Our Management's Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking. Forward-looking
statements are, by their very nature, uncertain and risky. These risks and
uncertainties include international, national and local general economic and
market conditions; demographic changes and pandemics; our ability to sustain,
manage, or forecast growth; our ability to successfully make and integrate
acquisitions; raw material costs and availability; new product development and
introduction; existing government regulations and changes in, or the failure to
comply with, government regulations; adverse publicity; competition; the loss of
significant customers or suppliers; fluctuations and difficulty in forecasting
operating results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other risks that might be detailed from time to time
in our filings with the SEC.
Because forward-looking statements are inherently subject to risks and
uncertainties, the actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. The following
discussion and analysis of financial condition and results of operations of the
Company is based upon, and should be read in conjunction with, the audited
consolidated financial statements and related notes elsewhere in this Annual
Report on Form 10-K.
Plan of Operation
Cool Technologies, Inc. and subsidiary, ("the Company" or "Cool Technologies" or
"CoolTech") was incorporated in the State of Nevada in July 2002. In April 2014,
CoolTech formed Ultimate Power Truck, LLC ("Ultimate Power Truck" or "UPT"), of
which the Company owns 95% and a shareholder of Cool Technologies owns 5%. Cool
Technologies was formerly known as Bibb Corporation, as Z3 Enterprises, and as
HPEV, Inc. On August 20, 2015, the Company changed its name to Cool
Technologies, Inc.
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The Company's technologies are divided into two distinct but complementary
categories: mobile power generation and heat dispersion technology.
The Company has developed a mobile power generation system (eMGen) that enables
work trucks to generate electric power by running an in-chassis generator. The
eMGen system can be retrofit onto new and existing American trucks. CoolTech
intends to sell the mobile electric power system to government, commercial and
fleet vehicle owners. Sales are expected to occur through the direct efforts of
the Company, its sales agents and its joint venture partners. CoolTech may also
license the eMGen system as well.
The markets targeted include consumer, agricultural, industrial, military and
emergency responders, both in the U.S. and worldwide.
CoolTech has also developed heat dispersion technologies based on proprietary
composite heat structures and heat pipe architecture in various product
platforms such as electric motors, pumps, turbines, bearings and vehicle
components. In preparation, Cool Technologies filed for and received a trademark
for Totally Enclosed Heat Pipe Cooled: TEHPC.
When a generator is enhanced by CoolTech's patented thermal technologies, it
should be able to output more power than any other generator of its size on the
market. That's because third party testing has demonstrated that the cooling
provided by the thermal technologies can help increase the efficiency of
electric motors.
Furthermore, management believes that the technologies will increase the
lifespan as well as help meet regulatory emissions standards for electric motors
and other heat producing equipment and components. The simplicity of the heat
pipe architecture as well as the fact that it provides effective new
applications for existing manufacturing processes should enhance the cost
structure in several large industries including motor/generator and engine
manufacturing.
As of December 31, 2022, we have seven US patents, two Canadian patents, one
Mexican patent, one allowed Brazilian patent and one pending US patent
application covering integrated electrical power generation methods and systems.
The Company intends to commercialize its patents by integrating the thermal
technologies and applications with Original Equipment Manufacturer (OEM)
partners and by licensing them to electric motor, generator, pump and vehicle
component (brake, resistor, caliper) manufacturers.
We believe the benefits of our mobile power generation systems are quickly
realized once potential customers see it in operation. Public demonstrations of
the eMGen systems began in April 2017. An inspection and performance
demonstration for Mexican government officials and business leaders occurred in
May 2018. Feedback from initial viewers resulted in more government officials
and fruit growers coming to see the eMGen power equipment and to learn about the
water purification options in March 2019. Even more officials and growers
followed -- flying to St. Louis for a review in May 2019.
Craftsmen Industries was selected to produce the first systems due to its
engineering capabilities and extensive facilities. In January 2019, it began
production on the initial vehicles and completed an initial production run
vehicle two months later.
While the Company awaits funding to begin continuous production, it has
continued to expand its contacts with potential clients -- meeting with
government agencies, emergency responders and city officials as well as military
engineers and procurement specialists. Specifications for custom applications
have been noted and preliminary designs drawn up.
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We have not generated any revenues to date. Consequently, there can be no
assurances that the Company will be able to generate new orders, fulfill the
existing ones, nor address all the requirements of all the interested parties.
Management is pursuing various financing alternatives, based upon a third-party
assessment of the historically demonstrated or contractually committed
profit-earning capacities of our IP. We see this as the best path forward for
non-dilutive funding.
If funding is received, it will be used to support completion of the initial
phases of our business plan, which is to license our thermal technologies and
applications; to license or sell a mobile electric power system; and to license
our submersible motor dry pit technologies and/or to bring to market our
technologies and applications through key distribution and joint venture
partners.
While the pandemic phase of COVID-19 has receded and the virus is now considered
to be endemic in the US as of this filing, the evolution of an acute and more
contagious variant is possible. In such a case, it may impact demand for our
products and may again hamper our efforts to provide our investors with timely
information and comply with our filing obligations with the Securities and
Exchange Commission.
Real GDP growth, inflation, employment levels, oil prices, interest rates, tax
rates, availability of customer financing, foreign currency exchange rate
fluctuations, and other macroeconomic trends can adversely affect demand for the
products that we offer. Geopolitical issues around the world and how our markets
are positioned can also impact macroeconomic conditions and could have a
material adverse impact on our financial results.
Significant Developments
Amendment of Series B Preferred Stock
On October 31, 2016, the Company filed an amended and restated Series B
Preferred Stock Certificate of Designation (which was originally filed with the
Secretary of State of Nevada on April 19, 2016 and amended on August 12, 2016)
to designate 3,636,360 shares as Series B Preferred Stock and to provide for
supermajority 66 2/3% voting rights for the Series B Preferred Stock. The Series
B Preferred Stock will not bear dividends, will not be entitled to receive any
distributions in the event of any liquidation, dissolution or winding up of the
Company, and will have no other preferences, rights, restrictions, or
qualifications, except as otherwise provided by law or the articles of
incorporation of the Company. The holders of Class B Stock shall have the right,
at such holder's option, at any time to convert such shares into common stock,
in a conversion ratio of one share of common stock for each share of Class B
Stock. If the common stock trades or is quoted at a price per share in excess of
$2.25 for any twenty consecutive day trading period, (subject to appropriate
adjustment for forward or reverse stock splits, recapitalizations, stock
dividends and the like), the Series B Stock will automatically be convertible
into the common stock in a conversion ratio of one share of common stock for
each share of Series B Stock. The Series B Stock may not be sold, hypothecated,
transferred, assigned or disposed without the prior written consent of the
Company and the holders of the outstanding Series B Preferred Stock.
