjustment related to derivative liability revaluation, not an indication of operational profitability, as the company has generated no revenue since inception. The reliance on external funding, coupled with material weaknesses in internal controls, presents an unacceptably high level of risk for investors. The long-term potential of OTEC technology is overshadowed by the immediate and severe financial instability.

Keywords

Ocean Thermal Energy, OTEC, Seawater Air Conditioning, SWAC, Renewable Energy, Desalination, Clean Water, Sustainable Cooling, U.S. Army, Kwajalein Atoll, Johnson Controls, SEC Filing, 10-Q, Financial Report

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