Quarterly Report for Quarter Ending September 30, 2025 (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 ("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 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 seeking to expand 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 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.

Results of Operations

Comparison of Three Months Ended September 30, 2025 and 2024

During the three months ended September 30, 2025, the Company recognized revenue of $413,567 compared to $0 for the third quarter of 2024. The increase is solely due to 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 September 30, 2025, we had salaries and compensation of $167,293, compared to salaries and compensation of $225,621 during the third quarter of 2024, a decrease of 26% 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 September 30, 2025, and 2024, we recorded professional fees of $214,187 and $122,663, respectively, an increase of 75%. The increase was primarily related to legal, audit and accounting fees incurred related to bringing our delinquent SEC filings current.

We incurred general and administrative expenses of $8,602 during the three months ending September 30, 2025, compared to $30,226 for the third quarter of 2024, a decrease of 72% due to the allocation of costs to cost of contracts and multiple factors associated with management cost reduction efforts for ancillary services not directly related to the fulfilment of the Kwajalein Atoll contract.

Our interest expense was $712,926 for the three months ended September 30, 2025, compared to $628,141 for the third quarter 2024, an increase of 14%. This change was due to increased debt and higher interest rates on defaulted notes payable.

There was $13,610 debt discount amortization for the three months ended September 30, 2025, compared to $0 for the third quarter of 2024. The increase is due to new notes payable entered into during the period.

There was an increase in the fair value of the derivative liability of approximately $71 million during the three months ended September 30, 2025, compared to a $5,264,094 decrease for the 2024 period, a 1,448% increase. This change resulting results primarily from the reduction in the market value of our common stock in 2025 compared to 2024.

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Comparison of Nine Months Ended September 30, 2025 and 2024

During the nine months ended September 30, 2025, the Company recognized revenue of $1,432,986 compared to $0 for the previous period. The increase is solely due to 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 nine months ended September 30, 2025, we had salaries and compensation of $587,828, compared to salaries and compensation of $692,485 during the same nine-month period for 2024, a decrease of 15%, 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 nine months ended September 30, 2025, and 2024, we recorded professional fees of $408,450 and $394,838, respectively, an increase of 3%. An increase in legal audit and accounting fees incurred related to bringing our delinquent SEC filings current were partially offset by decreases in other areas, as the Company has had less activities requiring the use of professionals during the period which were not specific to fulfilling the Kwajalein Atoll contract.

We incurred general and administrative expenses of $29,625 during the nine months ended September 30, 2025, compared to $85,934 for the same nine-month period for 2024, a decrease of 66% due to the allocation of costs to cost of contracts and multiple factors associated with management cost reduction efforts for ancillary services not directly related to the fulfilment of the Kwajalein Atoll contract.

Our interest expense was $2,052,536 for the nine months ended September 30, 2025, compared to $1,856,530 for the same period for 2024, an increase of 11%. This change was due to increased debt and higher interest rates on defaulted notes payable.

There was $40,830 debt discount amortization for the nine months ended September 30, 2025, compared to $0 for the same period of the previous year. The increase is due to new notes payable entered into during the period.

There was an increase in the fair value of the derivative liability of approximately $165 million during the nine months ended September 30, 2025, compared to a $2,091,934 decrease for the 2024 period, a 8,003% increase. This change resulting results primarily from the reduction in the market value of our common stock in 2025 compared to 2024.

We recognized gain on conversion of notes payable of $11,998 during the nine months ended September 30, 2025, compared to a gain of $30,303 in the 2024 period. This change is primarily driven by changes in the market value of our common stock which was used to settle outstanding notes payable during the period.

Liquidity and Capital Resources

At September 30, 2025, our principal source of liquidity consisted of $56,111 of cash, as compared to $16,142 of cash at December 31, 2024. At September 30, 2025, we had negative working capital (current assets minus current liabilities) of approximately $212 million. In addition, our stockholders' deficit was approximately $212 million at September 30, 2025. 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 $321,721 during the nine months ended September 30, 2025, as compared to using net cash of $459,934 during the nine months ended September 30, 2024. The decrease 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 $361,690 during the nine months ended September 30, 2025, as compared to $393,890 for the nine months ended September 30, 2024. During the nine months ending September 30, 2025, and 2024, we received cash proceeds from the sale of common and preferred 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 of approximately $168 million and used approximately $322,000 of cash in operating activities for the nine months ended September 30, 2025. We had a working capital deficiency of approximately $212 million and a stockholders' deficiency of approximately $212 million as of September 30, 2025. 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.

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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 nine months ended September 30, 2025, 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, 2024.

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.