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Craftsmen Industries, Inc.As a consequence of the first public demonstration of the eMGen 30 kilovolt amp
("kVA") system at the North America International Auto Show in Detroit in
January 2017, the Company entered into an agreement in principle, dated February
21, 2017, with Craftsmen Industries, Inc.("Craftsmen'), a company engaged in the
design, engineering and production of mobile marketing vehicles, experiential
marketing platforms and industrial mobile solutions.
On April 25, 2017, we delivered to Craftsmen Industries, a Class III Vehicle
(Ford F-350 dually) up-fitted with a production-ready eMGen 30 kVA (single
phase/three phase) system.
Subsequently, Craftsmen invited the Company to demonstrate its mobile generation
technology and the potential benefits for Craftsmen products at Craftsmen's 35th
Anniversary Party on April 27, 2017. Over one hundred current and prospective
Craftsmen customers were in the audience for the demonstrations.
Craftsmen recently signed a manufacturing contract with Translux-Fair Play.
Translux' Hazelwood, Missouri facility encompasses over 45,000 square feet of
manufacturing space and offers extensive laser cutting and metal bending
machinery. The contract significantly enhances Craftsmen's capabilities to
produce boxes and control panels for the eMGen Systems and the vehicles they're
upfitted to, but also all the eMGen's optional tasks and capabilities, including
welding, water purification and solar power.
Not only will basic production be optimized and improved, but control panels and
displays should be upgraded. CoolTech is expected to benefit from Translux'
electronics expertise which has been refined through their years of
manufacturing digital scoring panels for sporting arenas and ball parks.
Aon Risk Services Central, Inc and Lee and Hayes, PLLC
On January 18, 2018, the Company entered into an agreement with Aon Risk
Services Central, Inc. and Lee and Hayes, PLLC, through its operating unit,
601West, which provides intellectual property ("IP") analytics, to assess the
value of the Company's IP. As set forth in the agreement, the assessment will be
founded on historically demonstrated or contractually committed profit-earning
capacities of our IP and may be used to obtain financing, including but not
limited to, non-dilutive financing. Since then, significant progress has been
achieved, although at a pace much slower than anticipated.
Live eMGen 80 Demonstration in Fort Collins, Colorado
On May 4, 2018, nine representatives from Mexico's farming, banking, and
government sectors flew to Fort Collins, Colorado for a live demonstration of
CoolTech's generator-equipped truck. The demonstration showcased the
capabilities and ease of operation of the system. The Company demonstrated how
an operator is able to control the generator from the comfort and safety of the
truck's cab using a Panasonic Toughpad. The Company also used the electricity
from the truck to power a screw compressor, an industrial fan, and an industrial
load bank. Additional capabilities, such as purifying water and using batteries
and solar power to make operations more sustainable and environmentally friendly
were discussed with the attendees.
A representative from one of the Mexican farming producers' unions approved the
generator-equipped truck. CoolTech plans to put this into production as soon as
final funding is secured.
Purchase and Delivery of Truck to Craftsman Industries
On July 15, 2018, the Company purchased a Ford F-450 Chassis Cab Truck.
Subsequently, a metal flatbed was manufactured and installed. The truck was
delivered to Craftsmen on September 15, 2018. It will be used for the
installation and refinement of the eMGen 80 kVA system. A second F-450 will be
used for the eMGen 125 kVA system.
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Order of Parts and Components
As of September 2021, the Company has acquired enough parts and components to
build 5 eMGen 80s and 2 eMGen 125s. It is currently procuring two mobile water
purification systems and components for mobile electric vehicle charging
systems.
In addition, the Company has purchased another Ford F-450 and is seeking to
acquire more F-450s and 550s for use in demonstrations of the capabilities noted
above and for initial order fulfillment.
Unveiling of Initial Production Run Vehicle
On March 27, 2019, the Company unveiled the initial production run of its mobile
power generation (eMGen) work trucks for inspection by an audience of
agricultural and community leaders from Latin America at Craftsmen Industries.
The itinerary for the showcase event included a tour of the St. Louis
manufacturing facility and inspection of the first production-run eMGen vehicle
in operation as it powered a variety of equipment.
The purpose of the viewing was not only to show the truck's capabilities but to
get feedback from the attendees.
Mexico's population is expected to grow from 129 million to nearly 150 million
by 2050. As a result, energy and water demand should increase significantly.
Increased water demand for both human consumption and agricultural production,
along with lagging water management practices have resulted in a rapid depletion
of water reserves in Mexico, particularly in Northern Mexico. The forecast of
high temperatures in the summer combined with a developing La Nina weather
pattern could prolong an existing drought and spread water shortages.
According to an article in the NYTimes (https://tinyurl.com/2n76rjy7), Mexico's
National Water Commission (CONAGUA) determined that in July 2022, eight of
Mexico's 32 states were experiencing extreme to moderate drought, resulting in
1,546 of the country's 2,463 municipalities confronting water shortages, By
mid-July, about 48 percent of Mexico's territory was suffering drought,
according to the commission, compared with about 28 percent of the country's
territory during the same period last year. In June of 2021, 77 of Mexico's 210
principal water reservoirs were below 25% capacity. For the region encompassing
Western North America, this period is now the driest two decades in 1,200 years.
With reservoirs drying and groundwater levels declining, water is at a premium.
In many locations, sewage water is reused for irrigation. Water treatment is
scarce and pollution regulations are rarely enforced.
As long as investment in wastewater treatment lags behind population growth,
large numbers of consumers eating raw produce face heightened threats to food
safety from diseases such as salmonella, E Coli and roundworm. Add unchecked or
minimally treated industrial pollution and unusually large numbers of cases of
cancer and kidney problems have been documented in consumers living near
polluted waterways.
While access to electricity is high across the nation, in rural areas, power can
be sporadic or even non-existent. Many communities, particularly in regions
populated by indigenous people, are still not connected to the grid. They rely
on diesel generators to light homes and draw water from shrinking aquifers.
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Interest from Mexican authorities is high in the eMGen systems as they seek to
mitigate the effects of drought and guarantee access to drinking water as well
as provide a consistent source of electricity and mobile medical services for
underserved populations.
Through the efforts of its representatives in the country, the Company has been
in contact with and in some cases made presentations to the national water
commission (CONAQUA) as well as cabinet secretaries, senators, representatives
and deputies at the federal level; to governors, legislators, commissioners and
municipal presidents at the state level and mayors and county and local
politicians in cities and towns beset by energy and water problems. Private
entities such as distilleries, fruit growers, cattle rancher's associations and
mining companies have also requested information.
