Quarterly Report for Quarter Ending June 30, 2024 (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.

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 ("OTEC") 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 are currently executing 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 expanding into additional Indo-Pacific markets such as Guam, Diego Garcia, and the Northern Marianas. Our project pipeline also includes commercial engagements in the Caribbean and Southeast Asia, including India and Indonesia.

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. 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.

Results of Operations

Comparison of Three Months Ended June 30, 2024 and 2023

During the three months ended June 30, 2024, we had salaries and compensation of $234,054, compared to salaries and compensation of $217,149 during the same three-month period for 2023, an increase of 7.78%.

During the three months ended June 30, 2024 and 2023, we recorded professional fees of $117,305 and $105,340, respectively, an increase of 11.36%. Beginning with the first quarter of 2024, our professional fees increased as the Company began pursuing completing its securities filings, continued development of existing projects and relationship development.

We incurred general and administrative expenses of $35,024 during the three months ended June 30, 2024, compared to $40,113 for the same three-month period for 2023, a decrease of 12.69% due to multiple factors including cost cutting efforts by management.

Our interest expense was $602,833 for the three months ended June 30, 2024, compared to $559,100 for the same period for 2023, an increase of 7.82%. This change was due to increased debt and higher interest rates on defaulted notes payable.

There was no debt discount amortization for the three months ended June 30, 2024, compared to $33,174 for the same period of the previous year. The decrease is due to full amortization of discount on debt that became due during the periods.

There was an decrease in the fair value of the derivative liability of $7,309,946 during the three months ended June 30, 2024, compared to a $1,662,631 increase for the 2023 period, a 539.66% increase period over period, such increase resulting primarily from the changes in the market value of our common stock during the periods.

Comparison of Six Months Ended June 30, 2024 and 2023

During the six months ended June 30, 2024, we had salaries and compensation of $466,864, compared to salaries and compensation of $444,077 during the same six-month period for 2023, an increase of 2.6%.

During the six months ended June 30, 2024 and 2023, we recorded professional fees of $272,175 and $196,677, respectively, an increase of 38.39%. Beginning with the first quarter of 2024, our professional fees increased as the Company began pursuing completing its securities filings, continued development of existing projects and relationship development.

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We incurred general and administrative expenses of $55,708 during the six months ended June 30, 2024, compared to $85,673 for the same six-month period for 2023, a decrease of 34.98% due to multiple factors including cost cutting efforts by management.

Our interest expense was $1,228,389 for the six months ended June 30, 2024, compared to $1,096,242 for the same period for 2023, an increase of 12.05%. This change was due to increased debt and higher interest rates on defaulted notes payable.

There was no debt discount amortization for the six months ended June 30, 2024, compared to $65,969 for the same period of the previous year. The decrease is due to full amortization of discount on debt that became due during the periods.

There was an increase in the fair value of the derivative liability of $3,172,160 during the six months ended June 30, 2024, compared to a $1,389,220 increase for the 2023 period, a 128.34% increase period over period, such increase resulting primarily from the changes in the market value of our common stock during the periods.

We recognized gain on conversion of notes payable of $30,303 during the quarter ended June 30, 2024, compared to $22 in the 2023 period.

Liquidity and Capital Resources

At June 30, 2024, our principal source of liquidity consisted of $115,771 of cash, as compared to $115,149 of cash at December 31, 2023. At June 30, 2024, we had negative working capital (current assets minus current liabilities) of $48,611,734. In addition, our stockholders' deficit was $48,611,734 at June 30, 2024, compared to stockholders" deficit of $43,931,991 at December 31, 2023. 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 $313,538 during the six months ended June 30, 2024, as compared to using net cash of $297,955 during the six months ended June 30, 2023. The increase in net cash used in operations is primarily due to our net loss partially offset by the increase in the change in the fair value of derivative liability, a gain on debt conversion and an increase in accounts payable and accrued expenses.

Financing activities provided cash of $314,160 during the six months ended June 30, 2024, as compared to $351,648 for the six months ended June 30, 2023. During the six months ended June 30, 2024 and 2023, we received cash proceeds from the sale of preferred stock 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. We have experienced recurring operating losses since inception and we had a net loss of $5,164,993 and used $313,538 of cash in operating activities for the six months ended June 30, 2024. We had a working capital deficiency of $48,611,734 and a stockholders' deficit of $111,246,326 as of June 30, 2024. 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. The 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.

Management believes there have been no significant changes during the six months ended June 30, 2024, 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, 2023.

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.