Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated 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 and in our Annual Report on Form 10-K for the year ended December 31, 2025.

Certain information included herein contains statements that may be considered forward-looking statements 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

Ocean Thermal Energy Corporation ("we," "our", and the "Company") develops and commercializes renewable energy, desalinated water, and sustainable cooling solutions using its proprietary Ocean Thermal Energy Conversion (OTEC) and Seawater Air Conditioning (SWAC) technologies. These systems extract energy from the natural temperature differential between warm surface water and cold deep ocean water to deliver continuous baseload power and clean water without reliance on 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.

Our OTEC systems are designed for scalability and rapid deployment, supporting a range of commercial, governmental, and humanitarian applications. In addition to providing 24/7 renewable energy and potable water, our platforms offer opportunities for sustainable agriculture, aquaculture, and mariculture, contributing to local food security and economic development. Recent system designs also integrate with SWAC technology to enable district-level air conditioning using deep ocean water, significantly reducing energy consumption and carbon emissions in urban and resort environments.

We have recently completed a $3.5 million U.S. Army engineering and design contract in partnership with Johnson Controls for the U.S. Army Garrison-Kwajalein Atoll and are actively seeking to expand into additional Indo-Pacific markets such as Guam, Diego Garcia, and the Northern Marianas. Our potential project pipeline also includes commercial engagements in the Caribbean and Southeast Asia, including India and Indonesia.

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 funding will be available or that it can be obtained on acceptable terms or that we will successfully uplist.

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Results of Operations

Comparison of Three Months Ended June 30, 2026 and 2025

During the three months ended June 30, 2026, the Company recognized revenue of $92,403 compared to $846,382 for the second quarter of 2025. The decrease is solely due to the completion of the Company's contract to provide services to the United States Department of Defense relative to the design and engineering of an OTEC unit on Kwajalein Atoll.

During the three months ended June 30, 2026, we had $308,315 of direct cost of contracts compared to $629,827 for the 2025 period. The decrease is solely due to costs incurred to service the Company's contract to provide services to the United States Department of Defense relative to the design and engineering of an OTEC unit on Kwajalein Atoll.

During the three months ending June 30, 2026, we had salaries and compensation of $66,082, compared to salaries and compensation of $218,580 for the three months ended June 30, 2025, a decrease of 70%, primarily due to the allocation of costs to cost of contracts and management's continued cost cutting efforts for areas which are not specific to the fulfilment of the Kwajalein Atoll contract.

During the three months ending June 30, 2026 and 2025, we recorded professional fees of $159,263 and $111,645, respectively, an increase of 43%. The increase was primarily related to legal fees related to completed litigation and audit and accounting fees.

We incurred general and administrative expenses of $42,598 during the three months ending June 30, 2026, compared to $14,518 for the second quarter of 2025, an increase of 193% due to various increases in ancillary services not directly related to the fulfilment of the Kwajalein Atoll contract.

Our interest expense was $750,618 for the three months ended June 30, 2026, compared to $683,801 for the second quarter 2025, an increase of 10%. This change was primarily due to compounded interest rates on notes payable.

There was $13,610 debt discount amortization for the three months ended June 30, 2026 and 2025.

There was an increase in the fair value of the derivative liability of approximately $4 million during the three months ended June 30, 2026, compared to an approximately $94 million increase for the 2025 period, a 96% decrease. This change results primarily from the changes in the market price of our common stock in 2026 compared to 2025.

Comparison of Six Months Ended June 30, 2026 and 2025

During the six months ended June 30, 2026, the Company recognized revenue of $495,920 compared to $1,019,419 for the six months of 2025. The decrease is solely due to the completion of the Company's contract to provide services to the United States Department of Defense relative to the design and engineering of an OTEC unit on Kwajalein Atoll.

During the six months ended June 30, 2026, we had $971,299 of direct cost of contracts compared to $758,590 for the 2025 period. The increase is solely due to costs incurred to service the Company's contract to provide services to the United States Department of Defense relative to the design and engineering of an OTEC unit on Kwajalein Atoll.

During the six months ending June 30, 2026, we had salaries and compensation of $130,997, compared to salaries and compensation of $420,535 for the six months ended June 30, 2025, a decrease of 69%, primarily due to the allocation of costs to cost of contracts and management's continued cost cutting efforts for areas which are not specific to the fulfilment of the Kwajalein Atoll contract.

During the six months ending June 30, 2026 and 2025, we recorded professional fees of $288,064 and $194,263, respectively, an increase of 48%. The increase was primarily related to legal fees related to completed litigation and audit and accounting fees.

We incurred general and administrative expenses of $77,087 during the six months ending June 30, 2026, compared to $21,023 for the six months of 2025, an increase of 267% due to various increases in insurance and other ancillary services not directly related to the fulfilment of the Kwajalein Atoll contract.

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Our interest expense was $1,489,839 for the six months ended June 30, 2026, compared to $1,339,610 for the six months of 2025, an increase of 11%. This change was primarily due to compounded interest rates on notes payable.

There was $27,220 debt discount amortization for the six months ended June 30, 2026 and 2025.

There was a decrease in the fair value of the derivative liability of approximately $59 million during the six months ended June 30, 2026, compared to an approximately $94 million increase for the 2025 period, a 167% decrease. This change results primarily from the changes in the market price of our common stock in 2026 compared to 2025.

We recognized gain on conversion of notes payable of $11,998 during the six months ended June 30, 2025, with no similar item in the 2026 period.

Liquidity and Capital Resources

At June 30, 2026, our principal source of liquidity consisted of $33,265 of cash, as compared to $403,667 of cash at December 31, 2025. At June 30, 2026, we had negative working capital (current assets minus current liabilities) of approximately $57 million. In addition, our stockholders' deficit was approximately $57 million at June 30, 2026. We are 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.

Our operations used net cash of $389,862 during the six months ended June 30, 2026, as compared to using net cash of $65,859 during the six months ended June 30, 2025. The increase in net cash used in operations is primarily due to an increase in loss (after adjusting for non-cash items such as the change in the fair value of derivative liability) partially offset by a net increase attributable to working capital items such as accounts receivable and payable.

Financing activities provided cash of $19,460 during the six months ended June 30, 2026, as compared to providing $189,460 of cash for the six months ended June 30, 2025. During the six months ended June 30, 2026 we received cash from subscriptions for preferred stock. During the six months ending June 30, 2025, we received cash proceeds from the sale of common stock and issuance of notes payable which was the primary financing activity during the period.

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 unaudited condensed consolidated financial statements, we had a net loss from operations of $971,527 and used approximately $390,000 of cash in operating activities for the six months ended June 30, 2026. We had a working capital deficiency of approximately $57 million and a stockholders' deficiency of approximately $57 million as of June 30, 2026. 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. 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. The condensed consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

We have no significant contractual obligations or commercial commitments not reflected on our balance sheet as of the date of this report.

Critical Accounting Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from these estimates. If updated information or actual amounts are different from previous estimates, the revisions are included in our results for the period in which they become known.

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Management believes there have been no significant changes during the three months ended June 30, 2026 to the items that we disclosed as our critical accounting estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2025.

Recent Accounting Pronouncements

Information concerning recently issued accounting pronouncements is set forth in Note 2 of our notes to unaudited condensed consolidated financial statements appearing elsewhere in this report.