Conversations are ongoing and interested politicians are helping to promote,
coordinate and refine the Company's approach to secure funding for pilot
programs, full-blown projects and purchases of eMGen systems and vehicles.
Mexican Government
On May 13, 2019, government officials and fruit growers were at Craftsmen
Industries in St. Louis for a review of a first-run eMGen 80 production vehicle
and water purification/desalination options.
Among the politicians in attendance was Congressman Efraín Rocha Vega who is
Secretary of the Commission of Development and Rural, Agricultural and Food
Self-sufficiency Conservation, a member of the commission of Livestock and the
commission of Environment, Sustainability, Climate Change and Natural Resources.
Subsequent to the event, in an official Congressional Letter of Support, dated
May 20, 2019, Congressman Rocha wrote: "The successful demonstration of these
technologies further strengthens the Mexican Government's support of Mexican
entities that desire to purchase CoolTech products, as well as affirms our
position to provide financial assistance to such entities." The letter can be
viewed in its entirety at:
http://www.cooltechnologiesinc.com/content/pdf/MexicanLegislationandFinancialAssistanceLetter.pdf.
Introduction of new options
During the fourth quarter of 2019, the Company has introduced new options, which
include an eMGen System that generates up to 200 kVA of electric power, water
purification and desalination systems.
The Company's mobile electric generation system ("eMGen") offers optional 30 to
125 kVA water purification and desalination units capable of producing 2,800 to
14,000 gallons of potable water per day. Assuming the average person needs 2
liters per day, 10,000 gallons is enough for 26,498 people. If delivery is
required, an eMGen truck can also tow a water tanker.
The truck-mounted units cleanse contaminated, polluted wastewater or remove
saline from saltwater. Submerge the input pipe into any water source. Chemicals,
particulates, salts, heavy metals, bacteria, viruses and other impurities are
removed. Six levels of water purification output a range of water qualities from
clean potable water for drinking and cooking to to-potable water for
agricultural or other commercial and emergency usage.
The eMGen systems as well as the purification and desalinization units feature
fully automated controls and monitoring. A Panasonic Toughpad tablet provides a
rugged touchscreen interface for operation from the truck cab or anywhere within
a 300-foot radius. When outfitted with the optional telematics package, the
systems can be remotely controlled and monitored from distant locations.
The next generation of eMGens will include a solar-powered generator system with
a built-in water purification unit that makes seawater desalination sustainable.
The system pumps and purifies up to 4,500 gallons of potable water per day. It
can be set up and operated anywhere a four-wheel drive vehicle can go. Once the
batteries are drained, the systems shift to fuel power for 24-hour operation.
The solar panels collapse and fold, so the entire system fits easily in the bed
of a work truck.
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Rugged, reliable and versatile, the eMGen trucks are designed to operate in
extreme environments. A variety of capabilities handle a variety of needs
including:
· agriculture,
· municipalities,
· mining,
· emergency response,
· and disaster relief.
The applications for hurricanes, floods, earthquakes and other natural disasters
are obvious, others less so.
Here are a few common yet relatively unknown problems the system and units
address:
· In poorly served or third-world countries, irregular power service
prevents farmers from irrigating on a regular schedule which reduces the
size of the harvest.
· In areas where water tables are dropping, powerful pumps are required to
pull water up from deep underground. A mobile pump is far more
cost-effective than permanent ones positioned out in the fields.
· Use of polluted irrigation water stunts crops and restricts sales which
limits farmers' incomes.
· Over-pumping of aquifers enables saltwater intrusion to contaminate
coastal water supplies. Water must either be pumped and transported from
further away or very expensive desalination plants must be built to remove
the salt. The plants can take years to build.
Consider the Texas Freeze in February of 2021. Power failures at water treatment
plants necessitated boil water orders. Burst pipes and dripping faucets dropped
water reserves to dangerously low levels.
More than 800 public water systems serving 162 of the state's 254 counties were
disrupted. Over 13 million people were left without safe drinking water. The
town of Kyle almost went dry.
Cities opened water distribution sites, water was trucked in to flush toilets,
homeowners melted icicles and snow for drinking water, medical workers resorted
to using bottled water for chemotherapy treatments.
KeyOptions
On May 30, 2019, the Company entered into a joint venture agreement ("JV") with
KeyOptions Pty Ltd., a privately held technology and security provider based in
Victoria, Australia.
KeyOptions develops and markets products for governments, defense contractors
and other commercial applications to counter security and cyber threats. The
Company will provide a license for the JV to market and sell CoolTech's entire
product platform in Australia and neighboring countries in Southeast Asia.
New Strategic Alliance:
On December 16, 2019, the Company signed a cross-marketing and licensing
agreement with VerdeWatts, LLC., an energy generation and storage company
encompassing everything from mobile solar power generation systems to
large-scale biogas turbine installations. Pursuant to the agreement VerdeWatts
and the Company each granted the other a royalty-free non-exclusive license to
certain patents which license is subject to certain future negotiation.
Like CoolTech's mobile power generation systems ("eMGen"), VerdeWatts' products
are scalable and offer the ability to bring power nearly anywhere it is needed.
Their proprietary Smart Solar Power Generation Units and energy storage systems
combine to deliver sustainable power long after the sun has set.
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The agreement with VerdeWatts also included a cross-marketing and royalty-free
non-exclusive licensing agreement with FirmGreen, Inc., a water treatment
facilities developer that works closely with VerdeWatts to create a suite of
synergistic products that address significant needs in the global marketplace.
FirmGreen specializes in water purification and desalination technologies. Their
mobile, solar and container applications feature 6 levels of water purification
for unrivaled drinkability. Pursuant to the agreement FirmGreen and the Company
each granted the other a royalty-free non-exclusive license to certain patents
which license is subject to certain future negotiations.
CoolTech's eMGen platform makes the companies' product offerings complete with
mobile power generation. It provides the capability to power everything from
irrigation for farms and water purification for rural areas to electric vehicle
charging and fast charging in the urban ones.
Consider the solar-powered generator system with a built-in water purification
unit that makes seawater desalination sustainable. The system pumps and purifies
up to 3,000 gallons per day and interfaces with CoolTech's eMGen system for
24-hour operation. The solar panels collapse and fold together, so the entire
system fits easily in the bed of a work truck. It can be set up and operate
anywhere a four-wheel drive vehicle can reach. All of these systems are
patent-protected and cross-licensed to each of the three companies.
FirmGreen and VerdeWatts have a global presence with projects on three
continents. The largest encompasses the installation of 14 natural gas
generators to produce over 60 megawatts (MW) of power. The generators will be
integrated with 50-megawatt hours of battery storage and another 6 MW of solar
to ensure a consistent flow of power. VerdeWatts intend to replace most of the
legacy on-site generators with CoolTech's eMGen systems, however, the Company
has not received any orders and there cannot be any assurance that any orders
will be placed.
Together the companies can create an energy or utility ecosystem that can enable
less developed countries to leapfrog non-existent, inadequate or failing
infrastructure to deliver reliable power and water quickly, sustainably and
cost-effectively to their citizens, agriculture and other businesses. The scale
and impact can reach from individual farms and villages to cities and regions.
In fact, by combining their respective technologies: energy generation, energy
storage and load management controls into a single suite of products, the
companies create what is called a "microgrid". Varying combinations of energy
sources such as solar, wind, biogas and eMGen systems both backup and supplement
one another to provide consistent, uninterrupted primary power even during
severe weather or other emergencies.
The synergies between the companies extend beyond water purification and power
generation. VerdeWatts' wind and gas turbines and generators which produce
electric power can all be improved by CoolTech's thermal reduction technologies.
Request for Collaboration Sent to US Government Officials
On December 11, 2019, letters signed by thirteen government officials and
Congressmen in Mexico were mailed to their counterparts in the US, specifically
Governor Gavin Newsom, Secretary Rick Perry, Secretary Wilbur Ross, Senator
Mitch McConnell and Speaker of the House Nancy Pelosi.
The letters were a request for collaborative support between the two countries
to accelerate CoolTech's product deployment into Mexico to help solve urgent
rural power and water purification problems that are hurting rural communities.
Those problems include irregular and faulty power in rural areas which hinders
crop irrigation and water pollution which affects crops farmed for sale to the
US.
The letters also detail the Mexican officials' satisfaction with CoolTech's
solutions and management team and that they have met with the Company on several
occasions for product demonstrations as well as strategic and technical advice.
They highlight the benefits of CoolTech products, how they could quickly and
efficiently address the problems noted, and how they expect them to become a
viable part of the country's infrastructure.
Export Import Bank of the United States
With the help of VerdeWatts and FirmGreen, CoolTech has initiated a relationship
with the Export-Import Bank of the United States (EXIM), a U.S. government
agency whose sole mission is to support U.S. exports. The bank fulfills its
mission by offering very cost-effective financing for international customers
and project developers to purchase U.S.-made services and purchase or lease
U.S.-made goods.
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To that end, the two companies applied to finance the Mexican projects
referenced above. CoolTech also sent product information for due diligence
review by the technical team at EXIM bank. Subsequently, CoolTech has received a
Letter of Interest from EXIM, however, there cannot be any assurance that EXIM
will provide any funding to the Company.
New Sales Agent
In January 2021, the Company terminated its independent agent agreement with
Gaia Energy of Gdansk, Poland.
On January 26, 2021, the Company signed an independent agent agreement with H&K
Ventures, LLC of Morganhill, California. H&K will act as the Company's
independent agent.
The principals of H&K were also part of Gaia Energy. Consequently, the agreement
and the expertise provided by H&K are essentially the same. H&K will concentrate
on developing markets in Eastern Europe, the Middle East and Africa. The
agreement describes the agent's duties as "generating revenue, and investment
funding, for the Company from various organizations including investment funds,
end-users, channel partners, integrators, and OEMs." To that end, H&K has
requested quotes from the Company for eMGen 200 to 300 kVA systems with mobile
water desalination capabilities of up to 900,000 gallons per day.
Team members of H&K Ventures include executives with more than twenty-five years
experience with Panasonic, Ford Motor Company, Electronic Data Systems and the
US Air Force in the fields of advanced technologies and an African diplomat with
a thirty-year background working with and for diplomatic missions,
non-governmental organizations and international disasters and aid management
services.
The former has joined the Company's advisory board while the diplomat introduced
CoolTech products at a recent African technical summit attended by
representatives from 54 countries.
Order and Delivery of Water Units and Charger
Over the past six months, the Company has ordered two reverse osmosis water
purification units and an electric vehicle charger.
In May of 2021, the Company ordered a reverse osmosis system capable of treating
4,500 gallons of brackish water per day. That was followed by a 100 kW, mode 4
DC, electric vehicle charger capable of simultaneous charging and dynamic load
distribution. The Company ordered a second reverse osmosis system capable of
treating 4,500 gallons of brackish water per day in July of 2021.
A reverse osmosis system and an electric vehicle charger were delivered to
Craftsmen Industries for installation in the beds of the test vehicles
referenced in Note 3. The Company is awaiting the delivery of the second
reverse osmosis system.
Going Concern
As a result of our financial condition, we have received a report from our
independent registered public accounting firm for our consolidated financial
statements for the years ended December 31, 2022, and 2021 that includes an
explanatory paragraph describing the uncertainty as to our ability to continue
as a going concern. As of December 31, 2022, we have not commenced full
operations, raising 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 generate revenue, achieve profitable operations and repay our obligations
when they come due. As of December 31, 2022, we have $142 in cash and we owe
$1,231,272 for convertible notes, $1,362,050 for promissory notes and currently
have another $1,078,500 in promissory notes in default. We are pursuing various
financing alternatives to address the payment of outstanding debt and to support
the sales, component acquisition and assembly of our mobile power generation
systems as well as the completion of the secondary elements of our business
plan: to license its thermal technologies and applications, including
submersible dry-pit applications. There can be no assurance, however, that we
will obtain adequate funding or that we will be successful in accomplishing any
of our objectives. Consequently, we may not be able to continue as an operating
company.
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Results of Operations
The following table sets forth, for the periods indicated, consolidated
statements of operations data. The table and the discussion below should be read
in conjunction with the accompanying consolidated financial statements and the
notes thereto, appearing elsewhere in this report.
Year ended on December 31,
2022 2021 Change %
Revenues $ -- $ -- N/A N/A
Cost of Revenues -- -- N/A N/A
Gross Profit -- -- N/A N/A
Operating expenses
Payroll and related expenses 351,641 345,573 6,068 1.8 %
Consulting 470,645 467,241 3,404 0.7 %
Professional fees 204,430 254,793 (50,363 ) (19.8 )%
Research and development 19,854 19,853 1 0.0 %
General and administrative 149,194 87,064 62,130 71.4 %
Total operating expenses 1,195,764 1,174,524 21,240 1.8 %
Interest expense, net (726,028 ) (1,675,726 ) 949,698 (56.7 )%
Change in fair value of the
derivative liability (90,770 ) (648,506 ) 557,736 (86.0 )%
Gain on settlement of debt 168,771 52,963 115,808 218.7 %
Net loss (1,843,791 ) (3,445,793 ) 1,602,002 (46.5 )%
Less: Non-controlling
interest 168 (745 ) 913 (122.6 )%
Net loss to shareholders $ (1,843,623 ) $ (3,445,048 ) $ 1,601,425 (46.5 )%
Revenues
During the years ended December 31, 2022, and 2021, and since inception, we have
not generated any revenues. We generated our first Mobile Generation order
during the quarter that ended June 30, 2014 and received a partial deposit in
advance of completing the sale with companies controlled by the individual who
is a 5% owner of UPT and a shareholder of our Company. The order is in the
production queue.
Operating Expenses
Operating expenses increased during the year ended December 31, 2022, compared
to the year ended December 31, 2021, due to increases in consulting costs,
payroll and related expenses as well as general and administrative.
During the year ended December 31, 2022, payroll and related expenses increased
by $6,068 due to an increase in accrued payroll taxes.
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Consulting expenses increased from $467,241 in 2021 to $470,645 in 2022 which
was in line with the increase in macroeconomic conditions.
Professional fees decreased from $254,793 in 2021 to $204,430 in 2022. The
decrease reflects elimination of legal fees after the settlement of the
Company's eviction complaint and arbitration proceeding in October.
Research and development expenses essentially remained the same in 2021 and 2022
as the Company maintained its focus on the commercialization of the eMGen
System.
General and administrative expenses increased from $87,064 in 2021 to $149,194
in 2022 due to an inventory adjustment and the attendant adjustment in
miscellaneous office expense, transfer agents fees associated with the
substantial amount of debt converted (noted below), the purchases of new
computer equipment and the completion of the first full year of health insurance
provided by the company.
Other Income and Expense
Interest expense during the years ended December 31, 2022 and 2021 related
primarily to our debt. The change in fair value of derivative liability reflects
the change in fair value of the conversion features embedded in the convertible
debt agreements entered into in July, August, September, October and December
2022.
Interest expense decreased during the year ended December 31 from $1,675,726 in
2021 to $726,028 in 2022 due to the substantial amount of debt converted in
2022.
Net Loss and Noncontrolling Interest
Since we have incurred losses since inception, we have not recorded any income
tax expense or benefit. Accordingly, our net loss is driven by our operating and
other expenses. Noncontrolling interest represents the 5% third-party ownership
in UPT, which is subtracted to calculate net loss to shareholders.
Liquidity and Capital Resources
We have historically met our liquidity requirements primarily through the public
sale and private placement of equity securities, debt financing, and exchanging
common stock warrants and options for professional and consulting services. On
December 31, 2022, we had cash and cash equivalents of $142.
Working capital is the amount by which current assets exceed current
liabilities. We had negative working capital of $7,792,632 and $7,370,524 on
December 31, 2022, and 2021, respectively. The increase in negative working
capital was due to increases in accounts payable, accrued interest payable, and
accrued payroll. To that end, we owe approximately $1,232,872 for convertible
notes that mature in the next nine months and we owe another $1,362,050 in notes
payable and currently have another $1,078,500 in promissory notes in default.
Based on its current forecast and budget, management believes that its cash
resources will not be sufficient to fund its operations through the end of the
second quarter. Unless the Company can generate sufficient revenue from the
execution of the Company's business plan, it will need to obtain additional
capital to continue to fund the Company's operations. There is no assurance that
capital in any form would be available to us, and if available, on terms and
conditions that are acceptable. If we are unable to obtain sufficient funds, we
may be forced to curtail and/or cease operations.
February Convertible Note -- On February 25, 2021, the Company entered into a
convertible note agreement with an accredited investor. It issued 2,000,000
inducement shares of restricted common stock and received $150,000 after an
original issue discount of $15,000 in lieu of interest. The total amount of
$165,000 plus 3% interest or $4,950 will be due on November 25, 2021. After 180
days, at the holder's option, a portion or all of the unpaid principal and
interest may be converted into shares of common stock at a fixed price of $0.025
per share. In the event of default, the outstanding balance will increase by 25%
and a daily penalty of $100 will accrue until the default is remedied. On
November 22, 2021, the investor signed an amendment to the agreement extending
the maturity date until March 31, 2022. On March 30, 2022, the investor signed
an amendment to the agreement extending the maturity date until April 30, 2022.
On April 29, 2022, the investor signed an amendment to the agreement extending
the maturity date until May 30, 2022. On May 29, 2022, the investor signed an
amendment to the agreement extending the maturity date until August 30, 2022. On
August 30, 2022 the investor signed an amendment to the agreement extending the
maturity date until November 30, 2022. On November 30, 2022, the investor signed
an amendment to the agreement extending the maturity date until May 1, 2023. As
of December 31, 2022, the remaining balance totaled $169,950.
March Convertible Note -- On March 24, 2021, the Company entered into a
convertible note agreement with an accredited investor. It issued two sets of
commitment shares: a block of 500,000 and a block of 2,500,000 shares of
restricted common stock as well as warrants to purchase 1,000,000 shares of
common stock at an exercise price of $0.10 per share. In return, the Company
received $250,000 after an original issue discount of $25,000 in lieu of
interest. The total amount of $275,000 plus 8% interest or $22,000 will be due
on December 24, 2021. After 60 days, if the note has not been paid in full, the
investor will have the right to purchase up to 6 million additional warrant
shares. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a fixed
price of $0.055 per share. If the note is repaid by the maturity date, the
investor will forfeit the block of 2,500,000 shares of restricted common stock
and the shares will be returned to the Company's treasury. In the event of
default, the outstanding balance will increase by 25% and a daily penalty of
$1,000 will accrue until the default is remedied. On December 21, 2021, the
investor signed an amendment to the agreement extending the maturity date until
March 31, 2022. On March 30, 2022, the investor signed an amendment to the
agreement extending the maturity date until April 30, 2022. On April 29, 2022,
the investor signed an amendment to the agreement extending the maturity date
until May 30, 2022. On May 29, 2022, the investor signed an amendment to the
agreement extending the maturity date until August 30, 2022. On August 30, 2022
the investor signed an amendment to the agreement extending the maturity date
until November 30, 2022. On November 30, 2022, the investor signed an amendment
to the agreement extending the maturity date until May 1, 2023. As of December
31, 2022, the remaining balance totaled $297,000.
March Convertible Note -- On March 24, 2021, the Company entered into a
convertible note agreement with an accredited investor. It issued two sets of
commitment shares: a block of 500,000 and a block of 2,500,000 shares of
restricted common stock as well as warrants to purchase 1,000,000 shares of
common stock at an exercise price of $0.10 per share. In return, the Company
received $750,000 after an original issue discount of $75,000 in lieu of
interest. The total amount of $825,000 plus 8% interest or $66,000 will be due
on December 24, 2021. After 60 days, if the note has not been paid in full, the
investor will have the right to purchase up to 2 million additional warrant
shares. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a fixed
price of $0.055 per share. If the note is repaid by the maturity date, the
investor will forfeit the block of 2,500,000 shares of restricted common stock
and the shares will be returned to the Company's treasury. In the event of
default, the outstanding balance will increase by 25% and a daily penalty of
$1,000 will accrue until the default is remedied. On December 21, 2021, the
investor signed an amendment to the agreement extending the maturity date until
March 31, 2022. On March 30, 2022, the investor signed an amendment to the
agreement extending the maturity date until April 30, 2022. On April 29, 2022,
the investor signed an amendment to the agreement extending the maturity date
until May 30, 2022. On May 29, 2022, the investor signed an amendment to the
agreement extending the maturity date until August 30, 2022. On August 22,
2022, the Company issued 10,000,000 shares of common stock to LGH Investments,
LLC upon conversion of $121,410. On August 30, 2022 the investor signed an
amendment to the agreement extending the maturity date until November 30, 2022.
On October 27, 2022, the Company issued 7,500,000 shares of common stock to LGH
Investments, LLC upon conversion of $59,640. On November 30, 2022, the investor
signed an amendment to the agreement extending the maturity date until May 1,
2023. On December 5, 2022, the Company issued 10,000,000 shares of common stock
to LGH Investments, LLC upon conversion of $68,373. On December 28, 2022, the
Company issued 7,500,000 shares of common stock to LGH Investments, LLC upon
conversion of $71,355. As of December 31, 2022, the remaining balance totaled
$570,222.
August Convertible Note - On August 16, 2021, the Company signed a promissory
note agreement with an accredited investor. It received $125,000 after an
original issue discount of $7,000 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $135,000 will be due on August 16,
2022. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. On
February 24, 2022, the Company issued 2,500,000 shares of common stock to Power
Up Lending Group, Ltd upon conversion of $50,000, leaving a principal balance
remaining of $85,000. On February 25, 2022, the Company issued 1,750,000 shares
of common stock to Power Up Lending Group, Ltd upon conversion of $35,000,
leaving a principal balance remaining of $50,000. On February 28, 2022, the
Company issued 980,392 shares of common stock to Power Up Lending Group, Ltd
upon conversion of $20,000, leaving a principal balance remaining of $30,000. On
March 4, 2022, the Company issued 1,208,791 shares of common stock to Power Up
Lending Group, Ltd upon conversion of $22,000, leaving a principal balance
remaining of $8,000. On March 7, 2022, the Company issued 790,361 shares of
common stock to Power Up Lending Group, Ltd. upon final conversion of $8,000 in
principal and $5,120 in accrued interest. The note was then retired.
September Convertible Note -- On September 21, 2021, the Company signed a
promissory note agreement with an accredited investor. It received $102,000
after an original issue discount of $6,000 and reimbursement of $3,000 to cover
the investor's legal fees. The total amount of $111,000 will be due on September
21, 2022. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. On March
22, 2022, the Company issued 2,447,552 shares of common stock to Power Up
Lending Group, Ltd upon conversion of $35,000, leaving a principal balance
remaining of $76,000. On March 29, 2022, the Company issued 2,447,552 shares of
common stock to Power Up Lending Group, Ltd upon conversion of $35,000, leaving
a principal balance remaining of $41,000. On April 18, 2022, the Company issued
3,798,319 shares of common stock to Power Up Lending Group, Ltd upon final
conversion of $41,000 in principal and $4,200 in accrued interest. The note was
then retired.
November Convertible Note -- On November 22, 2021, the Company signed a
promissory note agreement with an accredited investor. It received $60,000 after
an original issue discount of $3,750 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $66,750 will be due on November 22,
2022. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. On May 31,
2022, the Company issued 1,652,893 shares of common stock to Power Up Lending
Group, Ltd upon conversion of $20,000, leaving a principal balance remaining of
$46,750. On June 6, 2022, the Company issued 2,252,252 shares of common stock to
Power Up Lending Group, Ltd upon conversion of $25,000, leaving a principal
balance remaining of $21,750. On June 15, 2022, the Company issued 2,233,654
shares of common stock to Power Up Lending Group, Ltd upon final conversion of
$21,750 in principal and $2,520 in accrued interest. The note was then retired.
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December Convertible Note -- On December 20, 2021, the Company entered into a
convertible note agreement with an accredited investor. It received $33,000
after an original issue discount of $3,000 in lieu of interest. The total amount
of $33,000 plus 3% interest or $990 will be due on September 20, 2022. After 180
days, at the holder's option, a portion or all of the unpaid principal and
interest may be converted into shares of common stock at a fixed price of $0.02
per share. In the event of default, the outstanding balance will increase by 25%
and a daily penalty of $100 will accrue until the default is remedied. On August
30, 2022 the investor signed an amendment to the agreement extending the
maturity date until November 30, 2022. On November 22, 2022, the Company issued
4,787,324 shares of common stock to LGH Investments LLC upon final conversion of
$33,000 in principal and $990 in accrued interest. The note was then retired.
February Convertible Note -- On February 1, 2022, the Company signed a
promissory note agreement with an accredited investor. It received $50,000 after
an original issue discount of $3,000 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $56,000 will be due on February 1,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. On August
8, 2022, the Company issued 2,752,294 shares of common stock to Sixth Street
Lending LLC upon conversion of $30,000, leaving a principal balance remaining of
$26,000. On August 11, 2022, the Company issued 2,323,967 shares of common stock
to Sixth Street Lending LLC upon final conversion of $26,000 in principal and
$2,120 in accrued interest. The note was then retired.
March Convertible Note -- On March 4, 2022, the Company signed a promissory note
agreement with an accredited investor. It received $55,000 after an original
issue discount of $3,500 and reimbursement of $3,000 to cover the investor's
legal fees. The total amount of $61,500 will be due on March 4, 2023. After 180
days, at the holder's option, a portion or all of the unpaid principal and
interest may be converted into shares of common stock at a 29% discount to the
lowest VWAP during the 10 trading days preceding the conversion date. In the
event of default, the outstanding balance will increase by 50% and the interest
rate will increase to 22% until the default is remedied. On September 8, 2022,
the Company issued 2,100,840 shares of common stock to Sixth Street Lending LLC
upon conversion of $25,000, leaving a principal balance remaining of $36,500. On
September 12, 2022, the Company issued 3,273,950 shares of common stock to Sixth
Street Lending LLC upon final conversion of $36,500 in principal and $2,460 in
accrued interest. The note was then retired.
March Convertible Note -- On March 21, 2022, the Company signed a promissory
note agreement with an accredited investor. It received $55,000 after an
original issue discount of $3,500 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $61,500 will be due on March 21,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. On
September 27, 2022, the Company issued 2,325,581 shares of common stock to
Sixth Street Lending LLC upon conversion of $20,000, leaving a principal balance
remaining of $41,500. On September 28, 2022, the Company issued 2,625,000
shares of common stock to Sixth Street Lending LLC upon conversion of $21,000,
leaving a principal balance remaining of $20,500. On September 30, 2022, the
Company issued 3,214,085 shares of common stock to Sixth Street Lending LLC upon
final conversion of $20,500 in principal and $2,320 in accrued interest. The
note was then retired.
April Convertible Note -- On April 25, 2022, the Company signed a promissory
note agreement with an accredited investor. It received $55,000 after an
original issue discount of $3,500 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $61,500 will be due on April 25,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. . On
October 31, 2022, the Company issued 2,247,191 shares of common stock to Sixth
Street Lending LLC upon conversion of $20,000, leaving a principal balance
remaining of $41,500. On November 4, 2022, the Company issued 2,777,778 shares
of common stock to Sixth Street Lending LLC upon conversion of $20,000, leaving
a principal balance remaining of $20,500. On November 7, 2022, the Company
issued 3,308,333 shares of common stock to Sixth Street Lending LLC upon final
conversion of $21,500 in principal and $2,320 in accrued interest. The note was
then retired.
May Convertible Note -- On May 23, 2022, the Company signed a promissory note
agreement with an accredited investor. It received $30,000 after an original
issue discount of $2,000 and reimbursement of $3,000 to cover the investor's
legal fees. The total amount of $35,000 will be due on May 23, 2023. After 180
days, at the holder's option, a portion or all of the unpaid principal and
interest may be converted into shares of common stock at a 29% discount to the
lowest VWAP during the 10 trading days preceding the conversion date. In the
event of default, the outstanding balance will increase by 50% and the interest
rate will increase to 22% until the default is remedied. On November 25, 2022,
the Company issued 3,521,127 shares of common stock to Sixth Street Lending LLC
upon conversion of $25,000, leaving a principal balance remaining of $10,000. On
November 30, 2022, the Company issued 1,594,366 shares of common stock to Sixth
Street Lending LLC upon final conversion of $10,000 in principal and $1,320 in
accrued interest. The note was then retired.
July Convertible Note -- On July 22, 2022, the Company signed a promissory note
agreement with an accredited investor. It received $30,000 after an original
issue discount of $3,200 and reimbursement of $3,000 to cover the investor's
legal fees. The total amount of $56,200 will be due on July 22, 2023. After 180
days, at the holder's option, a portion or all of the unpaid principal and
interest may be converted into shares of common stock at a 29% discount to the
lowest VWAP during the 10 trading days preceding the conversion date. In the
event of default, the outstanding balance will increase by 50% and the interest
rate will increase to 22% until the default is remedied. As of December 31,
2022, the remaining balance totaled $56,200.
August Convertible Note -- On August 18, 2022, the Company signed a promissory
note agreement with an accredited investor. It received $40,000 after an
original issue discount of $2,600 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $45,600 will be due on August 18,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. As of
December 31, 2022, the remaining balance totaled $45,600.
September Convertible Note -- On September 21, 2022, the Company signed a
promissory note agreement with an accredited investor. It received $60,000 after
an original issue discount of $3,750 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $66,750 will be due on September 21,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. As of
December 31, 2022, the remaining balance totaled $66,750.
October Convertible Note -- On October 24, 2022, the Company signed a promissory
note agreement with an accredited investor. It received $40,000 after an
original issue discount of $2,600 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $45,600 will be due on October 24,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. As of
December 31, 2022, the remaining balance totaled $45,600.
October Convertible Note -- On October 31, 2022, the Company signed a promissory
note agreement with an accredited investor. It received $20,000 after an
original issue discount of $2,000. The total amount of $22,000 will be due on
July 31, 2023. After 180 days, at the holder's option, a portion or all of the
unpaid principal and interest may be converted into shares of common stock at a
29% discount to the lowest VWAP during the 10 trading days preceding the
conversion date. In the event of default, the outstanding balance will increase
by 25% and a daily pen penalty of $100 will accrue until the default is
remedied. As of December 31, 2022, the remaining balance totaled $22,000.
December Convertible Note -- On December 8, 2022, the Company signed a
promissory note agreement with an accredited investor. It received $45,000 after
an original issue discount of $2,900 and reimbursement of $3,000 to cover the
investor's legal fees. The total amount of $50,900 will be due on December 8,
2023. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of common stock at a 29%
discount to the lowest VWAP during the 10 trading days preceding the conversion
date. In the event of default, the outstanding balance will increase by 50% and
the interest rate will increase to 22% until the default is remedied. As of
December 31, 2022, the remaining balance totaled $50,900.
Off Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Cash Flows
Our cash flows from operating, investing and financing activities were as
follows:
Year ended December 31,
2022 2021
Net cash used in operating activities $ (620,594 ) $ (1,646,746 )
Net cash used in investing activities
(34,015 ) (27,896 )
Net cash provided by financing activities 582,360 1,747,000
Net cash from operating activities increased due to increases in non-cash
interest expense, in fair value of derivative liability and in accrued payroll
taxes. Our investing activity increased due to an increase in expenditure for
intangible assets, which relates to the development of patents. Net cash
provided by financing activities increased due to an increase in proceeds of
debt or debt borrowings.
The Company's capital requirements for the next 12 months will consist of $3.8
million with anticipated expenses of $1.8 million for salaries, public company
filings, and consultants and professional fees. An additional $2.0 million in
working capital is expected to be needed for inventory and related costs for
production of our mobile power generation systems as well as development and
commercialization of our thermal dispersion technology applications.
Management believes the Company's funds are insufficient to provide for its
projected needs for operations for the next 12 months. The Company is currently
negotiating additional non-dilutive funding to support product development or
for other purposes. In the event that the negotiations fail, the Company may
have to rely on equity or debt financing that may involve substantial dilution
to our then existing stockholders. If it is unable to close additional equity
financing, the Company may have to cease operations.
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Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
amounts of revenues and expenses. Critical accounting policies are those that
require the application of management's most difficult, subjective or complex
judgments, often because of the need to make estimates about the effect of
matters that are inherently uncertain and that may change in subsequent periods.
In applying these critical accounting policies, our management uses its judgment
to determine the appropriate assumptions to be used in making certain estimates.
Actual results may differ from these estimates.
We define critical accounting policies as those that are reflective of
significant judgments and uncertainties, and which may potentially result in
materially different results under different assumptions and conditions. In
applying these critical accounting policies, our management uses its judgment to
determine the appropriate assumptions to be used in making certain estimates.
These estimates are subject to an inherent degree of uncertainty.
Impairment of long-lived assets
When facts and circumstances indicate that the carrying value of long-lived
assets may not be recoverable, management assesses the recoverability of the
carrying value by preparing estimates of revenues and the resulting gross profit
and cash flows. These estimated future cash flows are consistent with those we
use in our internal planning. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount, we
recognize an impairment loss. The impairment loss recognized, if any, is the
amount by which the carrying amount of the asset (or asset group) exceeds the
fair value. We may use a variety of methods to determine the fair value of these
assets, including discounted cash flow models, which are consistent with the
assumptions we believe hypothetical marketplace participants would use.
If actual results are not consistent with our assumptions and estimates, or our
assumptions and estimates change due to new information, we may be exposed to an
impairment charge in the future.
Derivative financial instruments
When we issue debt that contains a conversion feature, we first evaluate whether
the conversion feature meets the requirements to be treated as a derivative: a)
one or more underlying, typically the price of the Company's stock; b) one or
more notional amounts or payment provisions or both, generally the number of
shares upon conversion; c) no initial net investment, which typically excludes
the amount borrowed; and d) net settlement provisions, which in the case of
convertible debt generally means the stock received upon conversion can be
readily sold for cash. There are certain scope exceptions from derivative
treatment, but these typically exclude conversion features that provide for a
variable number of shares.
When we issue warrants to purchase our common stock, we must evaluate whether
they meet the requirements to be treated as a derivative. Generally, warrants
would be treated as a derivative if the provisions of the warrant agreement
create uncertainty as to a) the number of shares to be issued upon exercise; or
b) whether shares may be issued upon exercise.
If the conversion feature within convertible debt or warrants meets the
requirements to be treated as a derivative, we estimate the fair value of the
derivative liability using the Black-Scholes Option Pricing Model upon the date
of issuance. If the fair value of the derivative liability is higher than the
face value of the convertible debt, the excess is immediately recognized as
interest expense. Otherwise, the fair value of the derivative liability is
recorded as a liability with an offsetting amount recorded as a debt discount,
which offsets the carrying amount of the debt. The derivative liability is
revalued at the end of each reporting period and any change in fair value is
recorded as a change in fair value in the consolidated statement of operations.
The debt discount is amortized through interest expense over the life of the
debt. Derivative instrument liabilities and the host debt agreement are
classified on the balance sheet as current or non-current based on whether
settlement of the derivative instrument could be required within twelve months
of the balance sheet date.
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The accounting treatment of derivative financial instruments requires that the
Company record the embedded conversion option and warrants at their fair values
as of the inception date of the agreement and at fair value as of each
subsequent balance sheet date. Any change in fair value is recorded as
non-operating, non-cash income or expense for each reporting period at each
balance sheet date. The Company reassesses the classification of its derivative
instruments at each balance sheet date. If the classification changes as a
result of events during the period, the contract is reclassified as of the date
of the event that caused the reclassification. As a result of entering into
warrant agreements, for which such instruments contained a variable conversion
feature with no floor, the Company has adopted a sequencing policy in accordance
with ASC 815-40-35-12 whereby all future instruments may be classified as a
derivative liability with the exception of instruments related to share-based
compensation issued to employees or directors.
Contingent liabilities
We accrue a loss for contingencies if it is probable that an asset has been
impaired or a liability has been incurred, and when the amount of loss can be
reasonably estimable. When no accrual is made because one or both conditions do
not exist, we disclose the contingency if there is at least a reasonable
possibility that a loss may be incurred. We estimate contingent liabilities
based on the best information we have available at the time. If we have a range
of outcomes, we accrue the low end of the range.
Share-based Payments
All our share-based awards are classified as equity, as they may only be settled
in shares of our common stock.
We recognize expense for fully-vested warrants at the time they are granted. For
awards with service or performance conditions, we generally recognize expense
when the service is complete; however, there may be circumstances in which we
determine that the performance condition is probable before the actual
performance condition is achieved. In such circumstances, the amount recognized
as expense is the pro rata amount, depending on the estimated progress towards
completion of the performance condition. Nonemployee share-based payments are
measured at fair value, based on either the fair value of the equity instrument
issued or on the fair value of the services received. Typically, it is not
practical to value the services received, so we determine the fair value of
common stock grants based on the price of the common stock on the measurement
date, and the fair value of common stock warrants using the Black-Scholes
option-pricing model ("Black-Scholes"). We use historical data to estimate the
expected price volatility, the expected stock option life and expected
forfeiture rate. The risk-free interest rate is based on the United States
Treasury yield curve in effect at the time of grant for the estimated life of
the stock option. For awards that are recognized when a performance condition is
probable, the fair value is estimated at each reporting date. The cost
recognized is the fair value of the equity award on the date the performance
condition is achieved. Accordingly, the expense recognized may change between
interim reporting dates and the date the performance condition is achieved.
We issue two types of common stock options to employees: 1) fully-vested at the
time of grant and 2) market price-based vesting. We recognize expense for
fully-vested stock options on the date of grant at the estimated fair value of
the options using Black-Scholes. We recognize expense for market price-based
options at the estimated fair value of the options using the lattice-based
option valuation model ("Lattice Model") over the estimated life of the options
used in the Lattice Model. We use historical data to estimate the expected price
volatility, the expected stock option life and expected forfeiture rate. The
risk-free interest rate is based on the United States Treasury yield curve in
effect at the time of grant for the estimated life of the stock option. In the
event, we modify the terms of a non-vested share-based payment award, we would
incur additional expense for the excess of the fair value of the modified
share-based payment award over the fair value of the original share-based
payment award. The incremental expense would be recognized ratably over the
remaining vesting period.
Income taxes
We recognize deferred income tax assets and liabilities for the expected future
tax consequences of temporary differences between the income tax and financial
reporting carrying amount of our assets and liabilities. We monitor our deferred
tax assets and evaluate the need for a valuation allowance based on the estimate
of the amount of such deferred tax assets that we believe do not meet the
more-likely-than-not recognition criteria. We also evaluate whether we have any
uncertain tax positions and would record a reserve if we believe it is
more-likely-than-not our position would not prevail with the applicable tax
authorities. We have significant net operating loss carryforwards, for which we
have established a valuation allowance. If our estimate of the amount of such
deferred tax assets change, we may recognize a benefit in the future. UPT is a
limited liability company ("LLC"), which is treated as a partnership for income
tax purposes, where all tax obligations flow through to the owners of the LLC
during the period in which income taxes were incurred.
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